VZCZCXYZ0000
OO RUEHWEB

DE RUCNDT #0007/01 0100126
ZNY SSSSS ZZH
O 100126Z JAN 07
FM USMISSION USUN NEW YORK
TO RUEHC/SECSTATE WASHDC IMMEDIATE 1094
INFO RUEHUL/AMEMBASSY SEOUL IMMEDIATE 0751
RHEHNSC/NSC WASHDC IMMEDIATE

S E C R E T USUN NEW YORK 000007 
 
SIPDIS 
 
SIPDIS 
 
FOR ISN, IO, T, EAP 
 
E.O. 12958: DECL: 01/09/2017 
TAGS: EAID KFPC KN KNNP KUNR PINR PREL UNDP
SUBJECT: THREE LETTERS SENT TO AMBASSADOR WALLACE FROM UNDP 
REGARDING THE UNDP PROGRAM IN THE DPRK. 
 
REF: A.STATE 2744 B.USUN 00004 
 
Classified By: Ambassador Mark D. Wallace per reasons 1.4 (b) and (d) 
 
1.(S) On Friday January 5, 2007, following his letter to UNDP 
Administrator Dervis of December 22, Ambassador Wallace, 
returning his telephone call, had a telephone conversation 
with Mr. Dervis' Chief of Staff, Mr. Tegegnwork Gettu, in 
which Mr. Gettu confirmed that USUN would receive late Friday 
evening three letters from UNDP (a cover letter from 
Administrator Dervis and two letters from Assistant 
Administrator Ad Melkert, responding to U.S. requests for 
information regarding UNDP's program in the DPRK and the 
Office for Audit and Performance Review (OAPR), 
respectively), and certain financial information regarding 
the UNDP program in the DPRK. In regard to Ambassador 
Wallace's request for copies of the UNDP internal audit 
reports on the DPRK Country Office (CO), Mr. Gettu suggested 
that UNDP may be in a position to allow Ambassador Wallace to 
review the reports in UNDP's office and indicated that he 
would confirm this understanding. In addition, Mr. Gettu 
indicated that he would look into the issue of UNDP sponsored 
business class travel for DPRK officials to New York for the 
purposes of "lobbying" the Executive Board. In the letter 
subsequently received by USUN from Mr. Dervis Friday night 
however, UNDP asserted that "internal audits are important 
management tools for Executive Heads, and therefore 
confidential", but that he would consult with the Executive 
 
SIPDIS 
Committee of the United Nations Development Group (UNDG) on 
the release of such reports to Member States. The issue 
regarding UNDP sponsored air travel for DPRK officials was 
not addressed in that letter or the other two letters 
received from UNDP that evening (reftel A). See paras 3, 4 
and 5 for text of the three letters received by Ambassador 
Wallace from UNDP. 
 
2.(S) Late Friday evening, Ambassador Wallace received three 
letters from UNDP, one from Administrator Dervis and two from 
Assistant Administrator Ad Melkert. Per reftel B, the first 
of the two letters from Mr. Melkert attempts to address the 
issues raised by Ambassador Wallace during USUN's meeting 
with Mr. Dervis and other UNDP officials and the follow-up 
letter sent by Ambassador Wallace to Mr. Dervis on December 
22, 2006. The second letter from Mr. Melkert addresses the 
state of UNDP audit activities, specifically the U.S. 
Government concern that UNDP's Office of Audit and 
Performance Review (OAPR) has not been allocated sufficient 
funding to adequately cover UNDP programs classified at 
high-risk of irregularities. 
 
3.(SBU) The following is the text of the letter received by 
Ambassador Wallace from Mr. Dervis late in evening on Friday, 
January 5th. Begin text: 
 
-Thank you for you letters dated 22 December 2006 and 4 
January 2007. 
 
-Please find attached a detailed response to the specific 
questions and data requests contained in your letters. The 
response has been carefully reviewed by the Associate 
Administrator, Mr. Ad Melkert, and other senior staff. It 
also includes all the relevant information form our internal 
audits. 
 
-With reference to our recent telephone conversation and your 
most recent letter dated 4 January 2007, I can confirm that I 
will convene a special meeting of the Executive Committee 
agencies to discuss the issue of direct access to internal 
audit reports of DPRK and others more generally. You should 
be aware that, consistent with UN system-wide policies and 
practices as articulated in May 2005 by the Chief Executives' 
Board's 
High Level Committee on Management, internal audit reports 
are important management tools for Executive Heads and 
therefore, confidential. In this context, I will propose to 
the Executive Committee agencies that, on an exceptional 
basis, appropriate modalities of examination of internal 
audit reports should be considered and evaluated, so that it 
may be possible for your Government to examine such internal 
audit reported for the purpose stated in your letters. 
 
-I will also propose to my colleagues that we review the 
overall policy and practice, and perhaps introduce a clear 
distinction between evaluations focusing on internal 
management performance, and evaluations that are in the form 
of formal audits and could be shared with Board members, 
subject to mutually agreed procedures. End letter text. 
 
4.(SBU) The following is the text of the first of two letters 
 
 
received by Ambassador Wallace from Mr. Melkert late in the 
evening on Friday, January 5th. Begin letter text: 
 
-Please find below the response to the issue raised in your 
letters to the Administrator dated December 22, 2006 and 
January 4, 2007 on the UNDP program in North Korea. 
 
-Allow me first to provide you with some general context that 
defines our operations in the specific situation of DPRK. 
 
-Our mandate to operate is derived entirely from the decision 
of the Executive Board on the design and approval of Country 
Programs, including their implementation. This work by 
definition requires cooperation with the government of the UN 
Members States in which UNDP operates. As long as the Board 
expects us to remain active in any country (in this case 
DPRK) a flow/exchange of hard currency is inevitable. This is 
in accordance with UNDP's Financial Regulation and Rules. 
Permit me therefore to say that you unqualified statement (in 
the January 4 letter) that UNDP would "transfer hard currency 
directly to the KIM regime" seems to disregard the general 
conditions for our operation in the country as described, 
i.e. allowing for a flow of hard currency exclusively made 
available for the defined Programme, as mandated by the Board 
for implementation in cooperation with the government 
concerned. 
 
-Over the years 2001 to 2005, UNDP expended an average of 
(the equivalent of) $2.3 million per year in both program and 
administration, including approximately (the equivalent of) 
$100,000 each year for local salaries. 
 
-Furthermore, in terms of the transparency of our reporting, 
I would like to refer to standing procedures that have been 
agreed upon with and by the executive Board. At any time we 
would be ready to reconsider these as necessary and we fully 
respect that wish by Member States to receive additional 
information in specific circumstances. I trust that you would 
agree with me that the provision of such information in 
principle should be part of generally established procedures. 
On the basis of what is currently define as reporting duties 
for UNDP, I would appreciate your reconsideration of 
references to "inconsistent information" and "lack of 
transparency" (in the January 4 letter). I hope that the 
extensive additional information that we are providing as 
part of this response as to your specific request will assist 
in alleviating further concerns. 
 
-Turning now to your specific questions in the December 22 
letter, I would like to state the following. 
 
      Ad 1) Please find enclosed an overview of the 
recommendations from all audits conducted (from the years 
1999, 2001 and 2004), along with the current status of their 
implementation. 
 
      Ad 2) Please find enclosed the line-by-line budgets for 
both the office of the Resident Representative and the UNDP 
Programme for the last three years. 
 
      AD 3) As to your question concerning UNDP's written 
regulations, rules, procedures and/or policies on the use of 
hard currency in the particular case of the DPRK, I would 
first like to refer to what has been stated in the general 
introduction above. For countries in which the local currency 
is locally convertible-as is the case in DPRK-it is a matter 
of practical consideration to define options and limitations 
concerning hard currency transactions, as is included in the 
internal manual on administration and management that guides 
the Res Reps in their implementation. This takes into 
consideration the requirement to limit the devaluation of 
accumulated local currency, and utilizing local currency 
where applicable. However the decision regarding the choice 
of currencies utilized is delegated to the Resident 
Representative. As a consequence no waiver procedure needs to 
be in place for DPRK. 
 
-As stated by the Administrator in our meeting on December 
22, 2006 we have informed the government earlier that 
salaries of seconded national staff, local purchase of goods 
and services, local travel allowances and other similar 
expenses will in future be paid in convertible won. This can 
only be obtained by converting hard currency in the state 
bank of DPRK. 
 
      Ad 4) As stated during our meeting on December 22, 2006 
UNDP has a retention policy that requires accounting 
documents to be retained for a period of seven years after 
the finalization/approval of the document. We are informed 
 
 
that UNDP Country Office in DPRK that hard copies of 
accounting documents that exist at this point in time, as 
well as information stored electronically should not be 
destroyed until further notice. 
 
-Finally, on the point made in the January 4 letter 
concerning access to internal audit reports I would like to 
refer to Administrator's response in the cover letter to the 
information provided in my note. 
 
-Please don't hesitate to ask for further clarification if 
needed, which I would be happy to provide. End letter text. 
 
5.(SBU) The following is the text of the second letter 
received by Ambassador Wallace from Mr. Melkert late in the 
evening on Friday, January 5th. The letter addresses the 
state of UNDP audit activities. Begin letter text: 
 
-Thank you for your letter dated 17 November 2006 and for the 
interest expressed by the US Government to better understand 
the state of UNDP's audit activities in order to exercise 
your responsibilities as member of the Executive Board. 
 
-I take note of your concern, specifically, that "OAPR has 
not been allocated sufficient funding in 2006 to adequately 
cover auditing of UNDP programs classified at high risk of 
irregularities. As such, this has left OAPR unable to 
complete its program of work for the year." 
 
-Let me first elaborate on the facts with regard to the 
funding and coverage of audits before concluding on OAPR's 
facilitation and achievements. 
 
-Budgetary resource allocation to OAPR increased by $4m or 
25.8% (from 15.5m in 2002-2003 to 19.5m in 2006-2007). This 
is in addition to the $12m (or $6 annually) funded from 
projects and payable to professional audit firms for the 
audit of projects that are nationally executed by programme 
governments or other national institutions (NEX) and with 
more than $100,000 in expenditure. While zero budget growth 
was enforced vigorously across UNDP in the last two biennia, 
OAPR is one of the few entities in UNDP that continued to 
receive additional budgetary allocations while budgets were 
reduced in other units. In 2006, the Management Group chaired 
by the Administrator gave OAPR exceptional approval of $1m in 
funding for 2006-2007. This was to cover funding for a D-1 
level Deputy Director Post to strengthen leadership, three 
posts at regional audit service centers to strengthen audit 
capacity in the regional centers as well as another 2 posts 
at the New York office to strengthen its NEX unit and 
Investigations Section. As requested by OAPR, exceptional 
approval of $748,000 in non-core funding was also provided to 
meet unfunded general operating expenses required to meet its 
2006 work plan objectives. Throughout 2006 as requested, OAPR 
has been granted exceptional budget flexibility to meet its 
audit work plan objectives. 
 
-To sum up, for 2006-2007, UNDP has allocated $32.7m for 
audits. These included budgetary resources of $19.5m 
allocated to OAPR for 2006-2007; $12 m (or $6m annually) 
payable to professional audit firms for annual audits of all 
NEX projects with expenditure exceeding $100,000 and another 
$1.19m payable to UN Board of Auditors (UNBOA) for their 
services in the audit of country offices and HQ as part of 
the UNDP audit for the biennium 2006-2007. 
 
-On your concerns regarding adequate audit coverage, I would 
like to provide the following information. In 2006, OAPR has 
completed the audit of 35 country offices or close to 80% of 
their planned audit of 44 country offices. Of the 9 audits 
that were deferred, 3 were replaced with special audits in 
other country offices and one was deferred due to security 
situation on the ground. The remaining five audits could not 
be completed due to other urgent unplanned priorities at OAPR 
and has been rescheduled accordingly. Over and above these 
audits all NEX projects (involving more than 130 country 
offices) with more than $100,000 in programme expenditure has 
been subjected to annual audit by professional audit firms in 
accordance with NEX audit guidelines and as part if the audit 
assurance programme by OAPR. The results of the audit reports 
are reviewed and analyzed by the NEX Unit in OAPR. In 
addition, the audit work plans of OAPR and the UNBOA ensure 
that either party covers risk offices and thereby achieves 
maximum coverage and no duplication of efforts. In 2007, OAPR 
is planning to audit 44 country offices and 5 HQ offices as 
part of its risk based prioritization. The UNBOA will conduct 
operational and financial audits of 17 other country offices 
and 2 out posted HQ units as part of their audit of UNDP for 
2006-2007. 
 
 
 
-To your specific question of programmes with high-risk of 
irregularities, as referred to above, the UNDP audit work 
plan is based on a Country Office risk assessment in 
consultation with Regional Bureau. The risk-based approach to 
audit planning (started in 2005 and still being implemented) 
enables OAPR to optimize its allocated resources by focusing 
on areas most important to UNDP. For 2006, OAPR has achieved 
close to 870% of its audit plan, comprising offices wit high 
risks and/or offices with special importance to UNDP. The 
details of the risk assessment model have already been 
presented to the June 2006 Executive Board session (Annex 1 
to DP/2006/31). The risk-based approach to audit is part of a 
larger effort to formalize ands mainstream management 
methodologies and policies in UNDP business processes. 
 
 
-To facilitate your wish to "more effectively understand the 
audit and oversight capacity of UNDP" and in your response to 
points 1 to 5 in your letter dated 17 November 2006, I have 
provided in the corresponding annexes, summary results of 
audits conducted by OAPR at the country offices in the last 5 
years (Annex 1 and 2), a summary of audit issues as analyzed 
by OAPR (Annex 3), a list of HQ audits conducted in the last 
5 years (Annex 4) as well as the internal and external audit 
plans for country offices and HQ units in 2007 (Annex 5). 
 
-Concerning the possible release of full audit reports I 
would like to refer to the parallel correspondence by the 
Administrator, following tour questions on audit data with 
regard to the UNDP program in DPRK. I trust that the 
information provided in the annexes to this letter will meet 
your information needs. Extracts of OAPR audits conducted in 
2005 have been presented to the June 2006 Executive Board 
(DP/2006/31). 
 
-In conclusion, OAPR can be considered to be by and large on 
track in implementing its (recently established) risk-based 
audit policy, duly making use of additional budget resources 
and currently in the process of strengthening the quantity 
and quality of t staff resources. 
 
-I would like to add that UNDP management attaches great 
importance to the findings and signals by the UNBOAs' report 
that we consider encouraging for our efforts to solidify 
UNDP's accountability. Moreover, we now benefit from the 
advice of an Audit Advisory Committee with highly qualified, 
exclusively external membership. 
Naturally, improvements are still possible and will be 
pursued, particularly through more focused audit risk 
planning and a strengthened OAPR team. Your questions are 
highly appreciated as an expression off shared interest 
between UNDP's management and its Board Members and other 
stakeholders in order to ensure the necessary standards of 
cooperation and accountability. End letter text. 
 
 
 
 
 
 
 
 
 
 
WOLFF