Soon after she left her position as General Counsel at AIG in order to avoid the annual pay caps of $500,000 for federally bailed-out banks and companies, Anastasia Kelly sat down with Fortune Magazine and announced,

I wanted to put in a worldwide compliance and regulatory organization, but I kept hearing, ‘Why do we need this?’ I just kept pushing, and eventually we got that organization in place. When things blew up in 2008, it was very important in keeping things under control overseas.

Given the amount of public financing the US government has sunk into AIG over the past two years, it would be reassuring to know that, at the very least, the corporate compliance department is in order there. That way, the feds can “wind down” their/our ownership and liquidate this load. Action appears to be increasingly urgent after the value of AIG common stock fell an alarming 16 percent yesterday, and analysts predictthat it will sink to less than 20 percent of its current value.

Sadly, however, it appears that Ms. Kelly’s assessment of her efforts to strengthen the compliance function at AIG is grossly overstated. This is a problem because of the significance of compliance capability at a global corporation. It is the compliance function that establishes and integrates anti-money laundering measures, anti-corruption safeguards, and risk management capability, among other things.

GAP has obtained a draft report of the Independent Monitor (IM) at AIG written in October, 2009 that more than contradicts Kelly’s claims to Fortune. The IM is a product of AIG’s unfortunate government entanglements since 2004, when the former CEO, Hank Greenberg, accepted a deal that, among other things, placed a government monitor in the Corporate Compliance Office and the Board Room. The monitor reported to the Securities Exchange Commission, and in return, Greenberg escaped criminal prosecution for fraud.

Although the monitor reportedly allowed AIG to rewrite his final evaluations, his draft report makes for interesting reading. Right up front it reveals that Kelly’s ‘worldwide compliance and regulatory organization’ is a delusion. The draft report is a chronicle of the IM’s frustration in dealing with Kelly’s appointee Suzanne Folsom, AIG’s Chief Regulatory Officer/Chief Compliance Officer (CRO/CCO). According to the draft report, Folsom variously exaggerated the impact of the compliance work she’d done, juggled numbers, withheld information, and ignored appeals for better data. This record looks very much like a reprise of her performance at the helm of the World Bank’s investigative unit, which she abandoned in January, 2008 after running it aground and subverting another ‘independent’ effort to right the ship

To begin with the real basics at AIG, Folsom either could not or would not tell the IM how many people actually work in compliance at the corporation worldwide. Some “compliance officers,” it seems, had other job duties, and this made it difficult to count them. In addition, Folsom could not assure the IM that her part-timers performed their compliance assignments with any degree of independence from their day jobs. In other words, the part-time compliance officers are like traffic cops who moonlight as cab drivers – they have serious conflict of interest issues.

After establishing that he could not oblige Folsom to divulge the number of compliance officers on staff at AIG, the IM generously assumed that these people do exist and turned to the question of their qualifications. This issue also became extraordinarily complex, leaving the IM unable to determine whether local compliance officers were even aware of the legal and regulatory obligations of the countries where they operate.

So, let’s see. The Chief Compliance Officer (Folsom) does not know how many people work for her or whether they’re qualified. Yet the General Counsel (Kelly) tells the public that she and her CCO have established a global compliance capability at AIG. Since US taxpayers unhappily own a majority stake in this operation, it’s time someone started asking questions.