North Korean Economy Watch

The UNDP issued a response to the US Senate investigation into their operations in North Korea.  This is from their web site (January 23, 2008):

UNDP welcomed the recent investigation by the US Senate Permanent Subcommittee on Investigations (the “Subcommittee”) into its former operations in North Korea.  UNDP voluntarily cooperated with the inquiry, including by making its personnel and documents available for review by the investigators.  UNDP’s extensive cooperation is acknowledged in the report.

The Subcommittee initiated the inquiry in June 2007, in the wake of persistent allegations concerning UNDP’s operations in North Korea.  A 31 May External Audit had found that, because of constraints imposed by the North Korean authorities, UNDP and other UN agencies did not operate in North Korea according to the same standards and practices they used elsewhere worldwide.  The same audit found, however, contrary to allegations that UNDP spending totaled hundreds of millions of dollars, that UNDP ran a modest program of less than $3 million per year, and had in place a full range of monitoring mechanisms to verify its spending.  New allegations surfaced shortly afterward, including detailed charges that UNDP had underreported its funding levels, and engaged in illicit transactions with entities tied to the North Korean armaments program, and that a significant amount of UNDP funding had been diverted by the North Korean government.  The Subcommittee initiated its investigation shortly afterward.

Nearly seven month later, after extensive interviews with UNDP staff, as well as a Subcommittee field to visit UNDP headquarters to verify the financial control systems UNDP had in place in North Korea, UNDP emphasizes that the Subcommittee’s report contains nothing to substantiate persistent allegations that:

• UNDP transferred tens of millions of dollars to the North Korean government, as had been alleged;
• UNDP money was used to fund North Korean purchases of real estate, or were diverted to its nuclear or missile programs;
• UNDP dealt in significant amounts of cash, which could be diverted or embezzled in defiance of financial controls;
• UNDP ignored UN controls on prohibited vendors and dealt directly with entities barred by these processes.

The report does contain a series of findings and recommendations.  UNDP’s responses are outlined below.

On UNDP’s management and operational practices in North Korea:
Finding: UNDP operated in North Korea with inappropriate staffing, questionable use of foreign currency instead of local currency, and insufficient administrative and fiscal controls.  

UNDP Response:

– The report states that UNDP operations in North Korea are a case study of an international agency’s attempts to achieve development goals in a restrictive environment, and that By all accounts, operating development projects in North Korea presented management and administrative challenges of the most extreme nature.  By definition, UNDP operates in challenging environments, and has crafted, for the most part, sound rules and procedures to ensure that UNDP development funds benefit the people of a host nation.
– UNDP has said all along that North Korea was a difficult place in which to do business.  It operated there since 1981 at the explicit direction of its Executive Board, which includes the US, and which regularly approved its programs.  The Executive Board was aware of the operational constraints UNDP faced.  All foreign entities in North Korea – UN agencies, national diplomatic missions and international NGOs – face the same constraints. 
– UNDP is committed to addressing any and all management and operational deficiencies that have been identified in its former operations in North Korea, and to applying lessons learned to other countries in which it faces similarly challenging operational environments.

On access to internal audits

Finding: By preventing access to its audits … UNDP impeded reasonable oversight.
Recommendation: UNDP should provide UN member states with unfettered access to financial and management audit reports about UNDP activities, including providing timely copies of such reports and allowing UN member states to make audit information public.

UNDP Response:

– As noted by Senator Levin, a proposal that would grant routine access to UNDP Executive Board members to UNDP audit reports is currently before the UNDP Executive Board.

On deceptive financial transactions by the DPRK government:
Finding: In 2002, the DPRK government used its relationship with the United Nations to execute deceptive financial transactions by moving $2.72 million of its own funds from Pyongyang to DPRK diplomatic missions abroad through a bank account intended to be used solely for UNDP activities and by referencing UNDP in the wire transfer documents.

Recommendation: UNDP should take steps to ensure that its name and resources are not used as cover for non-UN activities.

UNDP Response:

– UNDP is not happy that its name may have been used inappropriately by the North Korean government in connection with deceptive financial transactions.  It has formally raised this matter with the North Korean government.
– UNDP is pleased to note, however, that there is no suggestion that UNDP either knew of or could have prevented the transactions.  The report states: The Subcommittee does not conclude that the deceptive financial transactions executed by the North Korean government would have been prevented had UNDP’s management been more vigilant.
– UNDP is also pleased to note that contrary to persistent allegations it has faced, the report finds that the $2.72 million in question was not UNDP’s money.
– UNDP records show that the total sum transferred from 2001 to 2005 to the North Korean entity that was misusing UNDP’s name was approximately $175,000.  This figure is far less than the $7 million UNDP was alleged to have transferred to the entity in during this period.

On UNDP payments to Zang Lok

Finding: UNDP transferred UN funds to a company that, according to a letter from the US State Department to UNDP, has ties to an entity involved in DPRK weapons activity.

Recommendation: Prior to making payments to a contractor, UNDP should take steps to ensure that the contractor is not associated with illicit activity.

UNDP Response:

– UNDP paid a Chinese company named Zang Lok $22,000 in 2002 on behalf of WIPO, and $30,000 in 2004, on behalf on UNESCO.  UNDP did so because although both of these UN agencies have run projects involving North Korea, neither of them has a presence in the country.  In both cases the goods in question (computer equipment) were paid for by WIPO and UNESCO and received in good order.
– The State Department first informed UNDP that Zang Lok had ties to a “designated entity” on 6 June 2007, and UNDP immediately agreed to cease doing business with Zang Lok.
– UNDP and other UN agencies routinely consult control lists maintained by the UN Security Council before making procurement decisions.  It is unclear whether Zang Lok, as a company with ties to a “designated” North Korean entity – but not itself a designated entity – was on any list that could have been consulted in 2002, 2004, or afterward.
– The report acknowledges that UNDP’s vetting procedures appear sound and that It does not appear that UNDP, or the UN agencies on whose behalf UNDP was acting, knew of – or had any way of knowing – whether Zang Lok was connected to an entity involved with DPRK weapons activity at the time the payments were made.
– UNDP agrees that it would benefit from increasing its information-sharing with the other UN agencies and is committed to doing so within the ongoing process of harmonizing the UN standards system-wide, in which it is a leading participant.

On alleged retaliation against a whistleblower:

Finding: By…not submitting to the jurisdiction of the UN Ethics Office … UNDP undermined its whistleblower protections. 

Recommendation: UNDP should ensure that whistleblowers do not face retaliation for reporting irregular or improper conduct.

UNDP Response:

– Contrary to criticism directed at UNDP over the past year, UNDP has had policies and procedures in place to protect employees from retaliation for some time.  Some of these predated the policies initiated by the Secretary-General in 2005.  Moreover, all personnel (staff and non staff), regardless of level or legal status, are encouraged to bring concerns and claims under these procedures, and all such claims are treated with appropriate seriousness. 
– More recently, and in accordance with the new policies issued by the Secretary General in late 2007, UNDP has appointed an Ethics Officer.  In addition to overseeing the key components of UNDP’s ethical standards and mechanisms, the Ethics Officer will work together with the Director of the Ethics Office of the Secretariat, the new UN Ethics Committee, and the Ethics Officers of other UN entities, to further harmonize the overall ethics regime of the wiser UN system. 
– From a staff perspective, there is now in place a “two step system”.  Staff from UNDP can now appeal to the Chair of the new UN Ethics Committee to have their individual case reviewed by the UN Ethics Office, if they believe that they have not been appropriately treated within UNDP.
– In the case referenced by the Subcommittee, there is no question that Mr. Artjon Shkurtaj raised operational concerns during his time at UNDP North Korea.  There is equally no question that it was his job to do so, that the concerns he raised were similar to those raised by his predecessors, and that UNDP managers responded as appropriate.
– A key point is fundamental to ethics regimes and whistleblower protection mechanisms almost everywhere, including at the UN and UNDP: the complainant must avail him or herself of the mechanisms and cooperate with any inquiry. Mr. Artjon Shkurtaj neither availed himself of existing UNDP mechanisms nor cooperated with a subsequent inquiry.
– Mr. Shkurtaj’s case has been taken up by the External Independent Investigative Review (EIIR), which is being led by former Hungarian Prime Minister Miklos Nemeth.  According to the terms of reference of the EIIR, if the UN Ethics Office is not fully satisfied on the issue of Mr. Shkurtaj, it will itself look into the matter.  UNDP will not offer further comment while the EIIR is ongoing.

The US Senate Permanent Subcommittee on Investigations of the Committee on Homeland Security and Governmental Affairs published a report detailing the failure of the United Nations Development Program (UNDP) to adequately monitor its projects in the DPRK. 

By way of background…In March 2007, the UNDP suspended its operations in North Korea because of the government’s refusal to agree to new measures designed to increase the transparency and accountability of the UNDP programs there. 

The subcommittee staff released the following findings:

1. UNDP operated in North Korea with inappropriate staffing, questionable use of foreign currency instead of local currency, and insufficient administrative and fiscal controls

• UNDP’s DPRK office was staffed in large part with North Korean nationals who were selected by the DPRK, contrary to UNDP policy; 
• UNDP paid the salaries of local staff directly to the North Korean government without any way of verifying that the salaries were properly disbursed and despite UNDP’s suspicion that the DPRK was, in the words of one UNDP official, “skimming” money from the payments; 
• UNDP paid salaries and other expenses in convertible currencies, such as US Dollars or Euros, rather than in the local currency, contrary to UN best practices; 
• UNDP was required to conduct its financial transactions using a DPRK state bank that accepted paperwork only from DPRK personnel, sometimes routed UNDP funds through an unrelated bank account, and, until recently, refused to provide UNDP with copies of cancelled checks;
• UNDP was allowed to conduct on-site project visits only with prior notice and in the company of North Korean officials, contrary to UNDP best practices; and
• The UNDP office in Pyongyang operated without secure communications, and the regime routinely monitored UN activity, going so far as to enter and search private residences of UN personnel.

2. By preventing access to its audits and not submitting to the jurisdiction of the UN Ethics Office, UNDP impeded reasonable oversight and undermined its whistleblower protections.

The UNDP commissioned four audits of its North Korean operations, in 1999, 2001, 2004, and 2007. Problems were identified in all four. The first three audits were nonpublic and, in accordance with UNDP policy, unavailable for review even by nations serving on the UNDP Executive Board. After repeated requests, UNDP made an exception to this policy and, in 2007, showed the audit reports to the US Mission to the United Nations, whose personnel were allowed to read but not copy them.

Beginning in 2005, Artjon Shkurtaj, then Operations Manager of the UNDP office in Pyongyang, raised concerns about management and operational deficiencies in UNDP operations. After raising these concerns, his employment contract was not renewed. He then filed a complaint with the UN Ethics Office claiming that UNDP had retaliated against him.  In August 2007, however, the Ethics Office determined that, although Mr. Shkurtaj had established “a prima facie case of retaliation,” it lacked jurisdiction to decide his claim and could protect only whistleblowers within the UN Secretariat.

3. In 2002, the DPRK government used its relationship with the United Nations to execute deceptive financial transactions by moving $2.72 million of its own funds from Pyongyang to DPRK diplomatic missions abroad through a bank account intended to be used solely for UNDP activities and by referencing UNDP in the wire transfer documents.

4. UNDP transferred UN funds to a company that, according to a letter from the US State Department to UNDP, has ties to an entity involved in DPRK weapons activity.

UNDP regularly made payments to contractors on behalf of other UN agencies operating in North Korea. During the course of its investigation, the Subcommittee learned that payments on behalf of other UN agencies – totaling approximately $50,000 – were made to an entity named Zang Lok Trading Co. in Macau. According to a letter dated June 7, 2007, to UNDP from the US Permanent Mission to the United Nations, Zang Lok “has ties to a North Korean entity that has been designated [by the US government] as the main North Korean financial agent for sales of conventional arms, ballistic missiles and goods related to the assembly and manufacture of such weapons.” UNDP maintains that it does not know, and has no way of knowing, whether Zang Lok is connected to North Korean weapons sales.

How much money are we talking about?
UNDP estimates that, from 1995 to 2005, it spent a total of about $33.5 million in North Korea. Of that figure, approximately $6 million was spent on UNDP office, staff, and operating expenses, including roughly $100,000 per year in payments to local staff and contractors, and $500,000 per year spent on rent, office supplies, transportation, employee compensation, and other expenses. An ongoing external audit is expected to refine these estimates. In addition, the UNDP office in North Korea made payments and provided administrative support on behalf of other UN Funds and Programs operating in North Korea including the United Nations Population Fund and United Nations Office for Project Services, among others. Total expenditures by all UN agencies in North Korea – excluding the World Food Program – during the same ten-year timeframe have been estimated at roughly $200 million.

Here is the full report: undpreport.pdf