Report on the Commodity Credit Corporation's GSM-102/103 Export Credit Guarantee Programs and Iraq's Participation in the Programs

Published by the Government Accountability Office on 1990-10-16.

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

                    United states General Accounting Omce

 For Release        Report on the Cmmdity     Credit   Corporation’s
 on Delivery
 Expected at        GSPt102/UI3 Ezpxt Credit Guarantee Programs
 9:30   a.m.   ED   and Iraq’s P2rticipation in tfn Programs
 October 16, 1990

                    Stab3nenc of
                    Allan 1. Xendeltitz,   Director
                    Trade, Energy, and Finance Issues
                    National Security and International     Af fait-s

                    Before the Gxmittee on Banking, Finance and
                      Urban Affairs
                    Lhited States &use of Representatives

                                                                        GAOPm la (lZb3-7)
Mr.      Chairman             and Members of the                    Committee:

We are pleasad                   to     be here         today       to discuss               the     management and
operations               of    the      U.S.        Department           of    Agriculture            *s Commodi:y              Credit   .
Corporation's                  (CCC) Export                Credit        Guarantee            Program         and
Intermediate                  Export         Credit        Guarantee           Program,            referred          to as the
GSM-102 and GSM-103 programs,                                   respectively.                  The GSM-102/103
programs           are        managed and operated                       by the        Foreign         Agricultural
Service          (FAS).              Besides         our overall              views         on management             of the
programs,           you asked                that     we specifically                  address            Iraq's
participation                  and some of the                  issues         involved.

In the       past         few years,                we have conducted                  several            reviews       of these
programs           in     response            to     requests           from     the        Senate        and House
agriculture               committees                and the       House Budget                Committee's             Task Force
on Urgent           Fiscal            Issues.           In general             we have found                 that     FAS needs
to     improve          its      management             controls          over        the     programs             to better
ensure       the        programs'              integrity          and to         avoid        excessive             financial
risk      to the          U.S.        government.              Regarding              Iraq,        a number of            issues
have      arisen          over        its     participation-:                 most     importantly                 perhaps,      Iraq
has stopped               repayment             on approximately                  $2 billion               in guaranteed
loans.           Many of             those      loans       are     from one bank,                  the     Atlanta        branch
of the       Banca Nazionale                        de1 Lavoro,           which        has been under
investigation                  for     several          irregularities.


    The GsM-302/103                     programs         are U.S.          government                    loan     guarantee
    programs           designed           to     increase       export8               of U.S.             agricultural
    commodities.                      The GSM-102 program                  has been in                    effect          since             1981    and
L   the       GSM-103 program                   has been in effect                     since             1986.          Almost              $33
    billion          in     loan        guarantees          have been approved                            to     finance          U.S.
    agricultural                 exports         under      these        programs.

    Each year,              FAS announces             the     availability                        of loan         guarantees                  for
    credit          sales        of specified              commodit; -es made to                          buyers          in specified
    countries.                  Loan guarantees              announced                for         Mexico,         Korea,          and Iraq
    are      among the             highest        under      the programs.                         In return             for      payment            of
    a relatively                 small     guarantee          fee,        a U.S.             exporter             obtains              a CCC
    guarantee             that        he or      she will       be repaid                   for     a credit             sale      made to             a
    buyer       in an eligible                   foreign      country.                 If         the    buyer          fails          to     repay,
    then      the     exporter            can file          a clai;a           with         CCC for            the loss.                After
    paying       the        claim,        CCC attempts           to       obtain             reimbursement                      from the
    foreign          buyer         or the        foreign      buyer's            government.

    Exporters             are     generally          not     able        to,     or interested                     in,      personally
    financing             a sale.          Therefore,           the       programs                 are     designed              to allow
    the     exporter             to    obtain      immediate             payment             on the            credit           sale        by
    assigning             the     account         receivable             and the             repayment             guarantee                 to any
    financial             institution             in the      United            States             desiring         to participate
    in these          programs.                When this       assignment                    is made,            the       financial

institutioc                    pays the            exporter            for        the     value       of the sale               and begins
collecting                  the      periodic             payments               from     tha      foreign        buyer,           iL^ the
 foreign            buyer          defaults             on a payment,                    then      the     financial
institution                    can    look         to CCC for                recovery.              CCC must approve                    the
exporter's                  assignment                 of guarantees                    to financial             institutions.

CCC generally                      tries          to    share         some of the                 ffaancial         risk        with        the          l

exporter,                or the            exporter's                assignee,            by not         providing          lOO-percent
coverage              for         a loan's             principal             and interest.                     CCC guarantees                 98
percent             of      the value              of the            sale        plus     a significant              portion            of the
interest             payable.                The exporter                    or the         exporter's            assignee             is     at
risk         for     2 percent               of        the      principal               and a portion             of the         interest
payable.                 However,            CCC has flexibility                           to      adjust        the amount             of
guarantee                coverage            it        provides.                 For     example,          in the past,                Ccc has
guaranteed                  100 percent                 of the         value            of commodity             sales      to Mexico.

There         are        no operational                      differences                 between         the     GSM-102 program
and GSM-103 program;                               however,            each program                 covers        different
repayment                periods            and has different                           funding       authorization                levels.
Under         the        GSM-102 program,                        guarantees               are      provided         for     sales           having
credit             terms        of 36 months                    or    less,             Under      the     GSM-103 proqram,
guarantees                  are provided                  for        sales        having        credit          terms      of    3 to         10
years.              In      the      1985 farm               bill,          Congress         directed            CCC to make
available                not       less      than         $5 billion               annually           in     guarantees            under           the
GSM-102 program                       and not            more than                $1 billion             annually          under        the

GSM-103             program.

CCC'S contingent                   liabilities           under        the     programs          total          about          $8.9
billion          as of      September            30,    1990.         CCC has paid              out      about           $3
billion          in claims            since      the    programs'            inception          and is             at    risk           for

the       approximately               $2 billion          not       being     serviced          by Iraq.


Over       the    past      few years            we have         reported1           that      the GSK-lO2/103
programs          were      not       being      adequately           managed.              Specifically,                    we
re;?orted         that      CCC had not             adequately              (1)     accounted           for        outstanding
guarantees,               (2)     ensured        that     guarantees              were being            used only                 for
U.S.       agricultural               commodities,              (3)   provided         guidance               to    GSM-102/103

program          users,         and    (4)    reflected             estimated         program           losses           in its
financial          statements.                We recommended                 that     the      Secretary                of
Agriculture              direct        the    General       Sales           Manager,         FAS, to do the

1 Status     Report on GAO's Reviews of the Targeted Exuort Assistance
Program.     the Extort      Enhancement Proaram.       and the GSM-102/l     3 Exm
Credit     Guarantee Prosrams        (GAO/T-NSIAD-90-53,      June 28, 199:; GAQ,"$
NSIAD-30-02,       Feb. 21, 1990; and GAO/T-NSIAD-90-12,            Nov. 16, 1989);
financial      Audit:     Commodity Credit     Cormoration's    Financial
Statements      for 1988 and 1987 (GAO/AMD-89-83,             Aug. 1988); Commodity
Credit     CorPotatfon's      Export Credit      Guarantee Pfoqrams (GAQ/T-?TsIAD-
89-41,     June 14, 1989; GAO/T-NSIAD-89-9,            Mar.  1, 1989; and GAO/T-
NSIAD-89-2,       Oct. 6, 198a); International          Trade: Commoditv Credit
COmOratiOR'S          Extort  Credit   Guarantee    Programs (GAC/NSfAD-S8-lg4,
June 1988); and International             Trade:   Commoditv Credit     Corporation's
Refunds of Export Guarantee            Fees   (GAO/NSIAD-87-165,     Aug. 1987).
--   Enforce         compliance             with      the    requirement              that     exporters          submit
     complete            reports       of        exports     to ensure              accurate      accounting             of
     outstanding              guarantees.

--   Design,         develop,          test,         and implement             internal          controls,
     including            random on-site               verifications,                 to ensure          that     loan
     guarantees            are only            used to. obtain               U.S.     agricultural

--   clarify         program        regulations              by providing              specific          definitions            of
     what        constitutes           a U.S.         agricultural             commodity          and a firm             sale
     2nd demand acknowledgement                             of       these    requirements              on guarantee

--   Provide         timely        and accllrate             decisions              on document          revisions
     requested            by exporters              or their           assignees.

--   Initiate            suspension           or debarment              actions        against          program
     participants              found        to     have violated              program        regulations.

--   Act    to prevent             less-than-arms-length                       transactions              between
     participating              financial             institutions             in the        United       States       and in
     the    importing           countries.

We also         recommended            that        CCC include           an allowance             for     estimated
losses      in     its     financial             statements.

Action           has      been taken               on some of our                recommendations.                          For
example,               CCC has improved                    its      aCCOUnting             for     outstanding                  loan
guarantees,                enhanced           some internal                   controls            over        the progrmts,                      and
is     in the           process         of    recognizing                 estimated              loeses        in its           1989
financial               statements.

However,               we believe            that         further         improvements                  are    still           needed            in
tightening                internal           controls,              specifically             those            related           to
financial               institutions'                participation                 in the programs,                       and in
defir.ing              an agricultural                    commodity          eligible             for     export          under            the

PARTICIPATION OF FINANCIAL                                   INSTITUTIONS

~'ne success               of the        GSM-102/103                 programs            depends          greatly              on the
active           participation                of     financial              institutions,                     These       institutions
disburse            the     approximately                    $4 billion            in SSM loans                  each year,
providing               direct       credit          to      the     foreign            buyers.           About         100 financial
institutions                have participated                        in the       programs               since         their
inception.                 They make money on this                             low-risk           business              by charging
fees       for      advising           on letters                of credit              and by ccllecting                      the
interest           on the           credit          sales.          However,             of the LOO or so
participating                    financial           institutions,                only       a    few         have been              major

participants                and have dominated                        the     lending            activity              under         the
programs.                Representatives                    of the        banking          industry              claFm that                  while
the     GsM-102/103              loans      are          very     low        in risk,      they        are also       very      low
 in profits.                 We found       that          the     few financial              institutions             heavily
 involved          in the        programs           specialize                in government             loan    programs            and
usa their           specialization                  to minimize                costs      and maximize             profits.

Despite          the     important          role          played        by the         institutions,            CCC has
only      two regulations                  covering             their        GSM-related          activities.                 The
first        is that          participating                institutions                must be located               in the
United         States.           The second               prohibits            a participating              U.S.      financial
institution              from     being       affiliated                with     the      overseas        bank issuing
the     letter          of credit,          which          the     foreign         buyer      uses       to pay for            the
commodities              exported          under          the GSM programs.

Although          the     second         regulation              prohibits             participation            in
transactions              by affiliated                  banks,         it     does not       fully       protect        U.S.
interests          from other              less-than-arn's-length                          relationships+               CCC has
guaranteed             the     financing            of     exports           to foreign         governments            who were
also     owners          of the U.S.           institutions                    lending      the money and
receiving          the        GSM guarantees.

During        a recent           review,       we found               three      U.S.-based            financial
institutions              that     were       either            directly         owned by or otherwise
affiliated             with      gove,llment-owned                    banks      in GSM customer                countries,
The three          financial          institutions                    had foreign           customer           ownership
ranging          from     14 percent           to        100 percent             of the       institution's              equity.
Since        inception           of the       GSM programs,                   CCC has guaranteed                 about        $1.3

billion          in these            related-party                     transactions.                  Although           these
financial            institutions                      are     conplying             with       current         regulations,
should         a default             occur,              any guarantee                payment         made by CCC to these
U.S.-based            institutions                       would      financially               benefit           the     foreign
government            that        is        in     default.              These apparent                   less-than-am's-
length         transactions                  increase             the        risk     of losses            to    the U.S.

In     fact,      two of          these            three         financial            institutions               held     guaranteed
debt      on which           their           foreign            goverment                 owners      defaulted.             One
institution             is       owned by a consortium                               of several            banks       and 43.7
percent         of    its        equity            is owned by a defaulting'                            government's              central
and nationalized                   banks.                    The other            institution             is    also     owned by a
foreign         consortium               and has financed                           about     $588 million               in GSM
transactions                to    one of               its     owner         countries          which          owns 14 percent              of
the     institution's                   equity.                These         loans        represent            about     62 percent
of    the      institution's                     total         GSM portfolio.

In    one of         the three               cases            in which            there     appear         to    be less-than-
arm's-length                relationships,                      there         have been no defaults.                         This
U.S.-based            financial                  institution                 is     a branch        of the         foreign
country's            national            bank            and has financed                   over      $474 million             in
commodity            exports           to        its         own country             under this            guaranteed          loan
protection            from        the       United             States.

IX4Q'S         ?ARTICI?ATTON                    IN THE GSM-102/103                   PRCGRkYS

Iraq's         participation                    in the       GSM-102/103             proqrams           began in 1983,
just      before           we re-established                      official         diplomatic              relations          with
that      country.              Iraq         was initially                 allocated            $230 million            in loan
qarantE;es            under          the        GSM-102 program                to purchase                feedgrains,          rice,
and wheat.                 The Iraqis              were depleting                 their         foreign        exchange
resemes             due to          their        war with           Iran      and they           desperately            needed
credit.             II-I 1984 Iraq's                   allocation            was almost           tripled,            to about
$6aO million.                   Iraq         began        importing           protein           concentrates,            tobacco,
vegetable            seeds,          and other             co;n;nodities           in addition               to the
feedgrains,             rice,          and wheat.                By 1988 Iraq's                  GSM-102/103
allocations             totaled             about        $1.1       billion        and were used to purchase
some 30 different                      commodities.                  This      level       of     GSM-102/103
aliocations             continued                in     1389 and the              Iraqis         sought        the     same
levels         in    1990.           However,            when the unauthorized                         loans     involving
Iraq      came to           light          in    the     Banca Nazior,ale                 de:. Lavoro           case,     the
Agriculture             Department                 decided          to scale        back         the    1990 program            for
Iraq      to    $500 million,                    with      the      possibility            of     another        $500     million

allocation            pending              re:;ults        of Justice's              investigation               of the bank.

In t:he meantime,                    the        Agriculture              Department         began conducting                   its
own review            of     Iraq's             participation                in the GSM-102 program.                        In May
1990,      the      Department                  concluded           that      certain       exporters            to     Iraq had
been charging                high       prices           and providing              Iraq         "after-sales            services"
which,         in the        Department's                 view,          may have violated                  program

regulations.                The 3eFartaent                   p1Ens further                   Inquiry           into     these
potential          violati0r.s                 at the      cor.clusion            of the           Santa        Nazionale          del
Lavoro       investigation,                     when more inforn;ation                        becomes           available.

Problems          identified                  in the      GSM     programs             for    iraq       so far         include         the

--   Iraq      has suspended                    payment         on its         approximately               $2 billion              in
     outstanding             GSM qaranteed                      loans,         exposing            CCC to         a    substantial

--   One bank,         the          Banca Nazionale                    de1 Lavoro,                has a high
     concentration                  of    loans         to Iraq,          a    SignIt'icant              amount of which
     are     guaranteed              under        the      GSM programs.                     However,           most     of the         GSM

     guaranteed             leans         were      not      authorized                by higher          level         bank
     officials.              I'll         discuss          this        in more cietail                 later          in this

--   Foreign        origin           agricultural                 commodities                have been exported                    to
     Iraq     under         the      GSM programs.                     Such exports                are    contrary            to
     program        regulations                  -Jhich      state        that         the    guarantees               are to be
     provided         for      U.S.           agricultural               commodities.                 Eight           tobacco
     exporting         companies                 have pleaded                 guilty         to    shipping            foreign
     tobacco        to Iraq              or     Egypt      under         the     programs            and have been fined
     a total        of S300,OOO.                    The companies                 were also              directed            to pay

      restitution             costs       to    CCC of Up to $1.1                       million         should        CCC incur
      losses        related          to those           shipments.

--    Money      obtained            under      Iraqi         participation                  in   the    GSM programs                   has
      been used for             purposes            other           than     those          permitted,         'including
      after-sales             services          that         are unrelated                  to agricultural                 exports.


In    previous          testimony,             we reported                 that      the     Department          of Justice
was investigating                    allegations              that         Banca Nazionale               de1 Lavoro~s
Atlanta,         Georgia,            branch       made more than                     $2 billion          in    loans            to
Iraq,      of which           only       a fraction            had been authorized                       by higher-level
bank     officials.              Some of          these         loans,            amounting         to approximately
$750 million,             were        guaranteed              under         the      GSM programs             and,         of    that
amount,        only      about        $130 million                  had been authorized.                       The
investigation              is    still         ongoing,             and none of the related                          information
has been made available.

Banca Nazionale                 de1 Lavoro              is    Italy's             largest         state-owned              bank.
Headquartered              in Rome, it              has several                   branches         operating          in the
United        States.           The New York                 City     branch           is    responsible             for        North
American         operations,              and its            Atianta,             Georgia,         branch      has provided
the     GSM loans.
There     may be lessons                 to be learned                 from        the    Banca Nazionale                  de1
Lavorc        investigation.                  Once it        is    complete,              we plan       to     evaluate            the
extent        to which          individual           financial               institutions            participate              in
GSM programs.                 We will         also     asBe            the        potential         impact          that     such
particfpatfon               may have an CCC'6 guarantee                               liability.             In
particular,            we will          review       the     bank's           involvement            with      Iraq        and
determine            the    appropriateness                of allowing                one bank to            participate
to    such a large             extent         in the       GSM programs,                  especially           if     that
bank's        loan     exposure          is    concentrated                  in    a single         ccuntry.

(3ur work       in     this      mea      is     continuing             at        the request         cf     Chairman
Charlie        Rose of the             Subcommittee               on Tobacco              and Peanuts,               House
Committee         on Agriculture                 and Congressman                    Charles         Schumer.
Investigations                by the      Department              of Justice              and U.S.          Customs
Service        on these          issues        are    also        continuing.

                                                      -      -     -     -

Mr.     Chairman           and members of the                    Committee,              this      concludes          my
statement.             I will       be happy          to     answer           any questions             you may have.

                                                                           APPENDIX I

                        TOTAL GSM-102 ~OG~VSM amEES             .
                           MADE A AWLE     AND APPROm
                             (DolLa    in Millions)

                                 Guarnntees           maa
1981                                $2,189.1
1982                                                                   $2,082.1
                                     x,224.6                            1,543.3
1983                                 4,079.g
1984                                                                    3,709.3
                                     4.125.6                            3,431.z
1985                                 4,485.2
1986                                                                    2,512,8
                                     4,175.3                            2‘522.4
1987                                 3 ,a21.4
1988                                                                    2,622.5
1989                                                                    4,141.4
1990                                                                    4,769.8
aTentatfve    figures    as of   October        11,
Source:    GSM-102 Commitment Reports prepared              by the U.S. Department
of Agriculture's         (USDA) Foreign Agricultural         Service,  CCC
Operations     Division.

APPENDIX II                                                              APPENDIX II

                            TOTAL GUAF!AHT~ MA-                 PJIQ
                             Fm         F R THE GSM-103 mQGR&Jj
                                  (Dollzra   in Millions)

 Y!sx                                  gvailabls
1986                                       $377.0                           12.7
1987                                        410.9                          250.4
1988                                        504.4                          362.9
1989                                        485.3                          425.5
1990                                                                       332 1
Total                                                                  $1,383:6a

aTentative        figures      as of October        11, 1990.
Source   :     GSM-103 Commitment Reports prepared by USDA's Foreign
Agricultural        Service, CCC Operations  Division.

APPENDIX III                                                             APPENDIX III

                            CCC ' S CONTINGENT      ILITY
                       UmER m     CSM-102/103 PROGRAMSFOR IRAQ
                                   (By Fiscal Year)

             j?iscnl     Year

                 1390                                    $154,336,?44
                 1991                                     930,144,855
                 1992                                     622,021,012
                 1993                                     287,593,955
                 1994                                       6,971,205
                 1995                                       3,817,090
                 1996                                        3,593,898
                 1997                                           121,22
                Total                                 $2,038,599,98;

Source:     UsCA's     Foreign   Agricultural    Service,   Financial    Management