oversight

Accountability and Control Over Foreign Assistance

Published by the Government Accountability Office on 1990-03-29.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                        United States General Accounting OiLIse / f 0 9 7 7
4

     GAO                Testimony



    For Release         Accountability   and Control     Over
    on Delivery         Foreign Assistance:
    Expected at
    1O:OO a.m. EST
    Thursday
    March 29, 1990




                        Statement   of
                        Frank C. Conahan,     Assistant    Comptroller    General
                        National   Security   & International     Affairs
                          Division
                        Before the Committee on Appropriations
                        Subcommittee on Foreign Operations,         Export
                          Financing, and Related Programs
                        House of Representatives




    GAO/T-NSIAD-90-25
                                                                      GAO Form 160 W/87)
Mr. Chairman              and Members of                       the Subcommittee:


We are pleased                  to be here               to provide               GAO's perspective                on the
potential          for     misuse            of    foreign            economic            and military            aid      funds.
I will      discuss             the Agency               for        International             Development's                (AID's)
accountability                  and control               over        cash transfers,              its      control             over
local      currencies                generated            from U.S.               assistance,          and its           management
of overseas              contracting               and procurement                    systems.           I will          also     talk
about      AID's        malaria          vaccine           program,               which     provides       a good case
study      of     the abuses             that       can occur                  when controls           are weak.                Our
discussions             of military                aid     will           focus      on grant      aid      accountability,
control          over     technology               transfers,                  accounting        systems          for     military
aid,      and the difficulties                        encountered                  in auditing           covert          aid.          I
will      also     discuss            special         program              accountability              issues           identified
in our      reviews             of    fuel        transfers               to El Salvador,              military           aid     to
the Philippines,                     and humanitarian                      assistance           to the     Nicaraguan
Democratic          Resistance,                   or Contras.


SUMMARYOF FINDINGS
In looking          at AID over                   the years,               our reviews          have      identified              a
number of management and internal                                          control         problems.        In some cases,
such as with              Economic            Support            Fund (ESF) cash transfer                          policy,
improvements              have been made in accountability                                      based on legislative
requirements              for        the maintenance                      of    separate       accounts           for     U.S.
dolfars.           However,            questions               of     accountability              and control               remain
                                                                      1
because       AID's        current       policy         for          ESF cash transfers                    does not
contain       agencywide             standards          for          verification               and audit          of dollar
accounts.


Our reviews           of Commodity                 Import        Program           (CIp)     and Public             Law 480
food assistance               programs             showed that                AID could          not   determine
whether       local        currency           generated              from      the assistance               was deposited,
or used as required.                     Serious            accountability                  issues         continue         t0
confront       AID in         its     monitoring              of      local       currency          use.          These
include       the     lack     of     audit         coverage            for      local      currency          accounts,
poor host          country          reporting         on account                activity,           and lack          of
assessments           of     host     country         capability                 to manage the accounts.
Also,      there      is debate          between            AID management and the                          AID Inspector
General       over      the extent             to which              AID,      or the host-government,
should       maintain         accountability                  and control                over      local      currencies.


Our reviews           of AID's          overseas            contracting                system       have also
identified          significant              management and control                          weaknesses.               These
include       (1)     the     lack      of     accountability                    for     certain       property            in the
hands of contractors,                        (2)    inadequate                contract       close-out             procedures
and final          audit      coverage,            and (3) poor                 procurement            planning            by
AID's      overseas         missions.


A good case study                   of what can happen when financial                                      accountability
and internal            control         systems         are weak is AID's                       malaria           vaccine
res%arch       project.              Our review             of       this      project       found         that     inadequate

                                                                 2
.   ,



        project       monitoring,               lack      of financial                audit,        and other           management
        weaknesses          directly            contributed              to the misuse               and waste            of
        economic       assistance               funds.           The responsible                   AID project            officer
        ultimately          pled       guilty          to the          acceptance            of    an illegal            gratuity,
        and a principal              university                 researcher            was indicted               for     the     theft         of
        AID grant        funds.


        Certain       problems,           which         increase             the     risk      of misuse          in many
        economic       assistance               programs,              appear        to be systemic               in AID.            We
        have found          these       to include               limitations                on AID'S        ability         to
        monitor       decentralized               field          operations,                the    lack     of    standard
        accountability              requirements                 for     the overseas               missions,            weaknesses
        in agency        accounting              and information                     systems,        and limitations                     in
        audit       coverage.           AID recognizes                   that        such problems               can threaten                 the
        integrity        of     the program.                    As part         of    the      Federal       Manager's
        Financial        Integrity              Act process,                 AID has identified                   the     following
        as material           agency        internal             control           weaknesses.
        --   A primary         accounting              system           that       has not         been fully            integrated
             with     subsidiary            and program                 systems.
        --   Inadequate          audit          coverage          of overseas                mission        programs.
        --   Insufficient            number of direct-hire                            staff.
        --   Inadequate          assessments               of     host-country                 capability              to manage
             AID-financed            host        country          contracts.
        SW Inadequate            procedures               for     tracking            host        country-owned             local
             currency.



                                                                         3
Our reviews             of U.S.           military         aid       have also           identified             a number of
accountability                 and management problems,                              including
--     limitations             on U.S.        monitoring              of military               grant        aid,
--     the unauthorized                   use of         technology,
--     inadequate            accounting            systems           for     management of military                       aid,
     and
--   difficulties                  in auditing            covert           aid     operations.


The case         that        probably         best        demonstrates                management oversight,
accountability,                    and control            problems               in military           aid    is the
transfer        of military                fuels         in El Salvador.                  We found            that      (1) grant
aid-funded            fuel         supplied        to the        Salvadoran              Air     Force        had been
improperly            transferred             to air        crews           involved           in a resupply
operation            supporting            the Contras               and (2)          there      were no U.S.
controls         over        Salvadoran            Air     Force           use of      the proceeds                 generated
from       selling          fuel     back to         the U.S.              government           and its         contractors.




Our 1986 review                    of military            aid    to the Philippines                      concluded         that
U.S.     aid    was not             always       used or managed effectively                                 to counter          the
communist            insurgency            in that         country.                We found        several           problems,
including            questionable             military           purchases             by the Philippine
military         and lack            of    U.S.      access          to Philippine               bases        to monitor
equipment            use.          A subsequent            review           indicated           that     some
improvements             had taken            place.



                                                                 4
We have also            looked      at        the Department                 of    State's           management of
humanitarian            assistance              for      the Contras.               We found            that    State's
control       procedures          were insufficient                      to ensure             that      the    funds      were
used as intended                by law.               Specifically,               problems           included       State's
inability           to monitor          and verify               the validity               of purchases            made in
the Central            American             region,       and a limited                  ability        to verify         and
monitor       final      delivery             and use of             items        purchased           under     the
program.            Since     1988,          AID assumed management of                              the Contra
assistance           program      at         the direction             of     the Congress.


I will       now discuss          these             issues       in more detail.


ECONOMIC ASSISTANCE

Our past          and ongoing               reviews       of AID operations                    and programs              have
identified           numerous       control              and management weaknesses.                             These

weaknesses            not only         increase           the vulnerability                    of AID to          fraud,
waste,       and abuse,          but         also      reduce        the overall              efficiency          and
effectiveness               of assistance                efforts.            We found              instances      where AID
could       not     determine          if      funds      and commodities                   were used as intended.
In other           instances,         we found            that       local        currencies            and commodities
were misused.




Cash Transfers
Over the years,               the United               States        has provided                  several     billion
doliars           in ESF cash transfers                      as part         of    its      assistance          package.

                                                                 5
,   ,




         Our reviews             of ESF programs                      in the            1980s indicated                 that
         accountability                    for      cash transfers                     was weak:
         --
                U.S.     dollar6            were often               commingled               with     other       host        country
                 revenues,           making             accounting           for        these        funds      difficult             and,   in
                some instances,                     impossible.
        -a
                Many missions                    relied       on host         countries               to tell          them how the
                money was used,                     instead          of verifying                actual         use,
        --
                Host-country                reporting              on fund             use was frequently                    late,
                inaccurate,            or nonexistent.


        For example,                 our         1986 report           on U.S.               assistance           to the        Philippines
        concluded             that     the disposition                       or actual               use of      over        $200 million
        in cash transfers                         (provided           as of            February        1986)       could        not     be
        determined.                  Special              accounts       were not               required         by AID,          and ESF
        funds         were commingled                      with      other         receipts           in the       Philippine
        Treasury.              In a 1987 report                       on assistance                   to Liberia,              we identified
        a variety             of control                weaknesses            affecting               the ESF program                  in the
        early         and mid 198Os,                      including          (1)        the     Liberian         Government's
        failure          to report                its      use of       initial              ESF grants,           or to report
        within          established                 time      frames         and        (2) AID’S            failure         to audit        the
        ESF program,                 even though                  accountabilitty                    problems          were apparent.


              Legislation            in effect              since       February              1987 requires                 special      accounts
              to help       track      the         use of ESF cash transfers.                                  Nonetheless,              we found
              in a review            subsequent               to passage                of    the     legislation              that     AID still
              could     not    always             trace      ESF funds                 to their        end use.              Although        some
                 Y

                                                                                   6
aid      recipients            we looked          at    (Egypt,          Jamaica,          and Senegal)              initially
deposited          ESF grants             into       separate          accounts           as required,              they
later      transferred              the      funds      to commingled                accounts         before
disbursing              them.       In some cases,                   however,        commingling             was difficult
to avoid          because          dollars        supported            foreign        exchange         auctions                  or
were provided                 to members of             regional            monetary         unions.          We also
found      that         (1) AID's         missions         did        not    plan     to systematically                          verify
recipient          reports          on the use of cash transfers                                 or audit       the         special
accounts          and (2) AID did                 not    require            separate         accounts         for          certain
types      of ESF sector                 grants        and project             assistance            because          it         did
not define            such assistance                  as cash transfers.


The most recent                   information           available            to us on the             status         of ESF
dollar       accounts             is a June 1989 AID survey                          of    its      overseas
missions.             The AID survey               developed             information              on both       dollar                and
local      currency            accounts,          including            the number of                such accounts,
the amounts,              and specific             problems            encountered               by the missions                       in
monitoring            them.         In response,            the missions                  reported       that        dollar
accounts          had been established                     in commercial                  or federal          reserve
banks and that                 dollars        were not           being       commingled.              However,
questions          of     accountability                remain         due to the            lack     of agencywide
standards          for        verification             and audit            of dollar            accounts.           AID's
policy       on ESF cash              transfers,           which         was established                in October
1987,      states         that       (1) assistance                  agreements           should      provide              for
appropriate              audit,       (2)     recipients              should     periodically                report              on the
disposition              of    funds,        and (3) recipients                     should        make available                       to

                                                                 7
AID the        records          supporting            their         reports         for     3 years         after         the
final      disbursement.                  AID Is special               account            survey      did    not     report            on
the extent         dollar          accounts       have been audited.


Subsequent         to AID's           survey      of      its        overseas             missions,         the     fiscal
year     1990 appropriations                    act      for        foreign         operations          required             that
separate        accounts           also     be established                    by recipients             of cash
transfers         provided          as nonproject                   sector         assistance.              AID officials
told     us that         they      are now considering                       agencywide            guidance          to
implement         this     account          requirement,                   along     with      standards            for
verification             and audit          of all        dollar            accounts.


Local      Currency         Issues
As of June 1989,                AID reported              about            250 host         country-owned                 local
currency       accounts            with     deposits            exceeding            $1 billion.               Local
currency        is often           generated           from         commodity          and food         sales        and,         in
some     cases,       recipients            of cash transfers                       are     required         to deposit
local      currency         into      special          accounts.               Our reviews             of CIP and
Public      Law 480 food assistance                           programs             during      the     1980s concluded
that     inadequate          accounting,              monitoring,                  and reporting             systems            have
prevented         AID from          (1)     verifying               that     required          local        currency
deposits       were actually                made and (2) determining                            whether           withdrawals
and disbursements                  were made for                agreed        purposes.               Misuse        of both
commodities         and local             currency            has occurred.




                                                                8
For example,               we reported           in 1987 that               both       Public          Law 480 title               I
rice      and local          currency         generated            from        the rice          sales      were misused
by the Liberian                  Government        and its          agents.              A several          million
dollar        shortfall           in accounts        resulted.                    In addition,            we found              that
the government-owned                   bank that          managed the                   local     currency          accounts
made unauthorized                  withdrawals           of       approximately                 $1.7     million         from
the      fiscal      year        1986 account.            Our 1987 report                       on assistance              to
Indonesia           also     identified          weaknesses              in AID's             accounting           for     the
title       I program.             Although       the problems                  were not nearly                 as serious
as those           in Liberia,         AID did       not          require            local      currency        funds           to be
deposited           in a special           account        to avoid              commingling,              nor did          it
enforce           Indonesian        compliance         with         financial                reporting
requirements.


In 1988,           we reported         that      the mission              accounting              and monitoring
systems           in Egypt       and Pakistan        --two          of      the       largest       commodity            import
programs --did             not     provide       complete           or accurate                 information           on
commodity           imports.          CIP transactions                   for         one fiscal          year      were
underreported              by $95 million            in Egypt             and about              $84 million             in
Pakistan.            Without        complete        information                 on commodity              transactions,
AID could           not    identify        all    commodities                  for     end use checks,                or
verify       that     required         local      currency           deposits                were made.            AID
monitoring           of    the local          currency            in those            countries          was not
sufficient           to provide           reasonable              assurance            that      funds     were used for
their      intended         purposes.



                                                              9
As previously              mentioned,            the June 1989 AID survey                              of     the overseas
missions          provided         more current                 information             on local             currency
accounts.               The survey        indicated              that        significant            accountability
issues         remain      because         (1) most local                    currency          accounts             had not been
audited,          (2) host         country         reporting                on currency            accounts           was
generally          untimely         or    inaccurate,                 and      (3)     most of         the     missions           had
not assessed              whether        the host              governments             had adequate                 financial
management              systems     to manage the                  accounts.              AID missions                cited       the
lack      of    staff      as an obstacle                 in monitoring                 the accounts.


One issue          currently         being         debated            within         AID concerns              the degree              of
accountability                and control           that         AID missions                 should         exercise         over
local      currency           generated          through           our assistance                  programs.              AID's
management recognizes                     that      it         must have "reasonable                         assurance"           that
local      currencies             are used for                 appropriate             development             efforts,           but
it     holds      the host         countries         primarily                accountable              for     providing
adequate          financial         management controls                         because         they         own the        funds.
On the other              hand,     the AID Inspector                        General's          position             is   that     the
agency must maintain                     control          because            local      currency             is generated
from U.S.          assistance.            This      issue          has been debated                    for     some time
without        being       resolved,         but         AID officials                 said     that         they     are
considering              several     options             for     providing             reasonable             assurance
that      local       currencies          are being              appropriately                used.           These OptiOnS
include         (1)     requiring         formal          and standard                 financial             assessments           of
host      country         agencies        responsible                 for      local      currency            accounts           and
the *organizations                 receiving             the     funds,         (2)     strengthening                 reporting

                                                                 10
and verification               procedures             for     local          currencies            held      in special
accounts,          and (3) requiring                  audits         of      host     country          agencies
managing        the accounts            and the organizations                             receiving          the    funds.


Contracting           and Procurement                 Issues
A significant             portion       of    the AID program                       is administered                through
two types        of contracts:               direct          and host             country.          Direct         contracts
are negotiated             and awarded              by AID,          while         host      country       contracts
are negotiated             and awarded              by host          country          officials.              The value        of
active      contracts          financed            by AID exceeded                   $2 billion           at the end of
fiscal      year      1989.


Our recently           completed         and ongoing                 reviews          of AID’S          direct
contracting           system        identified              several          internal         control         and
management deficiencies.                         We found            that         AID does not            exercise
adequate       accountability                for      project-funded                  nonexpendable                property
in the possession                 of contractors                   (for      example,         computer           hardware
and software,             motor      vehicles          and office                 equipment).             Also,      AID was
somewhat lax           in ensuring            that          completed             contracts         received         a final
audit      and were expeditiously                      closed             out.       Weak contracting                and
procurement         management at                  the overseas                  missions,         in our opinion,
also     contribute           to internal             control             problems         and reduced             program
efficiency.            Potential         problems             identified              during        our ongoing
review      include        (1)      inadequate              procurement              planning          by the missions,
(2) a lack         of procurement                  training          for         mission      staff,       particularly
proj'ect      officers,           and    (3) concerns                about         the     independence             of

                                                              11
overseas         contracting           officers.             Also,            reliable          information               on AID-
financed         host     country       contracts            is not            available             at either
AID/Washington             or at many of                the AID missions.


The Malaria            Vaccine       Research           Project
AID's        malaria      vaccine       research            project            illustrates              that      U.S.
programs         can be subject              to     fraud     and abuse when management,
financial         accountability,                 and internal                 controls          are weak.                AID has
obligated         over     $90 million             since         1966 for             malaria         vaccine           research
and field         trial      activities.                Our 1989 review                   of     this         project
disclosed         that     the project             generally                 lacked      program         and financial
accountability.                  As a result,            project              funds      were misused                or wasted.
A fundamental             control       weakness            was the            lack      of    supervision                of   the
malaria        vaccine       research         project         officer.                 The project              officer         and
the technical             office      responsible                for     the project                 had misrepresented
the results            of pre-award           evaluations                of     at least             three       research
proposals         and based on these                    misrepresentations,                          the proposals              were
selected        and fully           funded        despite         negative             pre-award              evaluations.
We also        found      that      competition             had been waived                    for      10 of        11
subprojects            and the basis              for    waiving              competition             was questionable
in all        10 instances.             Waivers          had been based,                      in part,          on
inaccurate         documentation              sent       from          the     technical             office       responsible
for     the malaria          vaccine         research         project             to AID procurement
officials.




                                                            12
In addition,            AID did            not ensure           financial             audit          coverage       of project
expenditures.                Audits           performed         prior        to 1988 focused                  on indirect
costs       and overhead               rates,        and did         not     cover          direct      project
expenses.            Consequently,                  these      audits        identified               few questionable
costs       and uncovered                no major           financial         management weaknesses,
misuse       of     funds,        or     indications            of      fraud.            Ours was a management
review,       not     a fraud            investigation,               but     it      is     important          to note       that
the AID project                  officer        ultimately            pled         guilty          to criminal         charges,
including         acceptance               of an illegal.gratuity.                             Also,
--   the principal                researcher           from the University                           of Hawaii       was
     indicted         for        theft        of AID funds;
we University               of     Illinois          auditors         were         investigating              claims       that
     the     university's                principal           researcher             had diverted              AID funds           to
     personal         use;        and
--   a contractor                for     the malaria            vaccine            research           program       has
     alleged         that        the principal               researcher             for      a subproject            at    the
     National         Institute               of Health         in Bogota,                Colombia,          defrauded       the
     U.S.     government               by submitting              false       claims              to the prime
     contractor.


MILITARY AID
Our reviews           of U.S.            military        aid     have        identified               several       problems.
Among these           are a lack               of accountability                    and control              over    aid
transfers,           ineffective               management and use of                         U.S.      aid    by the
recipient         countries,               and recipient              transfers              of      items    in violation
of itgreements              governing           the provision               of      U.S.      aid      and technology.

                                                               13
.




    Assistance            without          Accountability
    From the          1950s through                the early          19709,      the military             aid     program
    provided          U.S.     equipment             and services          on a grant            basis      for      use by
    foreign          recipients.              Grant      aid     legislation          provided           that      items
    supplied          under       the      program       were subject             to U.S.        monitoring              and
    control.             In the          19709,      the program         evolved          from a grant             of U.S.
    property          to primarily                a sales      program.           The new sales             legislation
    was silent           on authorizing                 U.S.    monitoring.               In the      early        198Os,
    grant      aid     was revived                as a major         component        of U.S.         security
    assistance.              At the Administration's                       request,          the Congress                approved
    administering              grant        aid      under     the     sales      program        legislation.                  As a
    result,          there     is no statutory                 provision          specifically             providing            for
    U.S.      monitoring            of     items      provided         as grant       aid     after        delivery.


    This      lack     of    U.S.         legislative          authority          to monitor          grant        aid      can
    act     as a constraint                 on U.S.         accountability            over       foreign          aid.         For
    example,          our     1989 report             on the Philippines               program           noted       that       most
    U.S.      military        aid        provided        to the       Philippines           under        current          foreign
    aid     legislation             becomes the property                   of     the Philippines.                   The
    Philippine           military            is not      required        to and does not                 report          on the
    distribution             of     this      aid.       Additionally,             U.S.     government             attempts
    to monitor           usage       are dependent              upon the discretion                   of    the
    Philippine           military            to allow        U.S.     officials           access      to Philippine
    bases and forces.                      Although         the access          situation         has improved,                 U.S.
    accgss       to these           bases      and forces            is still       limited.

                                                                 14
    .
.




        The accountability                      and control              problem            associated             with      monitoring
        foreign         aid     use at the discretion                            of    the      recipient            is compounded by
        the fact         that      what monitoring                      is done is not                  a primary            function           of
        U.S.       officials           in the         foreign           country.              While       the Department                  of
        Defense         (DOD) still              requires            monitoring,                this          is a secondary
        function         for      these         officials.               we plan            to conduct             a worldwide
        review        of accountability                      of U.S.         military            aid.           Among the          issues           to
        be addressed             are      those           of constraints                 on U.S.          accountability                  of
        equipment          funded         on a grant               basis,          the      impact        of national
        sovereignty             on controls,                 and the         trade-offs                between           personnel
        levels        and accountability.                          The Philippines                     will      be one of              the
        countries             included          in this           review.


        Technology             Transfers
        Technology             transfers             is another             area       of     increasing            concern         because
        of   the potential                for        misuse        of    the      technology                  (including          that
        funded        by U.S.       foreign               aid),      as well           as the          long-term            negative
        impact        on the U.S.               industrial              base of          unauthorized               production                and
        sales       of equipment                of U.S.           origin.             For example,               our       1988 report              on
        Korea's        coproduction                  of    the M-16 rifle                   disclosed             that      (1) Korean M-
        16 rifles          and parts             production              funded          with     U.S.          military          aid
        exceeded         levels        authorized                 in the production                     agreements               and (2)
        Korea had entered                  into           unauthorized                sales      agreements               with     third
        parties,         including              at    least        one confirmed                 sale.           These problems

               w


                                                                            15
resulted,            in part,         from        limited        U.S.     government            monitoring           and
oversight            of    the program.


Our follow-up                report        in 1989 found                similar        problems.            Specifically,
the executive                branch        did     not       directly         manage or monitor                worldwide
coproduction               programs         to ensure            compliance            with     agreement
restrictions               on production                quantities            and third         aountry        sales.            We
found      that       unauthorized                third       country         sales     of coproduced             equipment
occurred           in 5 of          18 major           programs         and in numerous              minor       programs.
In those           instances          where        the State            Department            took   action       regarding
these      violations,               the    typical           response         was a diplomatic                protest.


We     recommended that                the Departments                   of    State     and Defense             improve
management            controls         over        these        transfers         by adopting            internal
control        procedures             and increasing                  monitoring         of compliance               with        the
agreements            that       govern          the    transfers.             To date,         some of        our
recommendations                  have been implemented                        and others          are    in the process
of being           implemented.


Accounting            System Problems
In addition               to our      reviews           of    the management of                 the provision               of
U.S.      military           aid,     we have also               reviewed         the    accounting            system        that
supports          these       transfers.                For over         10 years,            GAO and DOD auditors
have reported                major     accounting               and internal            control         weaknesses
that      impair          DOD's ability                to properly            manage the          foreign        military
sal$s      trust          fund      and to provide               accurate         statements            t0 its

                                                                 16
customers.                 Additionally,                    these        problems       recently            resulted           in the
Office         of Management and Budget                                  placing       foreign        military             sales      on
its     list         of    "high           risk"       areas          in the       federal       government.


We are         involved                  in a multi-stage                    review    of      DOD efforts           to address
these       long-standing                     accounting                problems.           Our January             1990 report
concluded              that         DOD has implemented                        enhancements           to the central
accounting                system           that       are    intended           to ensure          that      records         are
accurate             and that              discrepancies                 between       disbursements                and billing
records         are promptly                       identified            and corrected.               We also          concurred
with       the decision                    to postpone                implementation             of   a new trust               fund
account         until          it         can perform             its     designated            function.            Subsequent
reports         will          cover         the development                    of a new accounting                   and billing
system         for        foreign           military            sales.


Covert         Programs                  Hamper Auditing                 Controls
We are all                aware of            the      Iran-Contra              scandal.          Our 1987 report                  on
DOD's arms transfers                              to the Central                Intelligence              Agency       (CIA)
disclosed             that          DOD bypassed                its      normal       review      and approval               channels
in managing                the arms transfers,                           and it       underpriced            the arms by $2.1
million.              We recommended,                       in part,           that    DOD adjust            its     billing          and
obtain         reimbursement.                        The CIA provided                  DOD with           an additional
payment         of        about           $300,000          as partial            reimbursement              for     the
undercharge.                   CIA officials                    stated         that    this      was the           remainder          of
the    funds          that          it     had received                 from    the    third      party       for      the     sale        of
the * missiles.                 Thus,             the U.S.            government        received           $1.8      million          less

                                                                        17
as a result               of    this      sale        than     the actual          value      of     the missiles.                    In
addition             to the CIA role                  in the     sale      of    the missiles                  between         two
agencies,             GAO wanted              to review         the CIA's          role      in the overall
missile             transfer.           However,             the CIA would           not     allow        GAO to review
its     role         in any aspect               of    the     Iran-Contra           transfers.


We     have      encountered              similar         problems         and concerns              regarding             the
provision             of aid      to the Afghan                 rebels.          In 1987 and 1989,                      we were
requested             to review           the provision               of military           aid      to the Afghan
rebels,          including             reports         of diversions             and misuse              of     the aid.             In
both      cases,         we were not              able       to perform          our work because                     the CIA
would         not     allow      us to audit              a covert         program.           However,              we were
allowed          to review             the AID-administered                     Afghan      assistance                program.
Our work confirmed                      our      concerns        about      control         and accountability
problems            associated           with         Afghan-related             programs.               Other       cases       that
demonstrate              the problems                 in accountability               and control                of military
and humanitarian                  aid      follow.


Salvadoran              Fuel     Transfers
In a 1989 report,                      we reported            on allegations               that      U.S.       military
grant         aid-funded          fuel        supplied         to the       Salvadoran             Air        Force      had been
improperly             transferred              to air        crews       involved         in a resupply
operation             supporting           the Contras.                 The State          Department               had been
asked previously                  to     investigate             this      matter         and concluded                 that     no
significant              diversion            had occurred.                I would         point         out     that      we
subsequently              discovered              that       the State          investigation                 was

                                                                18
4




     fundamentally                   flawed.             State         did      not    question            those           persons          with
    direct          knowledge               of     the     resupply             operation              about     refueling
    activities,


    Regarding            the diversion                    question,              we found          that        over         $100,000              in
    fuel      transfers                to the          Contras          and other              third      parties            occurred              in
    1986 and 1988.                      These          transfers              violated          agreements                 between          the
    United          States           and El Salvador,                    stipulating               that        title         or possession
    of u.s .-supplied                       defense            items     or services               cannot            be transferred
    without          prior           U.S.        government             consent.               Following             a lengthy            review
    of our        work,         the executive                    branch          acknowledged                 that         the diversions
    took      place       and formally                    notified             the     Congress.


    We also          found           that        the     Salvadoran              Air     Force         sold      almost            $1.5
    million         of       fuel,          provided           on a grant              basis       under         the        U.S.     military
    aid     program,            back to            the      U.S.       government               and its         contractors.
    Sales      of     U.S.       government-funded                            fuel     trace       back        to 1985.              Under
    the     sales        arrangement,                    the     Salvadoran              Air     Force         received             local
    currency          checks            from       the      U.S.       embassy           in San Salvador                     for     fuel
    transferred               to U.S.            military          aircraft              and dollar             payments             from
    contractor            personnel                for      fuel       transferred               to aircraft                 performing
    work under            U.S.         government               contracts.                The use of                 the     sales
    proceeds          was at the discretion                              of     the      Salvadoran             Air        Force,         with          no
    U.S.      government               control           or accountability                       over      their           expenditure.




                                                                         19
Concerned       about          the propriety           of direct             payments          and the        lack         of
U.S.     government            control       over     these        funds,          DOD officials             indicated
procedures          were established                 in April           1987 to credit               U.S.         fuel
payments       to a DOD account                   against        future           government-to-government
transfers       of military               aid.       In December 1988,                  we discovered                    that
the credit          system       did      not     include        the dollar            payments         from         the
contractor          flights        because         U.S.      officials             had not       been aware of
these      sales.


In June 1989 testimony                     on the      fuel        sales          and the credit             system,             a
DOD official           stated,           in part,         that    DOD had "taken                 appropriate                   steps
to ensure       . . . that              payments       received             for     authorized          transfers                are
properly       controlled           and reutilized."                     Our subsequent                check
disclosed       that      this      was not         the case.               We found          that     the    fuel
proceeds       were placed               in a Salvadoran                account        used for         commercial
purchases       that      is     not      reviewed         or approved              by the U.S.          government,
as the Congress               and GAO had been led                      to believe.              From April               1987
to   September         1989,       the     Salvadoran            military           used the proceeds                     in the
account      to make over               $1 million           in commercial              purchases.                 Among the
items      funded      from      this      account         were a $350,000                   purchase        of
buildings       in El Salvador,                   despite        U.S.       government           concerns           that         the
property       was overvalued,                   and a car        for       the     Salvadoran          military
attache      in Washington.                  In addition,               funds       were planned             for         but     not
expended       on two trips              by the       then       Salvadoran            Air     Force     commander.
We are      continuing           to review          the operation                 of   this     account.



                                                            20
I will       make one final                  point            about      the      fuels      case.        El Salvador           is
one of       the     four        countries               that      have received              fuel      in recent        years
under       the U.S.            military           aid        program.            The others           are    Honduras,
Israel,       and the Philippines.                               We have informally                    suggested         to DOD
officials          that         they    review            the provision               of     fuels      to these
countries          to ensure               that      similar            control       and accountability
problems        have not            occurred.                   While      there      was some agreement                 that
this      would      be a prudent                  management practice,                       there       has    been little
done to       implement             our      suggestion.                  Management           attentiveness             of     this
nature       could        be a major               factor          in stopping             the occurrence              and
continuation              of problems                with        accountability               and control.


Philippines              Aid
In a 1986 report,                   we stated               that        U.S.    military         aid      to the
Philippines              was not        always           managed or used effectively                             to counter
the communist              insurgency.                   Specifically,                we found          controversial
Philippine          military            purchases,                 including          one that          was being

investigated              for     fraud           by the Justice                Department,            poor      procurement
planning,          problems            in the          selection,              retention,            and utilization             of
u.s .-trained             Philippine               military             personnel,          and limited           U.S.       access
to Philippine              military               installations                in order        to monitor          how
equipment          was used.               We noted              that     the United           States        had taken
steps       to reverse            a general              attitude           that      U.S.     military          aid   was
Philippine          government               money to be spent                      as it      wanted,          regardless
of whether          it     addressed               the primary              threat.



                                                                   21
In a 1989 follow-up                       report,'         we found             that     various      improvements             had
taken      place       to ensure             that       U.S.       aid     was better             directed         toward
countering           the      internal             insurgency.                  Specifically,           the    Philippine
military          had improved               its      planning,            procurement,             and training.
However,          while       U.S.     officials              had greater                access     to various
Philippine          bases,           they        were generally                  unable      to visit         the bases         and
operations          of      front         line       units        actively             engaged     in the
counterinsurgency                   program.               AS such,             questions         remain      as to whether
adequate          control          and accountability                      is being          exercised         regarding
the eventual               distribution               of     U.S.      military           aid.


Contra      Aid
In 1985,          the Congress               authorized              $27 million             in humanitarian
assistance           for      the Contras.                   A key provision                 of the law required
the President               to establish               appropriate                 procedures         to ensure         that
program       funds         were not             used for          other         than humanitarian                 purposes.


We reported           in 1986 that                  the      State       Department's              control         procedures
were insufficient                   to ensure              that      the        funds     were used as intended                  by
law.       The State           Department              could         not        establish         management controls
outside       the United              States          because          certain           Central      American
governments           were unwilling                   to allow            it      to establish            offices      in
their      countries.               While          the State           Department            exercised         a
considerable               level     of control               over       items          purchased       in the United
States,      it     could          not verify              the validity                 of purchases          made in the
region       (64 percent             of     the program).                       State     was also         limited      in
     u

                                                                  22
verifying          the        final      delivery           and use of               the        items     purchased              under
the program.                  State      subsequently                  discovered               that     some payments              were
based on false                 receipts,           or     were for             munitions,               which     were
prohibited          under             the program.


About $6 million                  in payments               for        items     purchased               in the region              were
made to U.S.             bank accounts                   of agents             acting           on behalf         of    the
suppliers.           State            officials           took         the     position           that      such payments
completed          the        transaction             between           State        and the            suppliers,           and that
it   had no authority                    to trace           funds        further.                We disagreed               with    this
position,          since        a key requirement                       of     the    authorizing               legislation
was the maintenance                      of appropriate                  controls               to prevent         misuse          of
the funds.           Our examination                      of      the bank account                      records        raised
several      questions                about       the disposition                    of    funds         in the accounts.
For example,             we were able                   to trace         only        a small           amount of            the    funds
to specific          regional              suppliers,             and large               payments          were made to the
armed forces             of     one country.


Since     1988,      when AID assumed management of                                        the Contra             assistance
program      at the direction                      of     the Congress,                   we have observed                   a
considerable             improvement               in     the management of                       the program's
operation.           However,             our      report         on the         second           phase of assistance
pointed      out     that         AID's       medical          contractor                 did     not     have a reliable
system      for    estimating                requirements                for     medical           supplies            and
medicines.           During            the    third        phase,            the contractor                hired        a
subcon tractor,               at AID's            request,         to assist               in developing                usage

                                                                  23
rates     and to handle         medical      procurement.           We are presently
reviewing        these    activities.


Based on a 2-year            investigation         by the AID Inspector                General,          the
Justice     Department        has recently         charged       the deputy          director      of     the
AID task     force       in Honduras      with     accepting        bribes     from      the
subcontractor.            The Inspector          General's       staff     is continuing           it8
investigation,           and we are working            closely      with     them.


Mr. Chairman,        this     concludes      my remarks.            I am available              to answer
any questions        that     you or the         Subcommittee        may have.




                                                  24