[Senate Hearing 108-734]
[From the U.S. Government Publishing Office]
S. Hrg. 108-734
COMBATING MULTILATERAL DEVELOPMENT BANK CORRUPTION: U.S. TREASURY ROLE
AND INTERNAL EFFORTS [PART II]
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON FOREIGN RELATIONS
UNITED STATES SENATE
ONE HUNDRED EIGHTH CONGRESS
SECOND SESSION
__________
JULY 21, 2004
__________
Printed for the use of the Committee on Foreign Relations
Available via the World Wide Web: http://www.access.gpo.gov/congress/
senate
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COMMITTEE ON FOREIGN RELATIONS
RICHARD G. LUGAR, Indiana, Chairman
CHUCK HAGEL, Nebraska JOSEPH R. BIDEN, Jr., Delaware
LINCOLN D. CHAFEE, Rhode Island PAUL S. SARBANES, Maryland
GEORGE ALLEN, Virginia CHRISTOPHER J. DODD, Connecticut
SAM BROWNBACK, Kansas JOHN F. KERRY, Massachusetts
MICHAEL B. ENZI, Wyoming RUSSELL D. FEINGOLD, Wisconsin
GEORGE V. VOINOVICH, Ohio BARBARA BOXER, California
LAMAR ALEXANDER, Tennessee BILL NELSON, Florida
NORM COLEMAN, Minnesota JOHN D. ROCKEFELLER IV, West
JOHN E. SUNUNU, New Hampshire Virginia
JON S. CORZINE, New Jersey
Kenneth A. Myers, Jr., Staff Director
Antony J. Blinken, Democratic Staff Director
(ii)
C O N T E N T S
----------
Page
Witnesses
Elliott, Kimberly Ann, Research Fellow, The Institute for
International Economics........................................ 44
Prepared statement........................................... 46
Penzhorn, Guido, Advocate and Senior Counsel, Durban Bar, Durban,
South Africa................................................... 34
Prepared statement........................................... 38
Taylor, Hon. John B., Under Secretary for International Affairs,
Department of the Treasury..................................... 4
Prepared statement........................................... 7
Thornburgh, Hon. Richard, of Counsel, Kirkpatrick & Lockhart..... 17
Prepared statement........................................... 23
Appendix
Responses to Additional Questions Submitted for the Record by the
Committee...................................................... 57
Responses to Questions for the Record Submitted to Secretary
Taylor by Chairman Richard Lugar........................... 57
Responses to Additional Questions for the Record Submitted to
Secretary Taylor by Senator Joseph R. Biden, Jr............ 59
Additional Information Submitted for the Record.................. 60
Statement Submitted by Thomas Devine, Legal Director,
Government Accountability Project.......................... 60
Statement Submitted by Nancy Alexander, Citizens' Network on
Essential Services......................................... 64
(iii)
COMBATING MULTILATERAL DEVELOPMENT BANK CORRUPTION: U.S. TREASURY ROLE
AND INTERNAL EFFORTS [PART II]
----------
Wednesday, July 21, 2004
U.S. Senate,
Committee on Foreign Relations,
Washington, D.C.
The committee met, pursuant to notice, at 9:33 a.m. in SD-
219, Dirksen Senate Office Building, Hon. Richard Lugar,
chairman of the committee, presiding.
Present: Senator Lugar.
STATEMENT OF HON. RICHARD LUGAR,
U.S. SENATOR FROM INDIANA
The Chairman. This hearing of the Senate Foreign Relations
Committee is called to order. Today the committee meets to
review United States policy toward the multilateral development
banks, which include the World Bank, the Inter-American
Development Bank, the Asian Development Bank, the African
Development Bank, and the European Bank for Reconstruction and
Development.
This is the second in our series of hearings examining ways
in which the United States Congress and our government can
contribute to anti-corruption and anti-fraud efforts at the
multilateral development banks. Our committee is committed to
continued oversight of the multilateral development banks
through hearings, site visits, interviews, and document
reviews.
The United States has strong national security and
humanitarian interests in alleviating poverty and promoting
progress around the world. That is why the Congress funds
foreign assistance programs and also why we fund multilateral
development banks. The MDBs leverage our resources to promote
poverty reduction and development around the world.
For 2004, the United States provided the MDBs with $1.2
billion, and the MDBs provided developing countries with more
than $35 million in financing. In our May 13 hearing, we
learned that MDBs have been taking steps to curb corruption,
but that more needs to be done to ensure that bank funds are
used properly.
Today our hearing will focus on what the United States
Treasury Department is doing to stem corruption at the MDBs.
The Treasury Department is responsible for dealing with the
MDBs on behalf of the United States. We also will discuss the
World Bank's efforts to impede fraud and its response to
prosecutions of corruption related to one of its projects.
As one of its anti-corruption initiatives, the World Bank
commissioned former Attorney General Richard Thornburgh to
produce three reports analyzing World Bank operations. We will
discuss these three reports, which make recommendations for
improving the World Bank's mechanisms to address fraud and
corruption, streamlining the process used to debar companies
that fail to abide by World Bank policy and strengthening the
Department of Institutional Integrity, the World Bank office
responsible for investigating allegations of fraud and
corruption.
We also will discuss the Lesotho Government's ongoing
campaign against corruption. Lesotho has made a significant
effort to prosecute a number of companies for bribery related
to a World Bank-financed project. The World Bank's response to
Lesotho prosecutions is important, not only in that country,
but to the perceptions of countries and companies around the
world. How the World Bank deals with international corporations
convicted in a court of law for corruption associated with
World Bank projects will be a powerful indication of the
seriousness of the World Bank's anti-corruption efforts.
Finally, our hearing will examine the responsibilities and
activities of the Treasury Department concerning investigative
oversight of the multilateral development banks. Our initial
inquiry into this topic suggests that there is confusion or
some indecision within the Treasury Department about its
oversight role. In February 2004, my staff forwarded a specific
allegation of World Bank corruption to the Treasury Inspector
General's office. We received a response stating, and I quote,
``we are in the official phases of determining Treasury OIG's
criminal investigative jurisdiction in matters like the one you
have referred to this office. At this time, we anticipate no
further action with this matter.'' A copy of the Inspector
General's letter will be entered into the record.
[The information referred to follows:]
Office of the Inspector General,
U.S. Department of the Treasury,
February 27, 2004.
Mr. Keith Luse,
Senior Professional Staff Member,
U.S. Senate Committee on Foreign Relations,
Washington, DC 20510-6225
Dear Mr. Luse,
Thank you for your correspondence forwarding the conspiracy
allegation concerning [redacted] embezzling six million from a wire
transfer to [redacted]. We note from the attached documents that
[redacted] is represented to be [redacted] and, apparently, has a
relationship with the World Bank.
As you are aware, the Secretary of the Treasury serves as a World
Bank Governor from the United States and, in 2003, the United States
committed $25.8 billion in subscriptions and contributions. For fiscal
year 2003, the President's budget for the Treasury International
Accounts amounted to $1.47 billion, including funds for the
multilateral development banks, debt forgiveness, and technical
assistance. Further, the Department of the Treasury's Office of
International Affairs oversees U.S. participation in the International
Monetary Fund and the multilateral development banks, including the
World Bank, the Inter-American Development Bank, the African
Development Bank, the Asian Development Bank, and the European Bank for
Reconstruction and Development.
The Office of Investigations is in a rebuilding cycle brought on by
Treasury resources being divested to the Department of Homeland
Security. As such, we are refocusing our planning, business processes,
investigative, and prevention efforts to better protect the
Department's programs like those for which the Office of International
Affairs has responsibility. We are in the initial phases of determining
Treasury OIG's criminal investigative jurisdiction in matters like the
one you have referred to this office. We note your correspondence with
the World Bank and the Offices of Inspector General for the Department
of State and the United States Agency for International Development
with whom we are coordinating this matter. At this time, we anticipate
no further action with this matter.
We thank you for forwarding the aforementioned information to the
attention of this office. If you have any questions concerning this
matter, please feel free to call upon me at [redacted]. Staff questions
and requests for support related to this matter should be directed to
[redacted].
Nick D. Swanstron,
Assistant Inspector General for Investigations.
The Chairman. I am perplexed that the Office of Inspector
General of the Treasury Department remains unsure of its
jurisdiction in multilateral development banks matters, because
the Treasury Department has had the responsibility for MDB
oversight since the creation of the World Bank in 1946. We
invited the acting Inspector General of the Treasury
Department, Dennis Schindel, to testify today, but he declined.
His staff informed us in an e-mail that the Treasury
Inspector General's office was not currently working on
multilateral development bank corruption. It said, ``we are
exploring bases for invoking jurisdiction to do work in this
area, but have not reached any conclusions.'' They added that
the Treasury Inspector General is, ``low on resources since our
divestiture to Homeland Security.''
Now, given the United States has provided more than $39
billion in direct contributions to the MDBs since 1960, I am
concerned that the Treasury Department is unable to dedicate
sufficient resources to investigate the use of those funds.
Congress needs to determine whether the Treasury Department
Inspector General is suffering from a lack of resources. If we
need to direct additional funds to ensure that the Office of
the Inspector General can provide effective oversight, we
should do so. If the Treasury Department Inspector General's
office is not the best location for MDB oversight, then the
administration and the Congress should work together to provide
clear authority for this mission to another agency.
[Additional information received by the committee from
Dennis S. Schindel, Acting Inspector General, Department of the
Treasury, follows:]
Statement Submitted For The Record By Acting Inspector General
Dennis S. Schindel
regarding treasury office of inspector general jurisdiction
with respect to multi-lateral development banks
August 13, 2004.
Thank you for the opportunity to discuss with the Committee the
role and jurisdiction of the Treasury Office of Inspector General (OIG)
to investigate and audit the activities of multi-lateral development
banks (MDBs) that receive appropriated funds through the Department of
the treasury.
The Inspector General Act of 1978, as amended, 5 U.S.C. Appendix 3
(IG Act), gives inspectors general the authority and responsibility to
conduct and supervise audits and investigations relating to the
programs and operations of their establishments, and to keep the
establishment's head and Congress fully and currently informed about
problems and deficiencies relating to the administration of those
programs and operations.
To carry out these responsibilities, the IG Act requires all
offices and employees of the establishment to cooperate with OIG audits
and investigations, and mandates that OIGs have access to ``all
records, reports, audits, reviews, documents, papers, recommendations,
or other material available to the applicable establishment which
relate to the programs and operations with respect to which that
Inspector General has responsibilities under this Act.'' 5 U.S.C.
Appendix 3, Sec. 6(a)(1). OIGs additionally have authority to subpoena
documentary evidence necessary to the performance of their duties under
the IG Act. Id., Sec. 6(a) (4).
While Inspectors General (IGs) can generally audit and investigate
recipients of appropriated funds, such as contractors and grantees, and
can demand and even subpoena necessary information to that end, these
powers cannot be made to apply to the entities at issue here. The
international agreements that establish MDBs, and the U.S. law that
implements the agreements, makes clear that the MDBs possess an
effective immunity to the OIG's authority.
For example, the agreement establishing the World Bank specifically
provides that the archives of the Bank ``shall be inviolable,'' and
further states that all officers and employees of the Bank are immune
from legal process for acts performed in their official capacities,
except where the Bank waives such immunity. Article VII, Secs. 5,8.
Federal law enforces this immunity: 22 U.S.C. Sec. 286h states that
Secs. 5 and 8, among other provisions in the Bank agreement, ``shall
have full force and effect in the United States and its Territories and
possessions.''
We therefore believe that current law effectively bars our ability
to demand access to the MDBs in order to carry out audit and
investigative operations with respect to their stewardship of the
appropriated funds which are provided to them via the Department of the
Treasury.
Lastly, I must note that the resource limitations under which we
operate since last year's divestiture of two thirds of our personnel
would impose a serious obstacle to our ability to take on new audit and
investigative work in any case. We hope that our FY 2005 appropriation
will allow us to expand our audit and investigative staffing, and
increase our oversight of the Treasury.
I would be happy to provide further information to, and engage in
discussion with, the Committee on this issue.
The Chairman. Today, we have two panels to discuss
corruption and the multilateral development banks. On our first
panel, we are pleased to welcome Mr. John Taylor, Under
Secretary for International Affairs at the United States
Treasury Department. On our second panel we will hear from Mr.
Richard Thornburgh, former U.S. Attorney General, and former
Governor of Pennsylvania; Mr. Guido Penzhorn, advocate and
senior counsel of the Durban Bar in South Africa and
prosecuting attorney in corruption cases in Lesotho; and Ms.
Kimberly Ann Elliott, a research fellow at the Institute for
International Economics. At this time, I hear the fire alarm
and so the hearing is temporarily recessed until we can
reassemble.
[Recess.]
The Chairman. The hearing is resumed. It's now our
privilege to hear from the Honorable John B. Taylor, Under
Secretary for International Affairs, Department of the Treasury
in Washington, D.C. Secretary Taylor, we thank you once again
for coming to the committee and we look forward to your
testimony.
STATEMENT OF HON. JOHN B. TAYLOR, UNDER SECRETARY FOR
INTERNATIONAL AFFAIRS, DEPARTMENT OF THE TREASURY
Mr. Taylor. Thank you very much, Mr. Chairman, and thanks
for inviting me to discuss the U.S. efforts to fight corruption
in the use of funds at the multilateral development banks. It's
an issue we take very seriously. We're committed to every
possibly effort to help prevent, detect, and punish corruption
at the MDBs. Such corrupt acts are intolerable and we feel it's
our obligation to help ensure that the multilateral development
banks, all of them take the steps necessary to ensure an
effective anti-corruption apparatus.
My testimony today focuses on the five MDBs that you
mentioned in your opening remarks, Mr. Chairman, the World
Bank, the Inter-American Development Bank, the African
Development Bank, the Asian Development Bank, and the European
Bank for Reconstruction and Development. My written testimony
describes the recent anti-corruption efforts that have been
taken, the U.S. role in reforming the institutions and how it
relates to those efforts. I'd like to summarize the statement
briefly here and if possible enter the full testimony into the
record.
The Chairman. The full testimony will be published in the
record.
Mr. Taylor. Thank you very much. Let me emphasize at the
outset, Mr. Chairman, that at all the institutions we're now
pursuing a reform agenda that is an essential tool in the fight
against corruption, and that agenda can be called a measurable
results agenda. Through our efforts, the needs for rigorous
results measurement has now been broadly accepted by the
international community. All of the institutions have begun to
mainstream mechanisms to measure and report the results of
their projects. The new reforms emphasize measurable results
with specific timelines to get things done. They provide
incentives to the institutions, financial incentives, by tying
increased financial support to the establishment of results
measurement systems and the achievement of the measurable
results.
If the flow of money is tied to concrete measurable
results, we feel the chance of diverting MDB resources for
corrupt purposes will be lowered considerably. While more needs
to be done certainly, we have built broad support among
shareholders and management on the importance of measuring
results and accountability, and we will continue to pursue this
priority aggressively.
We at the United States Treasury conduct our oversight of
the corruption-related and other issues at the MDBs in many
ways, Mr. Chairman. On a regular basis we work with our
executive directors, we review all loans, grants, and policy
proposals to make sure they include fiduciary safeguards and
measurable results. We chair the Inter-Agency Working Group on
Multilateral Assistance, which meets weekly to review all MDB
loans and grants. We meet regularly with the NGO community and
other interested parties.
When we find problems with projects, our first effort is to
work with management to point out the problems and see what can
be done to deal with them. The ultimate voting decision on
projects is the responsibility of the U.S. Government. The
working group and input from the NGOs helps us gather expertise
and perspective of different agencies in the private sector,
informing our decisions.
But let me describe a few of the actions that have been
taken by the MDBs and there's more details in the written
testimony. Recently, in November 2000, and importantly, the
World Bank created this new Department for Institutional
Integrity. So far, investigations by this new department have
led to the Bank's imposing administrative sanctions on at least
180 firms and individuals. The names of the firms and
individuals that are sanctioned are made public, they're posted
on the Web site. The Bank has a hotline for both bank employees
and others to call if they believe there is any corruption
going on. The complaints can be confidential and anonymous.
This is good progress.
Similar actions are being taken at the other MDBs,
different names for the departments, different procedures, but
they're all taking similar approaches at this point, as
documented in my written testimony.
Another broad area where the anti-corruption effort is
underway is regarding specific projects. In this area,
beginning with the World Bank again, the World Bank has in
place procurement and consultant guidelines that govern the
purchase of goods, civil works, consulting services that are
financed in whole or in part from bank loans for investment
projects. These guidelines certainly include anti-fraud and
corruption provisions, and they provide for the Department an
example of a sanction or other remedies if the Bank determines
that firms have engaged in corrupt or fraudulent practices.
We're advocating now similar actions at the other MDBs, as
described in my testimony.
Overall, Mr. Chairman, we're going to continue to push
vigorously this strong measurable result framework for all
projects. That is, for the specific projects, as they're being
completed, as they're being put in place, that there will be
these measurable timelines. On both the outputs and on the
outcomes, what gets measured, gets done, so establishing a
strong results-based program will sharply reduce the likelihood
that monies will be diverted for corrupt purposes.
At the country level, where there are still significant
problems, is where the windows of the MDBs that are devoted to
the poorest countries have or are currently establishing what
is called performance-based allocation systems. I think these
are very important. These systems provide more resources to
those countries that improve governance and take steps to
combat corruption, while those who do not take such efforts
receive fewer resources.
For example, under the most recent replenishment of the
funds in IDA, 17 countries will have their resources
allocations reduced because of poor performance on the country
institutional assessment guidelines, the so-called CPA. In the
recently concluded Asian Development Fund negotiations, our
negotiators achieved an increase in the weight given in good
governance to anti-corruption, increased the weight that good
governments would be given, and good governance includes anti-
corruption in this performance-based allocation system. These
systems provide incentives for countries to tackle the
governance issues in order to receive greater resources. It's a
financial incentive to improve.
Mr. Chairman, I also want to mention the work that's
underway that's related to Section 581. This is a central part
of our efforts now. It's really implementing Section 581 of the
fiscal year '04 Appropriations Act, as signed into law last
January 23rd, passed by this committee, of course. And these
issues in Section 581, the provisions, were the product of
considerable consultation between the U.S. Treasury and the
Congress. Section 581 aims to increase transparency and
accountability, and this is an objective we all strongly
support.
On March 2nd of this year, I sent a memo to each of our
executive directors at the institutions conveying the Section
581 language along with the request that they use every effort
to advance the goals in Section 581. We are continuing to work
vigorously on these goals. I believe we're making good progress
on getting them done.
In conclusion, Mr. Chairman, let me reiterate that the Bush
administration takes very seriously the threat that corruption
poses to economic development and the effective use of MDB
resources. I've tried to describe briefly here and more fully
in my written testimony that the MDBs have taken important
steps to combat corruption, that management of the MDBs are to
be commended for these positive steps that they have taken in
recent years to fight corruption.
Clearly, more needs to be done. We are fully dedicated to
the efforts and I look forward to continuing to consult with
the Congress on our projects. Thank you.
[The prepared statement of Mr. Taylor follows:]
Prepared Statement of John B. Taylor
Chairman Lugar, Ranking Member Biden, Members of the Committee, I
welcome the opportunity to discuss with you U.S. efforts to fight
corruption in the use of funds by the Multilateral Development Banks
(MDBs). It's an issue we take very seriously. We are committed to every
possible effort to help prevent, detect, and punish corruption
associated with development assistance provided by the MDBs. Such
corrupt acts are intolerable and, as custodians of taxpayer dollars
intended to stimulate economic growth aid alleviate global poverty, it
is our obligation to help ensure that the MDBs take all the steps
necessary to ensure an effective anti-corruption apparatus.
My testimony today will focus on five MDBs: the World Bank, the
Inter-American Development Bank (IDB), the African Development Bank
(AfDB), the Asian Development Bank (AsDB), and the European Bank for
Reconstruction and Development (EBRD). I will describe the recent anti-
corruption efforts and the U.S. role in reforming the institutions.
Our efforts to strengthen anti-corruption efforts are focused on
three levels. First, at the institutional level, we are focused on
improving the functioning of MDB internal control processes for
internal auditing, investigative mechanisms, whistleblower protections,
and corporate procurement--and increasing the disclosure and
accountability of MDB operations.
Second, at the project level, we are focused on encouraging the
MDBs to conduct analysis and design projects that help reduce
opportunities for corruption, strengthen fiduciary standards, and help
ensure that Bank funds will be well spent.
Third, at the country level, we focus on enhancing the transparency
and accountability of recipient countries' governance systems and
disclosure in MDB operations and analysis, aid to channel MDBs
resources toward countries that have good governance in place. Treasury
reports annually to the Congress on the country specific anti-
corruption programs supported by each MDB, and actions taken by
recipient countries.
At all these banks we are pursuing a reform agenda that is an
essential tool in the fight against corruption--measuring results. The
need for rigorous results measurement has been broadly accepted
internationally. All of the institutions have begun to mainstream
mechanisms to measure and report the results of their projects. The new
reforms emphasize measurable results with specific timelines. They
provide incentives to the institution by tying increased financial
support to the establishment of results measurement systems and results
achieved in all operations; especially in the design of country
assistance strategies and individual projects and during project
implementation. If the flow of money is tied to concrete and measurable
results, the chance of diverting IDB resources for corrupt purposes
will be lowered considerably. While more needs to be done, we have
built broad support among shareholders and management on the importance
of measurable results and accountability and will continue to pursue
this priority aggressively.
We at the U.S. Treasury conduct our oversight of corruption-related
and other issues at the MDBs through a variety of practices and
processes. On a regular basis we work with the Executive Directors
(USEDs) on their participation in Board policy discussions and with
management of these institutions. In the case of corruption, this means
urging the institutions to establish effective and accountable policies
and mechanisms to reduce the opportunities for corruption and to detect
and punish corruption when it occurs. Treasury reviews all loans,
grants, and policy proposals to make sure they include fiduciary
safeguards and measurable results. Treasury chairs the inter-agency
Working Group on multilateral Assistance which meets weekly to review
all MDB loans and grants coming up for approval. This group includes
State, Commerce, and USAID. My staff meets regularly with the NGO
community and other interested parties to solicit input on MDB policies
and projects. When we find problem projects, our first effort is always
to work with management to improve loans or grants which we believe do
not meet our standards. The ultimate voting decision on projects is the
responsibility of the U.S. government. This working group and input
from NGOs helps us gather expertise and the perspective of different
agencies and the private sector in forming our decisions.
Let me now to describe the actions taken by the MDBs in the three
levels described above.
Structural Changes Within the Institutions
In the late 1990's the World Bank created what is now called the
new Department of Institutional Integrity (INT). So far INT
investigations have led to the Bank's imposing administrative sanctions
on about 180 firms and individuals. The names of firms and individuals
sanctioned are made public. The Bank has a hotline to which the public
or staff can report incidents of corruption or other inappropriate
practices. Complaints may be made confidentially or anonymously. We are
working closely with management and other shareholders to provide the
unit with the resources, both human and financial, and the authority it
needs to do its job effectively on an ongoing basis. This includes
implementation of the key recommendations of the report of former
Attorney General Thornburgh on ways to strengthen the unit's
capabilities, staffing and performance. The Bank's Executive Board
reviewed and endorsed these recommendations yesterday, in fact, and we
will be monitoring progress very attentively.
Last year, the Inter-American Development Bank established its
Office of Institutional integrity to enhance the scope of
investigations previously undertaken by the Oversight Committee on
Fraud and Corruption (OCFC). This office is now responsible for
pursuing allegations of fraud and corruption by IDB staff or
consultants, or in IDB-sponsored projects. The Oversight Committee of
Fraud and Corruption (OCFC) now serves as the secretariat for the
Office of Institutional Integrity, and trains officials in member
countries on implementing anti-corruption programs. The OCFC also makes
public a semi-annual report of its activities. Like the World Bank, the
IDB has established a toll-free hotline and other mechanisms for
reporting, on a confidential and anonymous basis, allegations of fraud
and corruption with whistleblower protections. Last week, the IDB
created a stand-alone Audit Committee of the Board.
The African Development Bank's Board of Directors has recently
approved the establishment of an Oversight Committee on Corruption and
Fraud (OCCF) that will be responsible for receiving and handling
allegations of fraud and corruption. The Bank will opt a formal
whistleblower protection program once the OCCF becomes operational. The
Bank has also modified its procurement regulations to be more explicit
regarding corruption. Over the past few years, about 30 tenders have
been canceled, companies sanctioned, and, together with their
affiliates, barred from participating in Bank projects.
The Asian Development Bank's Office of the Auditor General (OAG) is
the point of contact for reports of allegations of fraud or corruption
concerning AsDB-financed projects or its staff. In 2003, the OAG
established an Anti-corruption Unit (OAGA) to handle all such reports.
The Bank has established a variety of mechanisms through which
allegations of fraud and corruption can be conveyed in a confidential
and discrete manner.
The European Bank for Reconstruction and Development just launched
an inspection function, which will enable individuals to submit
grievances about a project. The Chief compliance Officer (CCO) works
with independent experts to determine whether banking operations were
in full compliance with Bank policies, and, if necessary, the CCO
undertakes problem-solving measures, which may include mediation and
independent fact-finding. The EBRD has just hired a new CCO, an
American with considerable experience working on anti-corruption
issues. The new COO will coordinate the new inspection function and
will also handle all matters related to fraud and corruption. The EBRD
has a hotline through which individuals can anonymously report
allegations of misconduct of Bank officials, employees, or consultants.
At each of the institutions, our U.S. Executive Directors have
spearheaded efforts to increase transparency through information
disclosure policies that require the MDBs to release more documents,
especially those relating to Board discussions, country performance,
measurable results, and anti-corruption measures. The Boards of
Directors of the EBRD, the AfDB, and the IDB have all approved
improvements in disclosure policies in the past 18 months and our
Executive Directors will work to ensure their effective implementation.
We expect similar actions will be taken at the World Bank and the AsDB
in the near future. We continue to work with the MDBs management and
other member countries to institute additional improvements.
Projects
The World Bank has in place procurement and consultant guidelines
that govern the purchase of goods, civil works, and consulting services
financed in whole or in part from bank loans for investment projects.
The guidelines emphasize the need for economy and efficiency in the
implementation of the project and the importance of transparency in the
procurement process. They state that open competition is the basis for
efficient public procurement. The guidelines include anti-fraud and
corruption provisions and provide for debarment or other remedies if
the Bank determines that firms have engaged in corrupt or fraudulent
practices. If World Bank procurement guidelines have not been followed,
then the Bank could declare a misprocurement and the borrowing
government will lose the funding.
The IDB has recently authorized a comprehensive review by external
consultants of its overall procurement practices. We are strongly
advocating reforms that will adopt transparent and accountable
procurement policies, and standard documents, fully harmonized with
those of other MDBs.
The AsDB has taken steps to improve the financial management and
governance of projects by revising the guidelines that govern the
financial management practices of executing agencies and by
implementing an automated project rating system to improve consistency,
standardize ratings, and reduce subjectivity. These procedures will
enable better identification of financial irregularities in project
implementation. In addition, corruption and fraud awareness workshops
are held regularly for project staff.
The AfDB conducts Financial Management Reviews (FMRs) of projects.
The FMR is designed to assess financial management and audit functions
of specific projects. The Bank has successfully carried out FMRs in
five countries (Cameroon, Madagascar, Malawi, Uganda, and Zambia),
covering four key sectors (agriculture, transport, public utilities,
and the social sector). The AfDB's internal audit department evaluates
the quality of independent audits of Bank projects. This department is
investigating at least two projects for fraud and corruption.
At the urging of the United States, the EBRD now includes a
certification of compliance with integrity check procedures for each
project with the documents presented to the Board of Directors. The
Bank is instituting mandatory training for staff on this process of
``integrity'' due diligence. In addition to due diligence, EBRD
routinely incorporates improvements in accounting and corporate
governance in the design of its projects.
Overall, the United States continues to push vigorously in all the
MDBs for strong result measurement frameworks for all projects, so that
we can monitor and assess the outputs and outcomes. What gets measured
gets done, so establishing a strong result-based program will sharply
reduce the likelihood that monies will be diverted for corrupt or
fraudulent purposes.
At the Country Level
The windows of the MDBs that are devoted to the poorest countries
have or are currently establishing performance-based allocation
systems. These systems provide more resources to those countries that
improve governance and take steps to combat corruption, while those who
do not take such steps receive fewer resources. For example, under the
most recent replenishment of funds in IDA, seventeen countries will
have their resource allocations reduced. In the recently concluded AsDF
negotiations, donors agreed to increase the weight given to good
governance, which includes anti-corruption, in the performance
allocation system for the AsDF. These systems provide incentive for
countries to tackle these governance issues in order to receive greater
resources.
Also at U.S. urging, the MDBs are doing more diagnostic work on
governance issues. Governance and corruption are routinely discussed in
MDB country assistance strategies. The World Bank, in some cases
working with the IMF and regional development banks, has taken the lead
in preparing key diagnostic studies such as Country Financial
Accountability Assessments, which looks at public financial management;
Public Expenditure Reviews, which looks at the effectiveness of
expenditures in terms of outputs and outcomes; and Country Procurement
Assessment Reports, which looks at the contract management process and
public procurement. The U.S. insisted on the expansion of these
diagnostics as part of our Incentive Contribution to IDA, the targets
for which IDA has met and exceeded.
The MDBs have also provided substantial amounts of assistance to
help build accountable public-sector institutions and develop national
anti-corruption efforts. The World Bank is also a leader in fighting
money laundering and the financing of terrorism. Also, the AsDB has
issued an extensive manual on countering money laundering and the
financing of terrorism.
In 2003, the IDB approved $772 million, or 11 percent of total
lending volume, for projects with the principal aim of improving
governance at the country level. These include projects to modernize
the Attorney General's Office in Colombia, strengthen tax
administration in Peru and improve decentralization of administration
in Uruguay.
The AfDB has developed a new diagnostic tool, the Country
Governance Profile. The profile's analysis helps a member country and
the AIDB develop governance programs and capacity building programs to
address identified weaknesses in governance. Profiles for Nigeria,
Ghana, Mauritania, Malawi, and Zambia are completed, and those for
another ten countries are underway.
The AsDB approved a new policy enabling AsDB to increase its
assistance to countries to counter terrorist financing and put in place
anti-money laundering initiatives. The new policy has also enabled the
AsDB to further strengthen its capability to protect internal funds
from misuse. Further, the AsDB recently launched a Regional Trade and
Financial Security Initiative. The $7 million initiative, which is
supported by cash and in-kind contributions from the U.S., Australia
and Japan, will finance anti-money laundering activities and port
security in Asian developing countries. Finally, in 2003, the AsDB
approved $458 million for projects to strengthen good governance in
borrowing countries.
The EBRD has less direct influence on recipient countries'
governance than the other MDBs because it focuses primarily on
investments in the private sector. However, it has undertaken efforts
to improve governance and combat corruption, such as its input into
Transparency International's work on business principles for countering
bribery. Where feasible and appropriate, the EBRD also engages in
policy dialogue with the host country, in the context of projects, to
highlight where regulatory frameworks could be improved, thus reducing
the opportunities for corruption. In addition, the EBRD periodically
reviews the business environment of its countries of operations.
Transparency and Section 581
A central part of our effort going now is the implementation of
Section 581 in the FY 04 Appropriations Act signed into law on January
23, 2004. This provision, which was the product of discussions between
Treasury and Congress, aims to increase transparency and
accountability. This is an objective we all strongly share.
On March 2, 2004, I sent a memo to each of our U.S. Executive
Directors in which I conveyed the Section 581 language along with a
request that they use every appropriate opportunity to press for the
goals set forth in that section. Working with the Executive Directors,
we have already made considerable headway. For example,
At the Inter-American Development Bank, the new information
disclosure policy includes a provision for release of the Board
minutes within 60 days of their approval, a first within the
MDB system.
The new African Development Bank policy includes a
commitment to make country strategies and operation policies
public at least 50 days prior to formal Board discussion.
The EBRD is implementing a Committee of Sponsoring
Organizations (COSO) system of internal controls over the
financial statements, the implementation of which will be
reflected in a letter from management and from the external
auditor in the EBRD's 2004 annual report.
A new draft Asian Development Bank policy includes a large
number of the transparency provisions of Section 581, including
making public an annual report containing statistical summaries
of fraud and corruption cases pursued by their investigative
unit.
For our part, the U.S. Treasury has begun posting a record of our
votes on MDB projects on our website on a monthly basis as well as the
U.S. position on inspection panel cases that we send to the Executive
Directors.
In my view, more needs to be done to build on this progress. We
need to increase the use of public fiduciary and governance
diagnostics. We need to create additional incentives for establishing
and achieving measurable results, and improve governance in borrowing
countries. The U.S. continues to urge further measures to maintain
progress. Among the priorities we are currently pursuing are the
following:
As a key element of implementing our results agenda, we will
continue to advocate for the establishment of independent
evaluation functions where they do not currently exist, such as
at the AfDB and the EBRD, which functions would report directly
to the Boards of Directors with the heads of evaluation hired
by and accountable to the Board. Evaluation of results is both
critical to achieving results and to ensuring that funds are
used as intended by the governments that are the beneficiaries.
The MDBs must also work towards achieving uniform best
practice procurement policies, procedures, and documents that
will be used by all the MDBs.
At the IDB, the office of the U.S. Executive Director is
engaged in several initiatives in procurement: (1) the overhaul
of the IDB's project procurement systems with the objective of
a new system using MDB-system wide best practices for policies,
procedures and standard bidding documents; (2) reform of
corporate procurement; and (3) the creation of a Sanctions
Committee to give the Bank authority to disbar firms.
We are also pushing the World Bank and the African
Development Bank to release the country ratings (Country Policy
and Institutions Assessment, CPIA)--including governance--that
determine country resource allocations under its performance-
based allocation system.
The MDBs need to further improve and mainstream staff
education, incentives, and processes for anti-corruption work.
Each MDB must enforce clear guidelines defining corrupt
behavior and stringent penalties for staff that violate the
rules.
The MDBs should continue to strengthen their whistleblower
protections.
We will continue to work with the World Bank to ensure that
the Department of Institutional Integrity (INT) has the
necessary resources and authority from the Board to carry out
its responsibilities of investigating allegations of corruption
and ensuring accountability of staff in all the Bank's
operations.
Conclusion
In conclusion, Mr. Chairman, let me reiterate that this
Administration takes very seriously the threat that corruption poses to
economic development and to the effective use of MDB resources. As I
have described in my testimony, the MDBs have taken important steps to
combat corruption and the United States is at the forefront of
continuing efforts to broaden and deepen those initiatives, including
ensuring the full effectiveness of new anti-corruption units. The
managements of the MDBs are to be commended for the positive steps they
have taken in recent years to fight corruption, following the example
set by the World Bank. Clearly more needs to be done, and we are fully
dedicated to these efforts, and look forward to continuing to consult
with Congress on our progress.
The Chairman. Well, thank you very much, Secretary Taylor.
Let me just say at the outset that one of the major functions
of any Senate committee is oversight. When that function is not
well-performed, usually there will be problems down the trail.
Quite rightly, critics of the committee will say, why was there
no oversight and why didn't you care?
Now, we're in the process of getting ready for
reauthorization of these multilateral development banks. It's a
very important procedure that requires the confidence of our
members in the House and the Senate. There are frequently
critics of the Banks. There are critics of American foreign
assistance generally. It is imperative that there be absolute
confidence in the contributions that are made. Granted that
these are multinational, the contributions come from many
countries, but the United States' contribution of taxpayer
funds is very considerable. So it's in that spirit that we have
tried to begin that preparation.
As I pointed out in my testimony--and it was not meant to
be just anecdotal--we came across a case, and essentially
attempted to find what was occurring in Treasury at the level
of the Inspector General. And as I've recited, without
hopefully being melodramatic about it, Mr. Schindel, who is
responsible, I gather, felt he simply didn't want to testify,
which is unusual. It's not that people always want to testify
before our committee, but we've not had many conspicuous
examples of people simply finding that this was not a
worthwhile activity, so I'm especially grateful that you are
here. You are knowledgeable about international banks and
finance and obviously a very, very able spokesperson for the
Department of the Treasury. So I just want to underline how
much I appreciate your presence.
Now, let me just ask this rudimentary set of questions.
When allegations of corruption related to MDBs are forwarded to
the Treasury, how does the Department process the allegation?
Is something more done beyond simply forwarding the allegation
to the World Bank or other relevant multilateral development
banks? What follow-up is done to ensure the Banks' diligence in
pursuing that?
And since the Treasury Inspector General is not
investigating fraud and corruption, what part of the
administration is? In other words, try to trace, aside from
these very important guidelines that you just mentioned,
measurable results, following through to make sure the job gets
done. Specifically, when the hotline produces somebody who
says, you ought to take a look at this, what happens over at
the Treasury?
Mr. Taylor. The first line of attack if our staff hear
about issues like this is to work through our executive
directors at the institutions. They're basically the conduit
for communicating to the management and the staff of the
institutions.
The Chairman. Now, by institutions you mean the Banks, the
World Bank, or what have you?
Mr. Taylor. Yes, sir. Not to say there are not many other
ways to communicate, but this is the first things to do. They
in turn communicate, raise the issues that occur on specific
issues. On the issues that have to do with process and
procedure, that appears in many different ways. There's
communications directly to the management, there's working
through the executive directors, working through the other
shareholders, because almost of all the things that are reform-
oriented require the other shareholders to participate. And so
we work with them on suggesting things like these measurable
results, and they're not easy to get through, there's lot of
different viewpoints.
The U.S., in my experience here, Mr. Chairman, the United
States is most often in the lead in pushing the items that
you're interested in in this hearing, and we're very proud to
do that. But it sometimes requires working, getting a consensus
internationally--these are international organizations--to make
it work.
If we see there's something wrong with the procedures or we
hear reports, for example, one of the people coming later
today, former Attorney General Thornburgh, writes reports. We
hear about those. That helps us, it helps guide us, and we will
use those to work with the institutions to help them make the
changes and say what we think is important and our executive
directors can speak at the board meetings quite actively about
that, so those are some examples.
The Chairman. Well, even then, what happens if somebody
brings an allegation to Treasury that in a specific country, on
a specific project, money is being misappropriated, it's being
stolen, it's being transferred to other accounts of people
clearly in violation? What do you do about that?
Mr. Taylor. Well, we communicate it through our executive
directors to the institutions, and if there's a problem with
how they're being handled, then we address that directly to the
management. But the process is, especially now with the World
Bank, the Department of Institutional Integrity is set up,
there's been some recent changes in how the sanctions process
works, the nature of the committee has changed due to outside
recommendations. The communication is not the problem. The
actions and making sure that there's actions taken is the
problem in my experience.
The Chairman. Well, does our government, if it believes
that a particular institution, whatever the institution may be,
is not taking appropriate action, do something about it? In
other words, what recourse do we have at that point? Is our
money all gone, and we just say, well, we just made a bad
mistake on this one?
Mr. Taylor. No, I don't think we want to take that kind of
an approach. We want to be very demanding of the institutions.
We want the institutions to work well. I always--I don't
hesitate to criticize personally. To me, you criticize the
institutions to make them work better. You criticize them
because you know they have an important role in the world, you
like the institutions, I like the institutions, but we want
them to work better.
So we don't mince words. We're candid with the criticisms
that we have. If we hear reports from the staff that the
process is not working well, we inquire at all levels on this.
We take it very seriously and it's something that I certainly
place a lot of emphasis on and Secretary Snow does as well.
The Chairman. You touched upon the fact that you believe
that in many ways the United States may be among the most
vigorous in terms of demanding transparency. In our study in
preparation for the hearing, we found that of 147 countries
eligible for World Bank lending, 77 of them require
parliamentary approval of multilateral development bank loans,
or a ceiling in which the executive branch can accept the
loans. In other words, the Parliaments of these countries are
trying to ride herd on executives that are taking in the money,
not with the supposition of malfeasance, but with recognition
of the ways of this world and of the fact that a good number of
the governments that they are overseeing may have some
problems.
We found in our first hearing that this oversight is well-
founded. There are some specific projects. You mentioned
measurable results, such as the building of bridges and dams
and roads and so forth. You can get some idea of whether there
is a road or a bridge. But increasingly we heard from the banks
that the loans are for so-called budgetary support--funds that
may have been intended for the uplifting of whatever the
objectives were of that government. This becomes very murky, in
terms of finding measurable results in an education system. We
are finding difficulty with that ourselves, for example, with
No Child Left Behind. We are trying to get some grip on how
this all works.
With an increasing amount of money headed in that
direction, there could be increasing skepticism about so-called
budget support. A taxpayer in this country could very well
raise the question. We are having difficulty meeting our own
deficit problems. Some budgetary support here may be required.
In Country X, for example, we are able at least to establish
that a school got built, that schoolchildren are being taught,
as opposed to a contractor siphoning money out of the process,
thus undermining the entire international banking system.
Furthermore, if we're not sufficiently observant, or if we have
not allied with enough nations to track these people down and
prosecute them, then there's going to be a lot of skepticism
about this.
Now, I'm not raising bogey men. For example, patriot Paul
Volcker is investigating Oil-for-Food or Food-for-Oil or
whatever went on there. There are lots of people now on top of
that situation, and the whole foundation of the United Nations
is under question. Even senior officials, people who don't like
the United Nations, are now really into this with a vengeance,
indicating that's what happens if you have multinational work
and so forth. This is serious business.
I'm hopeful that at Treasury, as you say, you've got some
pretty good guidelines going here at this point, and that we're
vigorous, as you point out, relative to other people. But at
the same time, with your own background in international
affairs, quite apart from the financial affairs of this
country, please take another hard look at this and inform the
Secretary that we think this is serious, and we think he ought
to think it is serious. I'm sure he's focused on a lot of
reforms now. This is a reform Secretary. I'm supportive of
that, and so are most Senators. But we want to make sure that
occurs also in these international situations that are not
specifically his responsibility. This situation needs to come
quickly into focus. We must build confidence as we get into the
reauthorization process particularly, because we're going to
have testimony from many sources next year about each of these
banks.
I would just say that as a result of our first hearing,
they all realize that. They are taking the situation much more
seriously. So that's obviously a salutary effect of having
oversight.
Mr. Taylor. Mr. Chairman, I very much appreciate what
you're doing with these hearings. It's just the best in terms
of oversight and trying to improve things. I'd like to respond
to a couple of the points you made in your statement. Regarding
budget support, I agree this is an area where we need to be
very careful. I don't think there's any reason why we cannot
insist on just as good measurable results and timelines for
budget support as for project support.
I made a particular point of traveling to a number of
countries around the world, mainly in Africa, to observe how
these measurable results are working. In some cases, they're
working really well. You can see schools, individual schools
where the PTAs are working with the parents and the teachers
are working together to document how many textbooks are
purchased and how much they spend and how much of a discount
they got, rather than the reverse is what we're worried about
in this hearing.
But I quite frankly say it's all too rare. We need to get
more of that done, and there's no reason why you can't have
adjustment loans, policy loans, budget support, have just as
good a system of measuring results as other kinds of support,
and we're going to continue to work on that as much as
possible.
I agree the measurable results, there's different ways to
do it. The No Child Left Behind focuses on performance and test
scores. That is great. Ultimately we want to do that. We're
starting with completion rates for primary education, that if
the IDA programs lead to somewhat higher completion rates in
primary schools, then there's a reward for that. And that's not
test scores yet, but it's certainly on the way. You've got to
have the kids staying in school at least through 6th grade to
accomplish something in the schools.
Mr. Chairman, on the Inspector General issue, I want to say
a couple things if I may, because we have consulted, our staffs
have consulted with the acting IG. First of all, of course, the
IG reports both to Congress and to the Secretary of the
Treasury. In consulting with the IG, I want to make the
following statements. I'm going to read these if I may, Mr.
Chairman. The Treasury Inspector General is responsible for
conducting and supervising audits and investigations relating
to the programs and operations of the Department except for the
Internal Revenue Service. This authority would reach to
Treasury's conduct of the process by which appropriated funds
are made available to the development banks. It is unlikely
that the IG's jurisdiction would extend to how the development
banks actually distribute the funds and how the borrowers
actually use the funds.
I understand that the IG's office would be willing to
discuss this directly with the committee and we can provide all
the contact information that you need if that's the way you'd
like to go, sir. So it is something we've been trying to
address. I understand what you're saying here. I think we need
to work with the acting IG to figure out exactly what the terms
of reference, but what I just read to you here is the effort
that we've already put into this, represents the product of the
effort we've put into this.
The Chairman. Well, I appreciate that, and I thank you for
taking the situation seriously and entering this into the
record. I would like to expand on the measurable results.
Specifically when this pertains to situations like education or
health or humanitarian situations. It occurs to me that the
United States again and again has a great story to tell about
work we are doing with people in many countries of the world.
We have hearings on public diplomacy and the difficulties our
country has had in that area, about the Pew Foundation polls
asking people, do you like the United States or do you like
Americans or don't you, with extraordinarily and tragically
perverse negative results.
The fact is that the good story of what we are attempting
to do doesn't get told very often. Maybe we are not very adept
at telling it. All I can say is that to the extent the Treasury
Department, through your reports, through following through on
these measurements of success, on specifics, while working with
other countries, with other institutions, could have a lot to
do. The alternative would be things simply being handled in a
more routine fashion, without seeing too much of the light of
day, perhaps outside the Department, without the certainty that
you feel keep them from fulfilling the requirements. That's an
extension of mission, but one that I hope you'll consider
carefully.
Mr. Taylor. Very much so. I think the international
institutions have a very important role to play in providing
assistance. Bilateral assistance is also important with the
Millennium Challenge Account, it's a very important part of
what we're doing. But this is good because it's international
and we get the leverage, of course, five times as much as we
put comes out, got to be done right.
But I think it is an important thing, and I find, if I
could just add personally from my dealings with other countries
on this, sometimes when you're out in front on issues like
measurable results or anti-corruption, it maybe doesn't look
like the most popular thing to do, but the headlines frequently
are about how much money is going less than how it's being
used. But it's so important, and if you go around, as I think
you have to, and see on the ground what's happening, you just
know that there's so much more to do in using a given dollar
more effectively.
So that's got to be part of it, and our approach in asking
for authorization and asking for appropriations from the
Congress is to emphasize the way the funds are used and doing
the best we can to show they're being used well. But I very
much appreciate your point on the foreign policy, sir.
The Chairman. Well, thank you very much. I appreciate your
long-time public service. I think that the thing that we have
to offer, in addition to the money and the supervision, is a
sense around the world of our integrity, that even if others
don't blow the whistle on corruption, that we do, we will. That
makes a big difference down deep in terms of fledgling
democracies, as well as those that are more mature.
Well, thank you so much for coming to testify.
Mr. Taylor. Thank you, Mr. Chairman.
The Chairman. The chair would like to call now upon a
second very distinguished panel, including the Honorable
Richard Thornburgh, of counsel to Kirkpatrick & Lockhart in
Washington, D.C.; Mr. Guido Penzhorn, advocate and senior
counsel of the Durban Bar, Durban, South Africa; and Ms.
Kimberly Ann Elliott, research fellow of the Institute for
International Economics in Washington, D.C.
We welcome another distinguished panel and we appreciate
very much your patience in waiting through our emergency of the
morning. The next break in the action will not be grave. We
will simply be observing a roll call vote in the Senate at
about 11:30. I will recess the hearing for about 10 minutes to
go to the floor, vote, and return. But we will attempt to
maintain the flow of the hearing as best we can. I would like
for you to testify in the order that I introduced you. That
would be first of all Mr. Thornburgh, the Honorable Richard
Thornburgh. And let me just say that the testimony of all three
of you will be placed in the record in full. Please proceed as
you wish, either with summary or with the delivery of that full
testimony.
Secretary Thornburgh.
STATEMENT OF HON. RICHARD THORNBURGH,
OF COUNSEL, KIRKPATRICK & LOCKHART
Mr. Thornburgh. Good morning, Mr. Chairman. Thank you for
inviting me to be here today to discuss the efforts of the
World Bank to deal with the problems of fraud and corruption in
projects financed with bank funds. As the largest contributor
to the Bank, the United States clearly has a critical stake in
understanding how bank funds are used and what type of
commitment the Bank has made to preventing these funds from
being wasted as a result of fraudulent or corrupt practices.
As you are aware, the Banks' articles of association, to
which the United States is a signatory, require that the Bank
make arrangements to ensure that the proceeds of any loan are
used only for the purpose for which the loan was granted. For
an organization that has disbursed as much as approximately $25
billion a year in countries having some of the least developed
economic, political, and legal systems in the world, this is
not a simple undertaking.
Funds loaned by and activities undertaken by the Bank are
vulnerable to fraud and corruption by bank employees, by
contractors, consultants, and others utilized in the execution
of its projects and by officials and governments to whom the
loans are made. An effective program to combat fraud and
corruption is important, not only to ensure that disbursed
funds are utilized in the manner intended, but also to maintain
the Bank's reputation and to assure the continued willingness
of member states to support its operations.
Unfortunately, during most of the Bank's first 50 years,
the culture within the Bank discouraged not only the taking of
any action to address problems of fraud and corruption, but
even the discussion of such action. When Jim Wolfensohn became
president of the Bank in 1995, he instilled a notable shift in
attitude. In a speech to the Bank's board of governors the
following year, Mr. Wolfensohn became the first senior official
within the Bank to acknowledge openly that fraud and corruption
constitute a major problem for the Bank and for the nations
that the Bank was attempting to assist.
Along with a new attitude, Mr. Wolfensohn brought an
institutional change as well. Beginning in 1966, the Bank
undertook a number of steps designed to assess evidence of
fraud and corruption in bank finance projects and to
temporarily or permanently preclude suppliers, contractors, and
consultants found to have engaged in such practices from
participation on future bank projects.
Thereafter, the Bank engaged me, along with my colleagues,
Ronald Gainer and Cuyler Walker, both of whom have joined me
here this morning, to consult with the Bank on furthering the
adequacy and proper functioning of the program. During our
engagement by the Bank, we have issued three reports, all of
which have been furnished to your staff by the Bank. They dealt
principally with the Bank's procedures for investigating
allegations of fraud and corruption. The first report issued in
January 2000.
The second reported issued in August 2002 dealt principally
with the Bank's procedures for sanctioning acts involving fraud
and corruption, and the third report issued in July 2003 dealt
with a strategic plan that had been produced within the Bank
for its investigative unit and our analysis of the steps the
Bank had taken to develop its internal investigative
facilities.
I should point out that in all cases the nature of our
assignment was to assist the Bank in developing policies,
procedures, and structures to enable it to protect its funds
from fraudulent and corrupt practices. In preparing these
reports, we were not asked to evaluate, quantify, or assess the
specific nature, scope, or extent of the problem, nor were we
asked to review or make recommendations relating to any
particular case or a set of circumstances in which bank
projects were alleged to be affected by fraud or corruption.
Before summarizing certain of our findings and
recommendations, it's worth taking a moment to note the
uniqueness of the environment in which the Bank operates and
how that necessarily has influenced the structures and
procedures it has put in place to address fraud and corruption.
As an international organization, the Bank does not possess
many of the tools that a national government may bring to bear
on a situation in which it has been the victim of fraud or
corruption. The Bank does not have traditional law enforcement
powers such as subpoena power or the ability to otherwise
compel the production of documents or witness testimony or to
conduct searches or electronic surveillance.
As a result, the Bank must rely almost exclusively on
informants and cooperating witnesses to build a case.
Furthermore, since the Bank finances projects all over the
world and often in some of the most remote parts of the world,
the Bank's investigators are invariably viewed as outsiders
with none of the advantages that come with knowing and being
known by local citizens or authorities who are closest to the
circumstances related to matters under investigation.
In light of these factors, it is not realistic to expect
the Bank's investigators to be as effective as police and
prosecutors of a sovereign nation in establishing facts that
support allegations or suspicions of fraud and corruption. When
it comes to seeking redress for wrongdoing involving bank
funds, the Bank is, however, no different than any other
private party to a contract. If it desires to recover monetary
damages, the Bank may initiate a civil action in a country in
which the courts have jurisdiction over the matter. If it
believes that a particular matter involves a violation of law,
the Bank may refer the matter for criminal prosecution in the
country whose laws may have been broken. In either case, the
Bank must be able to uncover the underlying facts giving rise
to the suspicions, which requires a sophisticated investigative
capability since perpetrators of acts of fraud and corruption
will be careful to cover their tracks as best they can.
Another important factor must be noted. Since the Bank
would be within its rights to treat those engaged in fraud and
corruption in bank finance projects simply as contracting
parties in a commercial transaction, such miscreants are
subject to being declared ineligible from participation in such
contracts in the future on the mere suspicion of improper
conduct.
However, the Bank is determined that its status as a
leading international organization, that among other things
promotes the rule of law and the independence of the judiciary
in developing countries, requires that it apply elements of
fundamental fairness, what we know in this country as due
process, when dealing with allegations of fraud and corruption
at a bank project.
The bank has painstakingly tried to strike an appropriate
balance between protecting the funds it loans out and
respecting basic principles of fairness. From the inception of
its anti-fraud and corruption efforts in the mid-1990s, the
Bank has separated the two distinct functions that make up this
effort, the investigation of activities involving fraud and
corruption whereby the Bank focuses on covering and compiling
evidence of such actions and the evaluation of the strength of
that evidence whereby the Bank determines whether sanctions
should be imposed, and if they are, what sanctions are
appropriate.
In each of the three reports that my colleagues and I
prepared, we were asked to deal with both aspects of the Bank's
program, at least to some extent. I will address our principal
findings and recommendations relating to how the Bank deals
with both investigations of instances of fraud and corruption
on the one hand and sanctioning those found to have engaged in
such practices on the other.
In January of 2000, we recommended to the Bank that the
investigations unit be merged into a new independent
department, the Department of Institutional Integrity, to be
created and assigned the principal responsibility for
conducting all investigations on behalf of the Bank in
instances of fraud and corruption. We also recommended that
this new department exercise operational independence under the
authority of the president of the Bank and report directly to
the president.
As part of the implementation of this new structure, we
also made the following recommendations: that the new
department be headed by a director with experience in
investigating and prosecuting fraud and corruption cases; that
the director be appointed for a fixed 5-year term to minimize
the potential for undue influence; that the department recruit
and develop a cadre of experienced in-house staff possessing
investigative skills, knowledge of bank procurement and
personnel procedures, forensic auditing and contract auditing
skills, and other characteristics necessary for mounting an
aggressive effort against fraud and corruption; that the use of
outside law firms and auditors, previously a major tool for
dealing with corruption allegations be minimized; that the
department's personnel have access to all records, documents,
and properties of the Bank in conducting its investigations;
and that the Oversight Committee on Fraud and Corruption be
reconstituted and given a policy-making, as opposed to
operational, mission with responsibility for general
supervision and coordination of all the Bank's programs
intended to address problems of fraud and corruption, not just
investigations.
I am pleased to say that all these recommendations were
accepted by the Bank and have been implemented. Beyond the
overarching recommendations for restructuring its investigative
efforts that we made in January of 2000, we offered as well a
series of additional recommendations relating to the Bank's
efforts to uncover fraud and corruption in projects it
finances.
These recommendations and similar recommendations outlined
in our 2002 report are set forth at pages 8 through 11 of my
full statement, and included the following: that the Department
of Institutional Integrity, now known within the Bank as INT,
develop and nurture close working relationships with other
offices in the Bank whose responsibilities and activities
necessarily overlap with and complement those of INT, including
the legal department, the internal audit department, and the
professional ethics office; that INT receive a mandate from the
board so that its authority is derived from the Bank's
governing body and not just from its chief executive officer;
that INT develop procedures for reporting to the president of
the Bank regularly on ongoing investigations and prepare an
annual report to the president summarizing its activities and
accomplishments during the preceding year and making
recommendations for management and procedural improvements to
aid in the deterrence or detection of fraud and corruption.
Last year, my colleagues and I had the opportunity to
revisit these and other issues when we were asked by the Bank
to review and comment on a strategic plan that the Department
of Institutional Integrity had prepared, and to review and
evaluate how the structures that had been put into place were
actually working and to what degree more needed to be done to
implement our earlier recommendations.
The proposed strategic plan focused on all aspects of the
management and operation of INT. I will briefly comment on only
the two most salient of these. The first is the department's
proposed strategy to move from an emphasis on reacting to
allegations of fraud and corruption when they are made to a
program that includes proactive and preventive actions. The
second concerns the proposed budget and staff for the
department.
We found the proposal for becoming more proactive to be
sound and consistent with our earlier recommendations. If INT
depends solely on a reactive approach that responds exclusively
to allegations of wrongdoing reported to the Bank, it would in
effect reward the most skillful manipulators of bank funds,
since it is usually only the most obvious forms of fraud and
corruption that tend to raise sufficient suspicions to be
reported to INT. It will, of course, always be critical to the
effectiveness and credibility of the Bank's anti-corruption
program for INT to maintain its capability and commitment to
zealously pursue allegations of wrongdoing when they are
reported. We believe that these three kinds of efforts--
reactive, proactive, and preventive--should not be viewed as
step-by-step progressions, but as component elements of an
effective, coherent, overall strategy, regardless of the level
of INT funding resources.
An aspect of INT's strategic plan that is a prime candidate
for some form of econometric cost benefit analysis is its
proposal to structure a triage approach for case selection.
Recognizing that the Bank's resources are finite and that INT
is not likely to receive sufficient funding to enable it to
undertake all the investigative activities that may be
warranted, the proposed triage system would build upon a
systemization of considerations that have been applied
informally in INT's past allocation of resources.
We encountered some concern that the concept of triage may
seem to contradict the Bank's sincere expression of zero
tolerance for fraud and corruption. Refusal to tolerate should
not be confused with striking out at every instance of
wrongdoing. As long as cases receive at least preliminary
investigation and assessment by INT personnel, as complemented
by INT's proposal, as long as matters apparently even involving
low levels of seriousness, are occasionally brought to the
sanctioning state, and as long as all geographic regions in
which the Bank makes loans receive some degree of regular
attention by INT's investigations, the triage system can be
recognized as in furtherance of the zero tolerance concept, not
in derogation of it.
Turning to INT's proposal for significant increases in its
overall budget and staffing level, it is interesting to note
this was met with considerable skepticism in some quarters in
the Bank. INT's staffing level had already given some offices
in the Bank the impression of an instant bureaucracy exploding
onto the Bank's scene and apparently destined to expand without
boundaries.
In assessing the justification for the Bank's expenditures
on its anti-fraud and corruption program, the appropriate
measure should not be a comparison of INT's accelerated growth
in total staff over its first few years with a bank-wide growth
in staff over the same period, but the size of the staff needed
to do the job in an effective and cost-justified manner,
tempered to a reasonable degree, of course, by budget
realities, competing bank responsibilities, and similar
constraints.
Doing nothing, as was the case before, or doing only as
much as can be accomplished by an arbitrarily limited level of
personnel growth, is clearly not the proper response for an
institution with a staff that probably possesses as great a
capacity for collective econometric analysis as any institution
in the world.
While INT's strategic plan represents a major step forward,
the planned use of resources must be continually subjected to
rigorous analysis, and the manner in which it operates must be
continually analyzed to identify areas where improvement can be
made.
In our report to the Bank last year, we identified a few
steps that could be taken to improve INT's operations. They
included the following: We continue to believe that INT would
be well-served by having its terms of reference endorsed by the
board. We believe that INT's stature would also be enhanced if
various constituencies, both within and outside the Bank,
receive a clear and unambiguous message from the Bank's senior
management that it is committed to the fight against fraud and
corruption. We believe that while the president should continue
to have the ultimate authority and responsibility for INT, a
more regularized process would be useful for acquainting the
board of directors with the general nature of the problems that
INT is able to uncover.
Finally, we believe that the public disclosure of sanctions
imposed by the Bank on the basis of findings of fraud or
corruption should be automatic. Such disclosure will help
achieve a level of deterrence that is one of the most valuable
results of the Bank's efforts. In addition, it will add
credibility to the Bank's anti-corruption program and will
enable member nations and other international organizations to
protect themselves from becoming victims of these perpetrators
in the future.
If an INT report contained evidence of criminal activity,
then it is likely that the government of the country whose laws
have been broken will want to obtain that information. Some
have argued that the Bank may either have a legal or moral
obligation to provide such information to its member countries.
Without resolving those issues, it is apparent from a practical
perspective that the Bank will have an interest in making
criminal referrals in most, if not all, instances where it
uncovers evidence of a crime.
We have recommended to the Bank that as the number of
matters eligible for criminal referral continues to increase,
the Bank should regularize policies and procedures for
evaluating such cases and for interacting with national
officials in notifying them of the evidence and giving them
access to bank files.
When INT investigators discover fraud and corruption in
bank finance contracts, the evidence may also place them in a
unique position to identify problems in the Bank's operating
procedures that have implications far beyond the matter being
investigated. The Bank would be doing itself a disservice if it
failed to take advantage of the educational value of the
reservoir of information accumulated by INT through case
studies or other methods of disseminating lessons learned.
As I mentioned at the outset, in 2002 we were asked by the
Bank to review and evaluate its process for imposing sanctions
on firms and individuals that have been found to engage in
corrupt activities. The principal tool available to the Bank
under such circumstances is to declare the wrongdoer ineligible
for future bank finance contracts, a process known as
debarment.
We made recommendations to the Bank in some 18 separate
categories pertaining to its structures and procedures for
imposing sanctions. These recommendations were thoroughly
reviewed by the Bank's management and were presented to the
Bank's executive directors. I've been informed that earlier
this month all of those recommendations were accepted by the
board, and the Bank will proceed to implement those
recommendations.
We also made a key recommendation related to the question
of whether the sanctions committee should have the authority to
impose sanctions on behalf of the Bank or should simply make
recommendations to the president. Requiring the president of
the Bank to review and evaluate every case in which fraud and
corruption has been found and to determine whether the
recommended sanctions are appropriate would place an enormous
burden on the president's time. Furthermore, since the parties
subject to sanction come from countries that are represented on
the board of the Bank to whom the president reports, there is
at least the perception that the president could be subjected
to political pressure and undue influence on behalf of a party
that had the support and sympathies of its government. For
these reasons, it seems advisable not to include the president
in the sanctioning decisions, and that as long as the sanctions
committee is composed at least in part of individuals who are
not current bank employees, the committee should be vested with
authority to make final decisions without further review or
appeal.
The other recommendations contained in our 2002 report on
the sanctioning process are set forth at pages 25 through 28 of
my prepared statement, and are largely concerned with
procedural matters and the Bank's desire to strike an
appropriate balance between an efficient and expeditious
process on the one hand and ensuring that the accused is
afforded fairness on the other.
In closing, Mr. Chairman, let me note that from a near
standing start, and in less than a decade, the World Bank has
created a greatly enhanced and increasingly credible capability
to deal with the problems of suspected fraud and corruption in
its activities. Problems remain, to be sure, many of them
referenced in my statement. But given a continued level of
commitment from executive leadership, buttressed by clear
authorization for its activities from the Bank's board of
directors and a widespread recognition within the organization
itself of the worth of such an undertaking, there is no reason
why this effort cannot mature into a showcase operation of how
to deal with a challenge of integrity problems within an
international organization.
Key to meeting this challenge will be the continued ability
to attract and retain INT staff and leadership of the highest
caliber and widest experience, and to ensure that INT is
recognized to be a genuine resource by all engaged in the
worldwide operations of the World Bank group. An admirable
beginning has been accomplished. Care must now be taken to
ensure that continued improvement remains the aspiration for
the future. Thank you.
[The prepared statement of Mr. Thornburgh follows:]
Prepared Statement of Richard Thornburgh
Good Morning. I am pleased to be here today to talk to you about
the ongoing efforts of The World Bank to develop effective policies and
procedures for combating fraud and corruption in projects financed with
Bank funds.
As the largest contributor to the Bank, the United States has a
critical stake in understanding how Bank funds are used and what type
of commitment the Bank has made to preventing those funds from being
wasted as the result of fraudulent or corrupt practices. As you are
aware, the Bank's Articles of Association, to which the United States
is a signatory, require that the Bank ``make arrangements to ensure
that the proceeds of any loan are used only for the purpose for which
the loan was granted . . .'' For an organization that has disbursed as
much as approximately $25 billion a year in countries having some of
the least developed economic, political and legal systems in the world,
this is not a simple undertaking.
Funds loaned by and activities undertaken by the Bank are
vulnerable to fraud and corruption by Bank employees, contractors, and
consultants utilized in the execution of its projects and by officials
in governments to whom loans are made. An effective program to combat
fraud and corruption is important not only to ensure that disbursed
funds are utilized in the manner intended, but to maintain the Bank's
reputation and to assure the continued willingness of member states to
support its operations. Unfortunately, during most of the Bank's first
fifty years, the culture within the Bank discouraged not only the
taking of any action to address problems of fraud and corruption, but
even the discussion of such action.
When James D. Wolfensohn became President of the Bank in 1995, he
instilled a notable shift in attitude. In a speech to the Bank's Board
of Governors in 1996, Mr. Wolfensohn became the first senior official
within the Bank to acknowledge openly that fraud and corruption
constitute a major problem for the Bank and for the nations that the
Bank was attempting to assist. Along with a new attitude, Mr.
Wolfensohn brought institutional change as well.
In 1996 the Bank's Executive Directors approved, in concept, the
establishment of a committee to assess evidence of fraud and corruption
in Bank-financed projects and to temporarily or permanently preclude
suppliers, contractors and consultants found to have engaged in such
practices from participation on future Bank projects.
In 1996 and 1997, the Bank revised its procurement guidelines in
order to make it manifest that fraud and corruption would not be
tolerated.
In early 1998, the Bank began the process of regularizing the
investigation of allegations of fraud and corruption by suppliers,
contractors and consultants with the establishment of an Investigations
Unit. At the outset, the Investigations Unit was composed of a very
small number of newly-hired Bank employees, most of whom were former
U.S. prosecutors. Since the number of in-house investigators was
insufficient to respond to various allegations of fraud and corruption
the Bank was receiving, the Bank contracted out the conduct of most of
its investigations to outside law firms and auditors.
Also in 1998, the Bank established two committees of high-level
officials to implement aspects of its anti-fraud and corruption
program. One committee, the Oversight Committee on Fraud and
Corruption, was given responsibility for the oversight and supervision
of all investigations of fraud and corruption, whether involving Bank
staff or Bank-financed projects. The other, the Sanctions Committee,
was given responsibility for assessing evidence revealed by the
investigations and for recommending to the President of the Bank the
appropriate disposition of such cases.
It was at this stage in the evolution of the Bank's program to
combat fraud and corruption, that the Bank engaged me, along with my
colleagues Ronald Gainer and Cuyler Walker, to consult with the Bank on
the adequacy and functioning of the program. During our engagement by
the Bank, we have issued three reports. The first report, issued in
January 2000, dealt principally with the Bank's procedures for
investigating allegations of fraud and corruption. The second report,
issued in August 2002, dealt principally with the Bank's procedures for
sanctioning acts involving fraud and corruption. And the third report,
issued in July 2003, dealt with a strategic plan that had been produced
within the Bank for its investigative unit and our analysis of the
steps the Bank had taken to develop its internal investigative
capabilities.
I should point out that, in all cases, the nature of our assignment
was to assist the Bank in developing policies, procedures and
structures to enable it to protect its funds from fraudulent and
corrupt practices. In preparing these reports, we were not asked to
evaluate, quantify or assess the specific nature, scope or extent of
the problem, nor were we asked to review or make recommendations
relating to any particular case or set of circumstances in which Bank
projects were affected by fraud or corruption.
Before addressing our findings and recommendations, it is worth
taking a moment to note the uniqueness of the environment in which the
Bank operates and how this necessarily has influenced the structures
and procedures it has put in place to address fraud and corruption.
As an international organization, the Bank does not possess many of
the tools that a national government may bring to bear on a situation
in which it has been the victim of fraud or corruption. The Bank does
not have traditional law enforcement powers such as subpoena power or
the ability to otherwise compel the production of documents or witness
testimony or to conduct searches or electronic surveillance. As a
result, the Bank must rely almost exclusively on informants and
cooperating witnesses to build a case. Furthermore, since the Bank
finances projects all over the world and often in some of the most
remote parts of the world, the Bank's investigators are invariably
viewed as outsiders with none of the advantages that come with knowing
and being known by local citizens or authorities who are closest to the
circumstances related to matters under investigation. In light of these
factors, it is not realistic to expect the Bank's investigators to be
as effective as police and prosecutors of a sovereign nation in
establishing facts that support allegations or suspicions of fraud and
corruption.
When it comes to seeking redress for wrong-doing involving Bank
funds, the Bank is, however, no different than any other private party
to a contract. If it desires to recover monetary damages, the Bank may
initiate a civil action in a country in which the courts have
jurisdiction over the matter. If it believes that a particular matter
involves the violation of the law, the Bank may refer the matter for
criminal prosecution in the country whose laws may have been broken. In
either case, the Bank must be able to uncover the underlying facts
giving rise to its suspicions, which requires a sophisticated
investigative capability since perpetrators of acts of fraud and
corruption will be careful to cover their tracks as best they can.
While the Bank does not possess traditional law enforcement powers,
it does enjoy special legal status including certain privileges and
immunities that private actors and even national governments do not
have. Except under certain exceptional and narrow circumstances, the
Bank is not subject to the jurisdiction of the courts of any nation.
This gives the Bank tremendous discretion in dealing with suppliers,
contractors and consultants, as well as national governments themselves
and its own employees. At the same time, it also imposes a heightened
obligation on the Bank to act responsibly since, while its actions may
not be subject to challenge in traditional ways, it will be subject to
considerable scrutiny due to its governing charter and its high profile
around the world.
Another important factor must be noted. Since the Bank would be
within its rights to treat those engaged in fraud and corruption in
Bank-financed projects simply as contracting parties in a commercial
transaction, such miscreants are subject to being declared ineligible
from participation in such contracts in the future on the mere
suspicion of improper conduct. However, the Bank has determined that
its status as a leading international organization that, among other
things, promotes the rule of law and the independence of the judiciary
in developing counties, requires it to apply elements of fundamental
fairness (or what might be thought of ``due process'' in a judicial
proceeding) when dealing with allegations of fraud and corruption in a
Bank project. When I describe our analysis of the Bank's sanctioning
process and some of our recommendations for strengthening it, I will
share some examples of the types of issues with which the Bank has
wrestled in trying to strike the appropriate balance between protecting
the funds it loans out and respecting basic principles of fairness.
From the inception of its anti-fraud and corruption efforts in the
mid-1990s, the Bank has separated the two distinct functions that make
up this effort--the investigation of activities involving fraud and
corruption, whereby the Bank focuses on uncovering and compiling
evidence of such actions, and the evaluation of the strength of that
evidence, whereby the Bank determines whether sanctions should be
imposed and, if they are, what sanctions are appropriate. In each of
the three reports that my colleagues and I prepared, we were asked to
deal with both aspects of the Bank's program at least to some extent. I
will address our principal findings and recommendations relating to how
the Bank deals with both investigations of instances of fraud and
corruption, on the one hand, and sanctioning those found to have
engaged in such practices, on the other.
With respect to the investigation of fraud and corruption, as I
noted previously, in 1998, the Bank had established its Oversight
Committee on Fraud and Corruption to oversee the investigations of
allegations of fraud and corruption involving Bank staff and Bank-
financed projects. The Bank had set up an internal Investigations Unit
with a small number of well-qualified investigators, but, due to its
limited capacity, had to contract out most of the investigative work to
law firms and auditors. This structure had evolved in a piecemeal
fashion over the course of several years as the effort to be more
responsive to allegations of fraud and corruption gained momentum, and,
while it was clearly well-intended, we found it to be somewhat
cumbersome and inefficient.
The Oversight Committee was composed of senior officials of the
Bank who brought a wealth of knowledge of and experience with Bank
operations to the table. However, understandably, none of these
officials had experience with investigative practices and procedures.
Moreover, all had considerable demands on their time which made it
difficult for the Committee to meet regularly and to provide the day-
to-day support and attention that the Investigations Unit required.
Some had oversight responsibility, directly or indirectly, for some of
the very operational components of the Bank whose projects were the
subject of investigation.
The Investigations Unit did not have sufficient staffing or
resources to follow up on the various allegations of fraud and
corruption that were being received by the Bank. The use of outside
investigators has been satisfactory when the Bank had only a few
matters under investigation at a time, but as the caseload increased,
it became cost-prohibitive to continue to engage an ever-increasing
number of outsiders who were unfamiliar with Bank practices to do this
work. We were also concerned that since the Investigations Unit
reported to a committee of several senior officials, there was at least
the appearance that the Unit lacked independence and could be subject
to inappropriate pressure under certain circumstances. I should note
that we did not observe any such pressure, but the opportunity itself
was sufficient to raise reservations about the oversight role of the
Committee.
Based on these findings, in January 2000, we recommended to the
Bank that the Investigations Unit be merged into a new independent
department, called the Department of Institutional Integrity, to be
created and assigned the principal responsibility for conducting all
investigations on behalf of the Bank into instances of fraud and
corruption. We also recommended that the new Department exercise
operational independence under the authority of the President of the
Bank and report directly to the President. As part of the
implementation of this new structure, we also made the following
recommendations:
that the new Department be headed by a Director with
experience in the investigation and prosecution of fraud and
corruption cases;
that the Director be appointed for a fixed five-year term to
minimize the potential for undue influence;
that the Department recruit and develop a cadre of
experienced in-house staff possessing investigative skills,
knowledge of Bank procurement and personnel procedures,
forensic auditing and contract auditing skills, and other
characteristics necessary for mounting an aggressive effort
against fraud and corruption;
that the use of outside investigators be minimized;
that the Department's personnel have access to all records,
documents and properties of the Bank in conducting its
investigations; and
that the Oversight Committee on Fraud and Corruption be
reconstituted and given a policy-making (as opposed to
operational) mission with responsibility for general
supervision and coordination of all of the Bank's programs
intended to address problems of fraud and corruption, not just
investigations.
I am pleased to say that these recommendations were accepted by the
Bank and have been implemented.
Beyond the overarching recommendations for restructuring its
investigative efforts, in January of 2000, we made a series of
additional recommendations relating to the Bank's efforts to uncover
fraud and corruption in projects it finances. These recommendations
included the following:
that the Department of Institutional Integrity, now known
within the Bank as ``INT,'' develop and nurture close working
relationships with other offices in the Bank whose
responsibilities and activities necessarily overlap with and
complement those of INT, including the Legal Department, the
Internal Audit Department and the Professional Ethics Office;
that INT receive a mandate from the Board, so that its
authority derive from the Bank's governing body not just from
its chief executive officer;
that INT develop procedures for reporting to the President
of the Bank regularly on on-going investigations and prepare an
annual report to the President summarizing its activities and
accomplishments during the preceding year and making
recommendations for management and procedural improvements to
aid in the deterrence or detection of fraud and corruption;
that INT develop a strategic ``risk management'' plan for
prioritizing its investigative resources based on an assessment
of those contracts, projects, geographic regions and countries
that may be particularly susceptible to fraud and corruption;
that, in order to regularize and enhance the operations of
INT, as well as to ensure fairness in the conduct of
investigation, the Bank put in place written procedures with
respect to INT's practices in the following areas:
adopting policies and procedures that ensure investigations
conform to acceptable norms, respect the rights of the accused
and develop evidence that can be used effectively in subsequent
proceeding;
designing systems to ensure that resources are used
efficiently and to enable the Department to track ongoing
investigations to ensure adequate internal monitoring and
oversight.
developing policies and procedures, based on objective
written criteria, to guide the Department in its decisions
about making other offices within the Bank aware of problems at
the appropriate time for informational purposes or remedial
action, about pursuing a matter either through civil or
criminal courts, and about making disclosures to affected or
otherwise interested parties outside the Bank; and
establishing procedures for the recruitment, hiring and
training of qualified individuals capable of conducting
investigations in a multicultural international organization.
In our 2000 report, we also proposed:
that in addition to investigating wrong-doing that had
already resulted in the loss of funds, the Bank develop ways to
reduce opportunities for fraud and corruption from occurring in
Bank-financed projects, such as: increasing the scope of and
resources available for the pre-review of contracts; and
increasing the requirements that disbursements be made only in
increments upon demonstrated achievement of specific
milestones;
that the Bank regularly review its loan agreements,
procurement guidelines and standard contracts, and insert
additional provisions designed to facilitate the prevention and
detection of fraud and corruption, such as: strengthening the
Bank's audit rights, document retention requirements and
contract representations and warranties; ensuring that
investigators have access to relevant personnel and documents
(whether in the control of the Bank or third parties); and
expanding the definitions of ``fraud'' and ``corruption'' in
the Bank's documents;
that the Bank conduct routine background checks on new
employees and on suppliers, contractors and consultants engaged
in Bank-financed projects;
that the Bank strengthen the financial disclosure
requirements applicable to high ranking officials and others in
particularly sensitive positions; and
that the Bank adopt ``whistleblower'' rules protecting Bank
staff that report misconduct, disclose information or otherwise
cooperate with investigations involving allegations of fraud
and corruption, as well as other types of wrongdoing.
Last year my colleagues and I had the opportunity to revisit some
of these issues when we were asked by the Bank to review and comment on
a strategic plan that the Department of Institutional Integrity had
prepared and to review and evaluate how the structures that had been
put in place were working and to what degree more needed to be done to
implement our recommendations.
The proposed strategic plan focused on all aspects of the
management and operation of INT. I will briefly comment on only the two
most salient of these. The first is the Department's proposed strategy
to move from an emphasis on reacting to allegations of fraud and
corruption when they are made, to a program that includes proactive and
preventive actions. The second concerns the proposed budget and staff
for the Department.
We found the proposal for becoming more proactive to be sound and
consistent with our earlier recommendations. If INT depends solely on a
reactive approach that responds exclusively to allegations of wrong-
doing reported to the Bank, it would reward the most skillful
manipulators of Bank funds, since it is usually only the most obvious
forms of fraud and corruption that tend to raise sufficient suspicions
to be reported to INT. It will, of course, always be critical to the
effectiveness and credibility of the Bank's anti-corruption program for
INT to maintain its capacity and commitment to zealously pursue
allegations of wrongdoing when they are reported. The proposed
proactive and preventive efforts are a logical extension of INT's
current work and are likely to strengthen INT's potential impact on the
Bank's overall objective of detecting and deterring instances of fraud
and corruption in Bank-financed projects.
We believe that these three kinds of efforts, reactive, proactive
and preventive, should not be viewed as step-by-step progressions, but
as component elements of an effective, coherent overall strategy,
regardless of the level of INT funding. In any event, a more
authoritative answer may be expected to emerge from a comparison of the
costs and benefits of the three approaches that balances them against
each other and that balances the overall utilization of Bank resources
against the potential savings realized by reducing losses to fraud and
corruption. Such an approach offers the prospect of more thoughtful
resolution of competing considerations than less disciplined forms of
evaluation.
Another aspect of INT's strategic plan that is a prime candidate
for some form of econometric cost-benefit analysis is its proposal to
structure a triage approach for case selection. Recognizing that the
Bank's resources are finite and that INT is not likely to receive
sufficient funding to enable it to undertake all the investigative
activities that may be warranted, the proposed triage system would
build upon a systemization of considerations that have been applied
informally in INT's past allocation of resources. This is the only
reasonable approach that can be taken.
We have encountered some concern that the concept of triage may
seem to contradict the Bank's sincere expression of ``zero tolerance''
for fraud and corruption. Refusal to tolerate should not be confused
with striking out at every instance of wrongdoing. As long as all cases
receive at least preliminary investigation and assessment by INT
personnel as contemplated by INT's proposal, as long as matters
apparently involving even low levels of seriousness are occasionally
brought to the sanctioning stage, and as long as all geographic regions
in which the Bank makes loans receive some degree of regular attention
by INT's investigators, the triage system can be recognized as in
furtherance of the zero tolerance concept, not in derogation of it.
Turning to INT's proposal for significant increases in its overall
budget and staffing level, it is interesting to note that this was met
by considerable skepticism in some quarters of the Bank. INT's staffing
level had already given some offices in the Bank the impression of an
instant bureaucracy exploding onto the Bank scene and apparently
destined to expand without ultimate boundaries. At the same time, the
staffing level had given INT personnel the impression of overwork and
inadequate willingness by the Bank to confront fraud and corruption
affecting large regions in which it operates.
It is important to recognize that any responsible business
enterprise would have been attempting, from the time of its inception,
to stem fraud and corruption that interfered with its mission. In the
Bank, however, senior management began to acknowledge the problem
openly only in 1996 `` after significant amounts already had been lost
to fraud and corruption. The Bank has a great deal of catching up to
do.
In assessing the justification for the Bank's expenditures on its
anti-fraud and corruption program, the appropriate measure, therefore,
is not through comparison of INT's accelerated growth in total staff
over its first few years with the Bank-wide growth in staff over the
same period, but the size of the staff needed to do the job in an
effective and cost-justified manner (tempered, to a reasonable degree,
of course, by budget realities, competing Bank responsibilities, and
similar constraints). Doing nothing, as was the case before, or doing
only as much as can be accomplished by an arbitrarily limited level of
personnel growth, is clearly not the proper response for an institution
with a staff that probably possesses as great a capacity for collective
econometric analysis as any institution in the world. The Bank needs to
develop a reasonable means of measuring, and recognizing in a practical
fashion, the value of investigations as well as the costs. This is
generally appreciated within the Bank, and many of the expressions of
concern about INT's rapid growth and future ambitions appear to be
bottomed primarily on a desire for assurance that the Department has
the analytical capacity for concentrating resources effectively and the
managerial capacity to assure that the anticipated effectiveness can be
realized--all in the context of the Bank's principal mission.
While INT's strategic plan represents a major step forward, the
planned uses of resources must be continually subjected to rigorous
analyses and the manner in which its operates must be continually
analyzed to identify areas where improvement can be made. In our report
to the Bank last year, we identified a few steps that could be taken to
improve INT's operations. These included the following matters:
We continue to believe that INT would be well-served by
having its terms of reference endorsed by the Board. While the
Board has been asked to approve the strategic plan for INT, it
has never taken any affirmative action on INT's role as the
principal instrument of the Bank for the investigation of fraud
and corruption in Bank operations. We think that bestowing such
a mandate upon INT would strengthen its ability to obtain
cooperation from other offices in the Bank and its authority to
conduct investigations in countries throughout the world.
We believe that INT's stature would also be enhanced if
various constituencies, both within and outside the Bank,
receive a clear and unambiguous message from the Bank's senior
management that it is committed to the fight against fraud and
corruption. Since, as President Wolfensohn has noted, this
objective was not always a part of the Bank's culture, it may
be premature to assume that all Bank staff have accepted its
importance. The President has consistently spoken out about the
significance of this effort, as have several other Bank
officials. It would be helpful if these senior managers would
make it a point to regularly reaffirm the priority the Bank
places on its anti-corruption effort and its connection to the
Bank's antipoverty agenda, and also acknowledge INT's central
role in this effort. Another way to deliver this message within
the Bank would be to incorporate information about the Bank's
anti-fraud and corruption program and its importance into all
of the Bank's core training program.
We believe that while the President should continue to have
the ultimate authority and responsibility for INT, a more
regularized process would be useful for acquainting the Board
of Directors with the general nature of the problems that INT
is able to uncover. If the Board is to be expected to support
INT's efforts and actions, it should be given a more complete
understanding of what INT is doing and what its investigations
uncover. In particular, the Board, through its Audit Committee,
should have the opportunity to receive sufficient information
about INT and its findings to appreciate whether there are
endemic problems in a particular country or geographic region,
whether there are systematic problems in how the Bank
administers its programs, and whether there are internal
obstacles within the Bank that prevent INT from effectively
conducting its investigations. At the same time, if the Audit
Committee is going to be given access to such information, its
members must recognize that INT would not be free to disclose
the details of some ongoing investigations, and that such
disclosure could be perceived as subjecting INT to the risk of
undue influence from the Executive Directors whose nationals
may be implicated in wrongdoing.
Last year, we also reviewed a set of issues that concern how and
with whom the Bank shares the results of its investigations, in
particular: whether the Bank should publicly disclose that it has
concluded that a firm or individual has engaged in fraudulent or
corrupt practices and that the firm has been sanctioned by the Bank;
whether the details and the results of INT's investigation should be
shared with affected or interested parties; under what circumstances
the results of an investigation should be referred to law enforcement
agencies or prosecutors for possible criminal charges; and in what ways
the lessons learned from those investigations can be imparted to Bank
managers.
The public disclosure of sanctions imposed by the Bank on the basis
of findings of fraud or corruption should be automatic. Such disclosure
will help achieve a level of deterrence that is one of the most
valuable results of the Bank's effort. In addition, it will add
credibility to the Bank's anti-corruption program and will enable
member nations and other international organizations to protect
themselves from becoming victims of the perpetrator in the future.
Beyond publicizing the fact that sanctions have been imposed, the
Bank is understandably cautious about releasing the details of INT's
investigative reports that describe the evidence of fraud and
corruption giving rise to sanctions. Nevertheless, there will often be
stakeholders, both within the Bank and in interested member states,
that would benefit from knowing the details of the fraudulent and
corrupt activities described in these reports. Just as there is a
deterrent effect from the public disclosure of sanctions, the
disclosure to responsible officials of the particular events giving
rising to those sanctions may provide an opportunity for the
introduction of corrective measures that could prevent such events from
recurring in future Bank-financed contracts. Over time, this could be
of considerable benefit to the Bank.
We recognize that there frequently will be information contained in
INT case reports that the Bank would have a legitimate interest in
keeping confidential. Such information includes: information about
INT's sources and methods of investigation, the disclosure of which
could undermine INT's investigative capacity; information about
cooperating witnesses, the disclosure of which could subject those
individuals to retaliation or physical harm; information of a less than
compelling nature, the disclosure of which could cause unjustified
damage to the subject of an investigation; and information that,
although seemingly credible, has no bearing on the culpability of the
subject of an investigation and unfairly portrays an innocent third
party in a negative light, the disclosure of which could cause damage
to that party's reputation. In such instances, the Bank could decide on
a case-by-case basis either to decline to release a case report in its
entirety or to withhold those portions of the report that the Bank
determines should not be released. The fact that these concerns may
arise in some situations does not suggest that the Bank should
routinely decline to release such INT reports.
If an INT report contained evidence of criminal activity, then it
is likely that the government of the country whose laws have been
broken will want to obtain that information. Some have argued that the
Bank may have either a legal or a moral obligation to provide such
information to its member countries. Without resolving such issues, it
is apparent from a practical perspective that the Bank will have an
interest in making criminal referrals in most, if not all, instances
when it uncovers evidence of a crime. We have recommended to the Bank
that, as the number of matters eligible for criminal referral continues
to increase, the Bank should regularize policies and procedures for
evaluating such cases and for interacting with national officials in
notifying them of the evidence and giving them access to the Bank
files.
When INT investigators discover fraud and corruption in Bank-
financed contracts, the evidence may place them in a unique position to
identify problems in the Bank's operating procedures that have
implications far beyond the matter being investigated. INT may be able
to glean instructive information from a single case report, and, in
addition, over the course of the many diverse and disparate matters
that INT investigates, it may discover patterns and trends that should
be called to the attention of operational managers within the Bank, as
well as to the attention of officials in member countries with
responsibility for the awarding or supervision of Bank-financed
contracts. The kinds of information that might be revealed in INT's
investigations include information that would show if there are endemic
problems in a country or geographic region, if there are systematic
problems in how the Bank administers its programs, and if there are
particular techniques or schemes that are being used to facilitate acts
of fraud or corruption in Bank-financed contracts. if these lessons are
made known to operational managers in the Bank and national officials,
it may be possible to correct the problems, or at least improve the
procedures for the awarding and executing of Bank-financed contracts to
the extent that the potential for future problems is lessened. The Bank
would be doing itself a disservice if it were to fail to take advantage
of the educational value of the reservoir of information accumulated by
INT.
In our 2003 report, we also identified a number of technical issues
relating to the Bank's policies and procedures concerning the
investigation of incidents involving fraud and corruption that need to
be resolved. These issues include:
whether the Bank should be willing to grant immunity to a
cooperating witness or to immunize certain information provided
by a witness, and, if so, whether such authority should be
given to the Director of INT or should be exercised only with
the approval of a senior official outside of INT;
whether the Bank should be willing to reimburse witnesses
for expenses incurred as a result of their cooperation with
INT;
under what circumstances INT should have access to the
contents of a staff member's computer files and e-mail
databases; and
under what circumstances the Bank should make Bank staff
available to testify in court given that, as a result of the
Bank's privileges and immunities, Bank staff cannot be
compelled to provide testimony.
Issues of this nature must be dealt with in all national criminal
justice systems, and they are resolved in the normal course. We
understand that the Bank is still in the process of reviewing these
matters and is attempting to resolve them in the near future.
It is likely that other procedural issues with confront the Bank as
INT matures as an investigative body. When such issues do arise, we
have encouraged the Bank to resist the understandable tendency to
resolve these issues by circumscribing INT's activities in a manner
that would simply minimize the potential for complaints by the subjects
of investigations. Since INT possesses only a limited set of
investigative tools and none of the powers common to law enforcement
agencies, we have advised the Bank that it should be reluctant to take
away any prerogatives that INT would otherwise possess. To resolve such
matters, we have also advised the Bank that, where there is
disagreement between INT and senior managers over INT's methods of
operation, the newly reconstituted Committee on Fraud and Corruption,
now known as the Investigations Policy Committee, is an appropriate
vehicle for recommending a resolution of the matter.
As I mentioned at the outset, in 2002, we were asked by the Bank to
review and evaluate its process for imposing sanctions on firms and
individuals that have been found to have engaged in fraud and
corruption in Bank projects. The principal tool available to the Bank
under such circumstances is to declare the wrong-doer ineligible for
future Bank-financed contracts, a process known as debarment. We made
recommendations to the Bank in some eighteen separate categories
pertaining to its structures and procedures for imposing sanctions.
These recommendations were thoroughly reviewed by the Bank's management
and were presented to the Bank's Executives Directors. I have been
informed that, earlier this month, all of our recommendations were
accepted by the Board and that the Bank will proceed to implement those
recommendations.
One of our principal recommendations with respect to the
sanctioning process concerned the composition of the body given
authority to frame the sanctions to be imposed by the Bank. As I
described previously, in 1998 the Bank established a Sanctions
Committee composed of five senior officials of the Bank to review
evidence of fraud and corruption and determine whether or not to debar
those found to have engaged in such actions. At the outset this
composition was sensible because senior managers of the Bank are in a
better position than any others to make thoughtful evaluations of
whether it is in the interest of the Bank and its member nations to
continue to do business with a firm that has engaged in practices that
raise serious ethical concerns. However, over time, it became apparent
that the composition of the Committee could be problematic.
Some of the difficulties were of a managerial and administrative
nature. An increasing caseload imposed greater time pressures on
Committee members for reading the case files in preparation for
hearings and for engaging in what has become in essence an adjudicatory
exercise, rather than an exercise in business discretion. As senior
Bank officials, each of the Committee members already has a full plate
due too their principal responsibilities within the Bank and most had
active travel schedules which made them unavailable for extended
periods of time.
Other difficulties were more troublesome in that they could be
perceived as affecting the basic fairness of the Committee's
determinations. First, the members of the Committee, other than the
General Counsel, are not lawyers, yet they are often called upon to
deal with essentially legal issues, such as the weight to be given
certain kinds of evidence and the adequacy of the overall submissions
required to satisfy a particular standard of proof. Second, the
managerial and professional positions of the Committee members within
the Bank open the entire process to claims of at least an appearance of
conflict of interest. The premise of perceived conflicts is that Bank
managers cannot fairly judge matters concerning loans that their
subordinates evaluated and supervised, and that they themselves may
have approved. Third, and closely related to concerns about conflicts
of interest, is the fact that senior officials by the nature of the
positions in the Bank may be perceived as being subject to externally
generated pressures from member governments trying to protect their own
nationals. These latter two concerns--conflicts and external
pressures--could be costly to the Bank in terms of the credibility of
the debarment process.
For these reasons, we recommended to the Bank that the composition
of the Committee be reconstituted to employ a system in which (a) the
membership of the Committee is drawn both from current Bank employees
who are not the most senior managers and from individuals who are not
current Bank employees; (b) the membership on the Committee be balanced
to ensure that it is composed of individuals with training and
extensive experience in procurement matters, in law, and in the
operations of the Bank or other international development banks; (c)
the total membership consists of seven such individuals, with current
Bank employees constituting no more than three; and (d) the Committee
sits in panels of three to hear cases, with two members of each panel,
including the chairman, being drawn from the Committee members who are
not current Bank employees. We believe that a careful iteration of such
an approach reasonably could be expected to minimize concerns about the
current system--regarding membership availability and allocation of
time, conflicts of interest, outside influences, and pressures of
increasing caseload--while maintaining necessary membership experience
and expertise.
We also made recommendations as to whether the Sanctions Committee
should have the authority to impose sanctions on behalf of the Bank or
should simply make recommendations to the President. Requiring the
President of the Bank to review and evaluate every case in which fraud
and corruption has been found and to determine whether the recommended
sanctions are appropriate places an enormous burden on the President's
time. Furthermore, since the parties subject to sanction come from
countries that are represented on the Board of the Bank to whom the
President reports, there is at least the perception that the President
could be subjected to political pressure and undue influence on behalf
of a party that had the support and sympathies of its government. For
these reasons, it seems advisable not to include the President in the
sanctioning decisions and that, as long as the Sanctions Committee is
composed, at least in part, of individuals who are not current Bank
employees, the Committee should be vested with authority to make final
decisions without further review or appeal.
One of the reasons we are comfortable with making the Sanctions
Committee's decision final and non-appealable is that we also
recommended that the Bank appoint an officer to review all cases that
are directed by INT to the Sanctions Committee to determine whether the
evidence is sufficient to warrant sanctions and to suggest what
sanction might be appropriate. As a result, there would be two levels
of review in the process, the Bank officer and the Sanctions Committee.
Considerations of fairness would not dictate that further opportunities
for appeal would be required.
The purpose of the reviewing officer within the Bank was intended
to improve the Bank's sanctioning process in two other fundamental
respects. First, we were concerned that the only mechanism for
disposing of a case, no matter how strong or weak the evidence might
be, was to conduct a full-blown hearing before the Sanctions Committee.
Committee members must spend considerable time preparing for Committee
proceedings and, as the quantity of evidence presented to the Committee
continues to grow, an ever-increasing amount of time conducting
hearings and meeting to decide how to rule on those cases. As the
number of cases becomes larger, it will be more and more difficult for
the Committee to hear cases and dispose of them in an efficient and
timely manner. The role envisioned for the Bank's internal reviewing
officer could alleviate much of this pressure. The accused will know
that the reviewing officer, who is independent from those investigating
the case, has reviewed the evidence and concluded there is sufficient
evidence to warrant a hearing before the Sanctions Committee. The
accused will also know what sanction has been recommended by the
reviewing officer. Under these circumstances, the accused may decide it
is in its best interests to avoid the time and cost of proceeding to a
full hearing before the Committee. In such cases, the sanction
suggested by the reviewing officer will take effect and the matter will
be closed without requiring any of the Sanctions Committee's time.
The second important feature of our recommendation for a reviewing
officer is to provide the Bank with a mechanism for temporarily
suspending the accused from participation in new Bank projects pending
final action by the Sanctions Committee. Under the Bank's original
procedures, an accused party remained eligible to be awarded additional
Bank projects until the Sanctions Committee process had been completed
and a debarment had been approved by the President. (The consequences
of this approach are compounded by the fact that, since it could cause
enormous costs and delays to a project that is already underway, a
debarment does not affect contracts that have been previously awarded
to a party that is subsequently debarred--although, under other long-
standing Bank procedures, the contract could be canceled if it was
tainted by the same fraudulent or corrupt actions that gave rise to the
debarment.) Since the accused could continue to compete for additional
Bank contracts during the pendency of its case before the Sanctions
Committee, the accused had an incentive to delay the proceedings as
long as possible rather than bringing them to a speedy conclusion.
Plainly, the Bank has an obligation to protect funds entrusted to it
from misuse at the hands of a party who has already been shown by
credible evidence to have engaged in fraudulent or corrupt practices,
and the Bank would only look foolish were it to award further contracts
under such circumstances on the mere technicality that it had not
completed its formal processes. For these reasons, we recommended that
if the reviewing officer determines, on the basis of the evidence
presented by INT, that the accused has engaged in fraudulent or corrupt
practices, then the accused would be temporarily suspended until the
Sanctions Committee's decision on the matter becomes effective.
The other recommendations contained in our 2002 report on the
sanctioning process largely concerned procedural matters and the Bank's
desire to strike an appropriate balance between an efficient and
expeditious process on the one hand, and ensuring that the accused is
afforded fairness on the other. Our recommendations on these procedural
matters included the following issues:
in response to arguments from some parties before the
Sanctions Committee that the Bank should be subject to some
sort of statute of limitations that would bar it from pursuing
matters that occurred in the distant past, we recommended that,
where there is reasonably sufficient evidence to establish that
a firm has in fact engaged in fraudulent or corrupt practices,
no matter how long ago the incident occurred, the Bank should
retain the opportunity to protect its assets from misuse in the
future by debarring the firm from participating in subsequent
Bank-funded contracts;
in considering the manner in which evidence is presented to
the Committee, we recommended that the practice of receiving
both written submissions and oral presentations should
continue, with the caveat that, in order to keep the
proceedings manageable, reasonable limits should be placed on
the length of written submissions (other than documentary
evidence) and the duration of oral presentations;
with respect to the burden of proof, we recommended that the
Bank should have the burden of establishing that an accused
party has engaged in fraudulent or corrupt practices, and that,
where such evidence has been presented, the burden should shift
to the accused to show cause as to why that party should not be
sanctioned as a consequence of such behavior;
since the standard of proof applied by the Bank that the
evidence be ``reasonably sufficient'' to support a finding that
fraud or corruption had occurred was considered ambiguous by
several members of the Sanctions Committee, we recommended that
the Bank adopt of a more descriptive standard, such as ``more
likely than not;''
in response to demands from parties before the Sanctions
Committee that they be given unfettered access to all documents
in the Bank's possession, we recommended that the Bank maintain
the practice under its existing procedures with respect to
providing access to its documents whereby the accused is not
given unlimited access to Bank documents but is entitled to
have access to all relevant evidence in INT's possession, or
known to INT, that would reasonably tend to exculpate the
respondent or that would mitigate the respondent's culpability;
with respect to documents in the possession of parties under
investigation by the Bank, we recommended that the Bank's
procurement guidelines and the documents required to be
submitted by bidders on Bank-financed projects be revised to
enhance the Bank's ability to obtain meaningful information
from the records of all parties that bid on Bank-financed
contracts, whether or not they ultimately are awarded the
contract, and that an accused's obstruction of or failure to
produce such documents or otherwise to cooperate with an
investigation should be considered by the Sanctions Committee,
and the Committee should be permitted to draw an inference from
such actions by the accused that the evidence it refuses to
produce would tend to establish the accused's culpability;
in response to demands from parties before the Sanctions
Committee that the accused be permitted to confront adverse
witnesses and compel them to testify in person before the
Sanctions Committee, we recommended that the Bank should
continue the practice whereby the Sanctions Committee accepts
witness testimony that is provided indirectly through either
INT or the accused, and that the Sanctions Committee assess the
weight to be given to such testimony in view of all the
circumstances, including the lack of opportunity to evaluate
the witness's credibility by face-to-face observation and the
lack of opportunity for the other party to cross-examine the
witness;
with respect to the range of possible sanctions that may be
imposed on the basis of a finding of fraud or corruption, we
recommended that the range be expanded to include one or some
combination of the following: (a) permanent debarment; (b)
debarment for a term of years; (c) a compliance program in lieu
of debarment involving the positioning of monitors on a board
of directors or elsewhere within a finn, the termination of
corrupt employees, the initiation of ethical training for all
employees, the adoption of systematic audits and
investigations, and the encouragement of voluntary reporting by
employees; (d) restitution; (e) formal reprimand; (1) other
appropriate sanctions; and in all cases (g) publication of the
particulars of any sanction imposed;
where there are circumstances beyond the underlying events
surrounding the fraudulent or corrupt activities of the
accused, such as prior conduct involving similar behavior, the
magnitude of losses caused by the accused, or the damage done
to the credibility of the Bank's procurement process, we
recommended that the Sanctions Committee take such aggravating
or mitigating circumstances into consideration in determining
the appropriate sanction to impose;
In considering the impact of the panoply of possible
aggravating or mitigating circumstances, we recommended that
the Sanctions Committee give special weight to the degree of
cooperation an accused party provides to the Bank in the course
of an investigation because of the benefits to the Bank and the
efficient use of its resources that would result from such
cooperation, and we recommended, in particular, that the Bank
develop a voluntary disclosure program that would encourage
firms and individuals to volunteer disclosure of wrongdoing
before it is suspected by the Bank; and
with respect to the parties that are potentially subject to
being sanctioned by the Bank, we recommended that the authority
of the Sanctions Committee to debar should apply not only to
the parties that enter into contracts for Bank-financed
projects, but also to any individual or entity that, directly
or indirectly, controls or is controlled by the contracting
party.
In addition to these recommendations, in our report on the
sanctioning process we made recommendation similar to those described
in our 2003 report that the Bank should make public disclosure of the
sanctions it imposes and should share evidence of criminal activity
with national law enforcement agencies and with other international
organizations.
From a near standing start and in less than a decade, the World
Bank Group has created a greatly enhanced and increasingly credible
capability to deal with the problems of suspected fraud and corruption
in its activities. Problems remain, to be sure, many of them referenced
in my testimony today. But given a continued level of commitment from
executive leadership, buttressed by clear authorization for its
activities from the Bank's Board of Directors and a widespread
recognition within the organization itself of the worth of such an
undertaking, there is no reason why this effort cannot mature into a
showcase operation of how to deal with the challenge of integrity
problems within an international organization. Key to meeting this
challenge will be the continued ability to attract and retain INT staff
and leadership of the highest caliber and widest experience and to
insure that INT is recognized to be a genuine resource by all engaged
in the worldwide operations of the World Bank Group. An admirable
beginning has been accomplished. Care must be taken to ensure that
continued improvement remains the aspiration for the future.
The Chairman. Thank you very much for that remarkable
testimony, and likewise for the written statement that
buttresses your oral testimony today. At this point, I want to
recess the hearing. We're in the last four minutes of the roll
call vote. We will quickly do our duty, and then return and
proceed with our other two witnesses.
[Recess.]
The Chairman. The committee is called to order again. We
now look forward to hearing from Mr. Guido Penzhorn, advocate
and senior counsel, Durban Bar, Durban, South Africa. Welcome
to the committee. Please proceed with your testimony.
STATEMENT OF GUIDO PENZHORN, ADVOCATE AND SENIOR COUNSEL,
DURBAN BAR, DURBAN, SOUTH AFRICA
Mr. Penzhorn. Mr. Chairman, I must thank you for the
opportunity of being here, but I must also extend the thanks of
the Lesotho authorities for the recognition that my being here
signals for the work that they've done in Lesotho in combating
corruption. The Lesotho authorities sometimes feel that they
are somewhat alone in a world awash with corruption and that
they are isolated in their efforts, and this invitation is a
source of great encouragement to them.
Mr. Chairman, in this paper I will briefly set out the work
done in combating bribery in Lesotho involving multinational
construction companies and consultants, and I will then express
a few thoughts from my experience in leading these
prosecutions.
By way of background, the Lesotho highlands water project
is the result of a treaty between South Africa and Lesotho
dating back to 1986. You may recall, Mr. Chairman, that that
was at the time of the stranglehold of sanctions against South
Africa, and this was a way for South Africa to somehow get out
of the stranglehold. And this treaty then allowed for the
damming of water in Lesotho for the use in Gauteng in South
Africa and for Lesotho to get the benefit of not only the
revenue, but also the hydro power that would then be generated.
Phases 1A and B have recently been completed, and
negotiations are underway in respect to phase 2. This is a
multibillion dollar water project, and in fact, I understand
one of the biggest dam projects in the world.
We started by prosecuting the chief executive of bribery in
a bribery scandal that was up to then quite unprecedented in
South Africa. He was convicted and sentenced to 15 years'
imprisonment. The Canadian consultancy, Acres, was then
prosecuted. They were convicted and fined about 15 million
rand, which is about 6 \1/2\ million U.S. dollars. The
engineering company from Germany, Lahmeyer International, was
then prosecuted, convicted, and on appeal their fine was
increased to 12 million rand, which is about $2 million.
We then prosecuted the French firm, Schneider Electric SA,
which had taken over Spie Batignolles, which had been involved
in the project. They in fact pleaded guilty and a fine of 10
million rand was agreed with them, and there are other
prosecutions pending.
Initially in 1999, these prosecutions were met with praise
from the international community, but also with a degree of
skepticism. The thought seemed to be that the chief executive,
the recipient of the bribes, would be prosecuted and then once
he is sentenced everybody would go on with their business.
However, when the prosecutions then moved to the multinational
companies involved, people started to take notice, and more
particularly when the convictions started coming in, and then
they really started taking notice.
And what must be remembered is that these prosecutions must
be seen against the background of mounting criticism in Lesotho
against the prosecutions. No doubt some of these criticisms
were very well-intended, because it was felt that Lesotho can
hardly afford to mount these prosecutions involving expensive
lawyers from South Africa and expensive accountants and
specialist witnesses and so on, and it was felt that the money
could be better spent in, for instance, the enormous AIDS
pandemic that you have in Lesotho at the moment.
However, some of the motivations for criticizing these
prosecutions and seeking to undermine them no doubt also go to
the very problem that you have with bribery, and that is, you
don't know how far it goes. Some of the people criticizing the
prosecutions may well have been doing so because they
themselves were involved and they wanted to keep this thing
covered up.
We received help, Mr. Chairman, from various instances,
particularly from the Swiss, also from OLAF, the anti-
corruption European Union unit. And we also received help from
the World Bank, and we received considerable help from the
World Bank. From early on, the World Bank extended to us access
to their records that they had with regard to the companies
that we were investigating. On the other hand, we extended our
assistance to the World Bank which was the result of our
investigations, and that cooperation was very fruitful and that
cooperation has extended until now, and we are still
cooperating quite extensively with the World Bank and we are
very appreciative of the help that we've received from the
World Bank.
But I must add though that that assistance fell short of
financial assistance, and this is a bugbear with the Lesotho
authorities because various promises have been made with regard
to financial assistance which was never forthcoming. One must
realize that faced with its own economic and social problems,
such as a frightening AIDS pandemic, Lesotho cannot really
afford the costs incurred in these prosecutions. But it did
what it had to do, and this involved the allocation of funds
that could well have been used for other purposes.
This clearly illustrates in my submission Lesotho's measure
of commitment to fighting corruption. From our vantage point,
we do not see any such commitment on the part of other
countries, i.e., those whose companies were and still are
involved in the water project. There is a lingering impression
in Lesotho, Mr. Chairman, as well as in South Africa, that the
interests of the first world countries in the present
prosecutions lies not so much in the successful outcome of
these prosecutions, but rather in protecting the interests of
its companies that are involved. Hopefully, this impression
will in time prove not to be correct.
I'd like to deal with a few lessons that we've learned.
Corruption is a worldwide industry. What Lesotho has shown is
that something can indeed be done about it. All that is
required is real and not merely token resolve. Such resolve
presupposes a prosecuting arm that is not hamstrung by
political considerations or, more importantly, skeletons in
cupboards of persons in a position to influence prosecuting
decisions. After all, the one sure way to get away with bribery
is to compromise those that make the decisions whether or not
to prosecute. This may explain why in so many countries, among
others Africa, little seems to be done about what appears from
the outside to be obvious corruption. My team and I were
fortunate in that we did not have this problem in that the
Lesotho prosecuting authorities gave us their unqualified
support.
International bribery is notoriously difficult to detect.
The reason for this is that you do not have an obvious victim.
The victim is the state and the public at large who would not
normally get to know of this. Bribery involves two parties, the
briber and the bribee, and the perception which we have found
in the first world is that in Africa bribery is an Africa
problem. And what I mean by this is that it is felt that the
initiative for the bribe comes from the bribee as opposed to
from the briber.
What these prosecutions that we have been involved in has
shown is that that is in fact not the case, that the initiative
comes from the briber, from the briber company, and it
initiates this through agents, and that's where the bribe comes
from.
I'd like to turn to something which I think is particularly
important. I've heard testimony and I've read testimony from
persons such as Nancy Boswell that testified before you at the
last hearing as well as other testimony, and this testimony
focuses on the supply side of bribery. In other words, from the
vantage point of the donor agencies or the contractors
involved. And then it focuses on transparency in the process,
proper accountability, the level of corruption in a particular
country, making sure the official is not bought off.
Now, our perspective is from the demand side, and what we
dealt with in Lesotho in this highlands water project is a
project that was overseen by the World Bank, by the European
union, by a joint investigating or oversight committee of South
Africa and Lesotho, the regular inspections by the World Bank
and the EU, regular visits, contracts that were won on merit--
both Acres and Lahmeyer, the ones that were convicted, won
their contracts on merit--bribe payers that actually did not
get their contracts, and so on.
In other words, we're dealing with a perfectly transparent
process. Where the real problem came in is that you are dealing
with a sophisticated system all revolving around the agent or
the middle man. This agent doesn't seek to obtain the contract
by getting the chief executive of the authority to override
procedures, or to bypass tenders that are better. Rather, it
involves compromising him in his discretion.
To use a simple analogy, it's like when my son is
prosecuted for drunken driving and I pass the policeman $100
and he accepts it, he's compromised, whether or not he helps my
son or doesn't help my son or how he helps my son is not the
point. The point is I have compromised him, and this is the
nature of the bribery that we are dealing with here.
The second problem is that the agent's costs are included
in the tender amount, it is built in. And this was in fact the
defense of companies like Acres and Lahmeyer that said, but the
money that we paid to our agent is perfectly transparent, it's
on our books, it's accounted for, et cetera, et cetera, what's
the problem. In fact, they have a contract with the agent. That
contract says the agent must do certain things and they somehow
established that he did certain things.
The point is then how do you prove it? You cannot really
prove it from the supply side, because from the supply side you
seem to work from the assumption that corruption comes from the
demand side. That is perhaps why Lahmeyer and Spie Batignolles
passed muster in an EU inspection, that is perhaps why Acres
escaped World Bank sanction the first time around, because it
was viewed from this perspective.
We view it from the other perspective, namely through
circumstantial evidence on the ground where the contracts take
place, and this circumstantial evidence involves that the
agent, for instance, wasn't really needed, the nature of the
agreement between the contractor and the agent, other factors,
the manner of the payments, i.e., that they were paid into
secret accounts, the amounts of the payments, whether the
agency relationship is a secret one or not.
The point I'm making is that from our perspective from the
demand side, we were then able to establish bribery. And as I
said, Mr. Chairman, this all surrounds the question of the use
of agents, and without sounding too simplistic, this is where
the heart of the problem is. Certainly an agent or a middleman
can serve a legitimate purpose. However, if he is given carte
blanche to obtain the contract, and especially on the basis of
a contingency fee, he's almost invited to obtain the contract
through corrupt means. This is what the judge said in the Sole
case, where he said that the agent there undertook in effect to
secure the award of the contract, that is, to the extent that
his fee would only become payable with the award of the
contract. How can a consultant give such an undertaking bona
fide?
Now, although in Lesotho we are only dealing with the
involvement of construction and consulting companies, it would
be naive in our submission to think that the use of
representatives to hide bribery is confined to the construction
industry. The overwhelming probability suggests that this is
also the way it is done in other large contracts involving
public officials.
Now, in this regard, Mr. Chairman, and these are my closing
remarks, the Lesotho Court of Appeal, the highest court in
Lesotho, has expressed itself very strongly in both the
Lahmeyer case and the Acres case, and it has called on the
international community, and specifically the World Bank, to
readdress its practices and its procedures and to look more
closely at the use of agents, because that is where the heart
of the problem is. But also, what it has asked the donor
agencies such as the World Bank to do is to help the courts in
a place like Lesotho with regard to a deterrent form of
punishment.
The companies that we prosecuted are not natural persons,
they are artificial persons, and you can't send them to prison.
And what happens is, if you can't take his liberty away, what
punishment do you impose upon him? The fines that the courts
were able to impose, the companies more often than not paid out
of their profits. In other words, it's like paying a criminal
who stole things from your house, you punish him by ordering to
give half of it back, but he still keeps the other half, so
what sort of punishment is that? And that is what the Lesotho
courts have asked the international community and the donor
agencies to do, namely, to ensure that the companies involved
are properly punished. I understand that in the case of Acres
that the rehearing that has taken place has been concluded and
we look forward to seeing what the result of that hearing is.
In conclusion then, my last point, and that is this, in
southern Africa, where I come from, we are dealing with a
transparent process in the water process. We are dealing with
the ability to prosecute these companies. What we are really
looking for, that is, the Lesotho authorities, is support and
encouragement from the outside world in this process, and for
Lesotho to know that it's not alone in combating bribery.
Thank you, Mr. Chairman.
[The prepared statement of Mr. Penzhorn follows:]
Prepared Statement of Guido Penzhorn\1\
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\1\ Lead counsel on behalf of the Lesotho government in the present
bribery prosecutions relating to the Highlands Water Project.
---------------------------------------------------------------------------
COMMENTS ON THE CURRENT LESOTHO BRIBERY PROSECUTIONS
In this paper I will briefly set out the work done in combating
bribery in Lesotho involving multi-national construction companies and
consultants. I will then express a few thoughts and make some
suggestions from my experience in leading these prosecutions. In doing
so I will deal in particular with the role played by the international
community and the role it can play through international donor/lending
agencies such as the World Bank.
Introduction
The Lesotho Highlands Water Project is the result of a treaty
between South Africa and Lesotho dating back to 1986 in terms of which
water is dammed in the mountains in Lesotho for the purposes of
supplying water to the Gauteng province of South Africa as well as
hydro-power to Lesotho. Phases 1A and 1B have recently been completed
and negotiations are underway in respect of phase 2. This is a multi-
billion dollar project and in fact one of the biggest dam projects in
the world.
In the mid 1990s an audit by Ernst & Young led to the dismissal of
the Chief Executive of the project authority, Mr. Masupha Sole. This in
turn led to civil litigation against him in the course of which it was
discovered that he had bank accounts in Switzerland. An application to
the Swiss authorities followed from which it was discovered that he was
receiving enormous sums of money, mostly through intermediaries, from
contractors and consultants involved in the water project. I was then
briefed to lead the prosecution of Mr. Sole and the others involved in
what was clearly a bribery scandal unprecedented in Southern Africa.
Mr. Sole was the first to be charged. He was convicted and on
appeal \2\ sentenced to 15 years imprisonment. Acres International, a
firm of consulting engineers from Canada, followed and also on appeal
\3\ it received a fine of R15 million (the exchange rate between the
Dollar and the Rand is presently approximately 6.1 to 1). Lahmeyer
International, the engineering consultancy from Germany, was then
prosecuted, convicted and sentenced to a fine of R10.6 million. It
appealed against the convictions and on appeal the fine was increased
to R12 million. Judgment was delivered on 7 April this year.\4\
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\2\ M. E. Sole v The Crown, Lesotho Court of Appeal, case number C
of A (CRI) 5 of 2002, judgment delivered on 14 April 2003. Smalberger
JA, Melunsky JA (both former judges of the South African Supreme Court
of Appeal) and Gauntlett JA (Senior Counsel in South Africa and former
Chairman of the South African Bar Council).
\3\ Acres International Limited v The Crown, Lesotho Court of
Appeal, case number C of A (CRI) 8 of 2002 delivered on 15 August 2003.
Steyn President of the Court, Ramodibedi JA and Plewman JA (a former
judge of the South African Supreme Court of Appeal).
\4\ Lahmeyer International GmbH v The Crown, Lesotho Court of
Appeal, case number C of A (CRI) 6 of 2002, delivered on 7 April 2004.
Steyn, President of the Court, and Grosskopf JA and Smalberger JA (both
former judges of the South African Supreme Court of Appeal). (All three
judgments referred to are electronically available.)
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In June 2003 one Du Plooy, the intermediary who acted on behalf of
Impregilo of Italy, the lead partner of the consortium that built the
main dam, pleaded guilty to bribing Mr. Sole on behalf of Impregilo. In
exchange for co-operation with the prosecution he was fined R500,000,
coupled to a lengthy period of imprisonment which was conditionally
suspended.
On 25 February 2004 Schneider Electric SA (formerly Spie
Batignolles), the multi-national French construction company involved
in building the transfer tunnels, pleaded guilty to 16 counts of
bribing Mr. Sole. A fine of R10 million was agreed with the prosecution
and was paid.
Other prosecutions are pending.
International Assistance
The institution of these proceedings in 1999 was met with praise
from the role players involved and the countries from where they came.
This included a number of European countries as well as the United
States and Canada. This praise was however coupled with a fair degree
of skepticism. The thinking seemed to be that the prosecutions would be
confined to the demand side, i.e. the Chief Executive, Mr. Sole. Once
he had been duly punished the point would have been made and everybody
could go on with their business. When, however, the prosecutions moved
to the international contractors/consultants involved and it was shown
that the Lesotho authorities were serious about prosecuting these
companies there was a discernible change in attitude. This was even
more so when convictions followed and these convictions were confirmed
on appeal by the highest court in Lesotho.
The initial praise to which I have referred was also accompanied by
offers of assistance. The extent and nature of such assistance, how it
assisted us and what lessons can be learnt therefrom is what I propose
touching on in this paper.
Offers of and actual assistance should firstly be seen against the
mounting resistance to these pending prosecutions in Lesotho once word
leaked out about the application to the Swiss authorities relating to
Mr. Sole's bank records. The institution of these prosecutions was
questioned by for instance suggesting that they were unlikely to
succeed, that they were too expensive, and so on. Such resistance only
quietened down once the convictions started coming in. These attempts
to undermine the prosecutions in my view illustrate the very insidious
nature of the crime of bribery. It may well be that certain prominent
persons genuinely questioned the prosecutions because they thought they
were too expensive or they thought that they were unlikely to succeed.
It is also possible however that the criticisms stemmed from a desire
to keep a lid on things. The point is that one simply does not know.
When prosecuting bribery, and this is what these cases have taught us,
one is met with an almost impenetrable wall of silence. Even Sole, who
is now serving his time in prison, is still not willing to come forward
and place it all on the table despite a clear indication to him that
this could well result in a reduction of sentence.
The prosecutions were and still are largely based on bank records
received in terms of the Swiss mutual assistance legislation. The
Lesotho government approached the Swiss federal authorities in Berne
for assistance which in turn referred the application to Zurich where
it was dealt with. The prompt and efficient manner in which the Swiss
authorities dealt with what eventually became a complex and multi-
layered application contributed immeasurably to the successful outcome
of these prosecutions. Without this prompt response and continued co-
operation which kept the momentum going these prosecutions may well
have been scuttled already at a very early stage.
Apart from the Swiss authorities, we also received considerable
assistance from OLAF, the EU anti-corruption unit. Over the last year
or so it has given us enormous support which support has to date for
instance impacted directly on the conviction of Schneider Electric SA.
At about the time the bribery scandal surfaced in Lesotho several
overseas companies that were involved in the water project changed
their corporate structure. Despite what the companies may say, we
believe that this may well have been done in order to evade
prosecution. One such company was Spie Batignolles. OLAF helped us
access its company records in order to ascertain the nature and effect
of its merger with Schneider Electric SA on criminal liability. But for
the help of OLAF we would not have been able to show that Spie
Batignolles, which was involved as lead partner of one of the
consortia, in fact survived the merger with Schneider Electric SA.
Together with OLAF we are presently investigating other companies that
we are considering prosecuting and good progress is being made here as
well.
The point is that for a small country like Lesotho with its limited
resources to investigate matters such as these without the assistance
of institutions such as OLAF is quite simply not feasible.
The World Bank as a major sponsor of the water project took an
interest in these prosecutions from early on, to the extent that there
was World Bank funding involved, which was the case with among others
Acres, Lahmeyer and Spie Batignolles. The interests of the World Bank
and those of Lesotho largely coincided and this resulted in close co-
operation between the Bank's investigation and ours. The World Bank
lawyers visited Lesotho on a number of occasions to share our
information and we did likewise when visiting Washington. The resulting
benefits were considerable. On the one hand the World Bank lawyers had
access to our documentation and witnesses which they could use in
proceedings against the contractors/consultants involved, and we had
similar access to World Bank documentation as well as any responses by
the contractors/consultants in answer to the charges leveled against
them by the Bank.
Assistance by the European Union and the individual countries from
where the accused contractors/consultants came was far less
encouraging. Initial approaches for assistance from the Maseru office
of the EU came to nothing. In fact, our approaches were met with what
bordered on suspicion.
As to actual financial assistance, I make mention of a meeting held
in Pretoria at the commencement of these prosecutions in November 1999.
This meeting was called by the World Bank in order to discuss the
pending prosecutions in Lesotho and ways in which Lesotho could be
assisted by the international community. It was attended by
representatives from South Africa, Britain, the European Union, the
European Investment Bank, individual banks in Europe, as well as
others. Various promises of assistance were made by those attending.
The official minutes of the meeting also record such promises, such as
the representative of the EU undertaking to ``contribute to the cost of
the process'' and the British High Commissioner in Lesotho saying
``that DFID could possibly offer direct assistance, even though a part
of the EU.'' The World Bank representative that chaired this meeting,
Pamela Cox, assured the Lesotho Attorney General in the context of
assistance that ``the World Bank has deep pockets.'' Unfortunately none
of this help has been forthcoming. I can only surmise that someone
higher up in the World Bank did not share Pamela Cox's willingness to
assist.
The EU did send out a team (not OLAF) a few years ago to
investigate the involvement of European companies. We placed all our
information and resources at its disposal. The team could find
virtually nothing untoward and largely gave the European companies a
clean bill of health (this included Lahmeyer which was convicted and
Spie Batignolles which pleaded guilty). We also noted a reluctance on
the team's part to give us the evidential material gathered by them
which led to their findings. I regret to say that they left us with the
impression that they were not so much concerned with helping us than
with white-washing EU spending.
Apart from Switzerland, and to some extent France which helped with
an application for mutual legal assistance, no assistance was received
from any other overseas country. This despite the fact that these
prosecutions have received considerable publicity overseas and interest
groups such as NGO's have taken up the question of funding with various
governments. When addressing the EU Committee on Development and Co-
operation in June last year I also raised the question of assistance in
the form of funding. Nothing has come of any of this. Faced with its
own economic and social problems, such as a frightening AIDS pandemic,
Lesotho cannot really afford the costs incurred in these prosecutions.
But it did what it had to do and this involved the allocation of funds
which could well have been used for such other purposes. This clearly
illustrates Lesotho's measure of commitment to fighting corruption.
From our vantage point we do not see any such commitment on the part of
other countries, i.e. those whose companies were and still are involved
in the water project.
There is a lingering impression in Lesotho, as well as in South
Africa, that the interest of first world countries in the present
prosecutions lies not so much in the successful outcome of these
prosecutions but rather in protecting the interests of its companies
that are involved. Hopefully this impression will in time prove to be
not correct.
There is a close working relationship between South Africa and
Lesotho in matters such as these and here we also received considerable
assistance from South Africa, particularly in the form of bank records.
The actual assistance I have referred to, particularly that from
overseas, apart from the direct impact it has on the actual
prosecutions, has also had a wider beneficial effect in Southern
Africa. It is this. Lesotho is a member of SADC, the Southern African
Development Community. This assistance and encouragement coming from
institutions such as the World Bank and OLAF has been a subject of
discussion at various meetings of SADC. I have no doubt that this will
serve as encouragement to other Southern African countries when
deciding whether or not to tackle high level corruption.
Lessons Learned
Corruption is a world wide industry. What Lesotho has shown is that
something can indeed be done about it. All that is required is real and
not merely token resolve.
Such resolve pre-supposes a prosecuting arm that is not hamstrung
by political considerations or, more importantly, skeletons in
cupboards of persons in a position to influence prosecuting decisions.
After all, the one sure way to get away with bribery is to compromise
those that make the decision whether or not to prosecute. This may
explain why in so many countries, i.e. in Africa, little seems to be
done about what appears from the outside to be obvious corruption. My
team and I were fortunate in that we did not have this problem. We were
given an open mandate by the Lesotho Attorney General to do what we
considered had to be done and throughout he gave us his full support.
International bribery is notoriously difficult to detect. It is
clearly not in the interests of those involved to have their conduct
known. The injured parties, i.e. the State and the public at large,
would then not normally get to know of it. Having said that, however,
where bribery is actually discovered, prosecuting it is not that
difficult, that is once the prosecution gets past all the various legal
hurdles placed in its way. On the one hand you have a contractor
seeking a contract and on the other a State official who is in a
position to exercise his influence in the award of the contract. There
is no relationship between them other than this fact. If money then
passes between them, particularly in suspicious circumstances such as
through Swiss banks, then, in the absence of some or other convincing
explanation, the only inference to be drawn is that this money
constitutes a bribe. In law we would call this compelling
circumstantial evidence. To everyone else, it would simply amount to
common sense.
Bribery involves two parties, the briber and the bribee. In a given
situation it is normally difficult to establish who initiated the
corrupt transaction. There seems to be a perception in the first world
that in the context of construction contracts in the third world the
initiative comes from the bribe taker rather than the bribe giver. In
the African context this has been described as an ``African problem.''
No doubt corruption can be initiated by the bribe taker. This has
however not been the evidence in the present prosecutions in Lesotho.
The evidence has shown that Mr. Sole's first Swiss accounts were opened
for him by the intermediary acting on behalf of French contractors,
whereafter the payments commenced. Also that the payments were then
normally linked to so-called representative agreements between the
contractor/consultant and its agent (to which I will return below).
Only once these agreements were in place were funds transferred to the
intermediaries who in turn transferred the funds wholly or in part to
Mr. Sole. This would suggest that the initiative came from the briber
and not the bribee.
The sophistication of the way in which it is done, and by for
Instance ensuring that the bribe payments come out of the receipts that
the bribe giver receives as payment for its services for its
contractual services under its contract with the employer, suggests an
established practice and fine tuning by the bribe giver so as not only
to protect itself but to also suit its financial accounting purposes.
This will hardly come from the bribe taker.
The purpose of these prosecutions has not only been to obtain
convictions. The objective has also been to get to the bottom of this
problem and to seek to prevent it from recurring. To this end overtures
have been made to various of the persons or entities involved to rather
co-operate with the prosecuting authorities, in return for possible
exemption from prosecution. All this has fallen on deaf ears. Even Mr.
Sole, now languishing in prison, has chosen to remain silent. At the
time when all the accused were still together (they were initially
charged together but the Court ordered a separation of trials) there
also seemed to be a clear conflict of interests between them. Despite
this they presented a unified front. What precisely it is that makes
persons involved in the shadowy world of bribery stick together is not
clear. Perhaps it is akin to some sort of honor among thieves. The more
likely explanation would seem to be that once you get involved in
bribery particularly of this magnitude you are not at liberty to simply
look after your own interests when things go wrong.
The Use of Agents
Multi-national contractors/consultants almost invariably it would
seem rely on so-called representative agreements. In terms of these
agreements the contractor/consultant would engage a local agent
ostensibly to perform various services in the country where the
contract is sought. Included among these is then also the obligation to
secure the contract coupled to a stipulation that unless the contract
is obtained the agent will not be paid.
I have heard and read various presentations at conferences and the
like as to how contractors should seek to prevent corruption by its
officials. Without wanting to sound too simplistic, at the heart of the
problem lies the control of the agent. Certainly an agent can serve a
legitimate purpose. However, if he is given carte blanche to obtain a
contract and especially on the basis of a contingency fee, he is almost
invited to obtain the contract through corrupt means. In this context
the presiding judge in the Sole case had the following to say, thereby
really stating the obvious as judges are sometimes obliged to do (at
pp. 203-204 of the judgment):
If the consultant is bribing a public official, then he is
doing so for a purpose: either he is securing confidential
information leading to an award of a contract, or he is
securing such award outright. Surely, in that case, the results
produced by the consultant speak for themselves? How can the
principal be unaware of the consultant's activities,
particularly where they are extended over a period?
It will be seen that under the consultancy agreement between
HWV and Mr. du Plooy, the latter undertook to supply not alone
the necessary information, but also undertook in effect to
secure the award of the contract that is, to the extent that
his fee would only become payable with the award of the
contract. How can a consultant give such an undertaking bona
fide? Surely the consideration which he offers and which he
executes is the services which he renders and not the results
thereof. In some jurisdiction legal practitioners have been
known to offer their services on a result basis; while the
system does not gain general approval, it cannot be said to be
mala fide: there the confidence of the practitioner is based
upon the strength of his client's case. The construction
industry gives rise to different considerations, however. Where
many tenderers are involved, vying with one another for the
award of a contract at an undisclosed sum, there is little
basis for confidence, and any agreed undertaking by a
consultant to secure the award, is then surely suggestive of
bribery on the part of both consultant and principal: indeed it
suggests that the consultant has already prepared the ground
for such undertaking.
Although in Lesotho we are only dealing with the involvement of
construction and consulting companies in the water project, it would be
naive to think that the use of representatives to hide bribery is
confined to the construction industry. Instead and as a matter of
overwhelming probability this is the way it is done in other large
contracts involving public officials.
Preventative Steps
The Lesotho Court of Appeal (Lesotho's highest court) in the
Lahmeyer appeal judgment observed as follows, at page 55:
However, it is also incumbent on the international community
and particularly the funding agencies to revisit those
practices and procedures it has in place and to use those
sanctions it has the power to impose whenever contraventions of
the kind proved in respect of this project occur. One of the
devices employed in various cases that served before this Court
was the use of ``representative agreements.'' They were used
extensively as mechanisms through which payments intended as
bribes were clothed with contractual respectability. They were
in fact, in all the cases before us, used as cloaks to disguise
and obfuscate the money trail. It required intensive research,
expensive court procedures across international boundaries and
tiresome and time-consuming efforts to obtain the necessary
information to unravel the complex evidential strands required
to determine and thus to provide the necessary evidence. Above
all it required political will and the provision of the
necessary resources. To their credit the Lesotho authorities
did this in full measure. They should be commended for their
resolve.
And in paragraph [65] at page 56 it stated as follows:
This Court trusts that the various funding agencies will have
regard to the above comments; that it will revisit its
practices and procedures in general, but for present purposes,
more particularly the practice of the employment of
representatives who can play the obfuscating role played so
frequently in this mammoth project. But also, that it will be
firm and resolute in enforcing its disciplinary proceedings on
any agency, company, individual or institution who participates
in the practice of bribing those employed on development
projects.
These sentiments were obviously addressed at funding institutions
such as the World Bank. Were the World Bank to act firmly against
contractors and consultants involved in third world corruption, this
would firstly have the effect of deterring corruption of the nature we
are dealing with in Lesotho. Secondly, and equally importantly from the
Lesotho vantage point, it would have the effect of encouraging a
country such as Lesotho in its efforts to fight corruption. Lesotho
would be told that it is not alone in fighting corruption which, after
all, was largely initiated outside Lesotho and more particularly where
the contractors come from. Perhaps most importantly what such action
would be saying is that corrupting officials in a third world country
such as Lesotho is not in any way condoned by the donor/lending
agencies.
In the Lahmeyer case the Lesotho Court of Appeal remarked as
follows on the World Bank's approval of the use of agents (at p. 19):
The World Bank suggests that it may be helpful for a
consultant operating in a foreign country to employ a local
representative who knows the country and can keep the
consultant informed, particularly in the early stages of a
project cycle when most consultancy business occurs. Detailed
information concerning the World Bank's approach to RAs
[representative agreements with agents] was not placed before
us. It obviously does not envisage the RAs being used for
improper or unlawful purposes. But the potential for abuse,
without proper control being exercised, is very real and, on
the evidence, not unknown. Whether in a particular case a RA
was intended for unlawful purposes, and put to unlawful use, is
a matter for evidence and/or inference given the circumstances
of that case. In short, a RA cannot simply be taken at face
value.
As to steps that contractors can take to ensure that the agent does
not act corruptly, the Lesotho Court of Appeal in the Acres case
offered the following ``advice'' (p. 38):
The genuineness of the agency contract would be best
evidenced by proof that the services to be delivered by this
mandate:
(i) Were genuinely required by the consultant
concerned;
(ii) Could be delivered by the representative;
(iii) Were in fact delivered; and
(iv) Generated remuneration that was commensurate
with the anticipated and the actual service delivery.
This, with respect, amounts to no more than common sense and the
fact that contractors and consultants do not take such basic
precautionary steps when engaging agents tends to militate against
their professed good faith. In our prosecutions none of the
consultants/contractors put up any invoicing, memos, faxes,
correspondence or any other evidence pointing to a bona fide
relationship with the agent.
In addition to the Court's above sentiments, it is suggested that
the World Bank make greater use of the contractual provisions that
entitle the beneficiary of World Bank funding to audit the entity that
it is contracted with. These prosecutions have shown that the bribe in
engineering/consulting contracts is normally built into the mark-up
factor. That is one of the things that such an audit would then focus
on. This in turn would assist in the prosecution in that prosecutors
have great difficulties otherwise in obtaining access to company
records.
Other Observations
There is one big difference between prosecuting a natural person
and prosecuting a company and that relates to punishment. A company
cannot be sent to prison and neither does it suffer the social stigma
of a conviction. The best the courts can do is to impose a fine which
in most cases the company involved can easily pay out of it profits.
Or the company simply does not pay the fine, as is the case with
Acres which still owes a large portion of the fine which was imposed.
Here the difficulty is that criminal sanctions (which fines are) are
normally not enforceable in other countries. What the solution here is
I do not know but something must be done to ensure that companies
cannot simply walk away.
Another problem here is companies changing their corporate
structure through for instance mergers in order to escape prosecutions.
This practice also needs to be looked at. This the Italian authorities
have indeed done by making the take-over company also criminally
responsible for the acts of its predecessor.
The real punishment is sanctions by the international donor/lending
agencies. By taking away the contractor/consultant's means of
livelihood is the only real punishment which would match for instance
the taking away of a natural person's liberty. Despite a somewhat
inauspicious start, the World Bank seems to now be acting firmly
against firms involved, starting with Acres. This is to be welcomed and
hopefully the EU will follow suit.
Corruption has both a supply and demand side and in a country like
Lesotho where international contractors/consultants are involved it is
from the vantage point of the recipient of the bribe that one is able
to view matters. This brings about obvious problems when having to deal
with the payers of the bribes, such as bringing them before court and
obtaining evidence from the countries where they are based.
Overseas prosecutions could then focus on the supply side.
Countries on the demand side, such as Lesotho, could then obviously
assist and it would then not be necessary for for instance Lesotho to
also seek to prosecute the alleged payers. (Clearly when you prosecute
the one you must also prosecute the other. As the Lesotho Attorney
General is apt to say, ``it takes two to tango.'') Similar help could
then also be extended in the other direction. This is what is already
happening with OLAF.
The Chairman. Thank you very much, Mr. Penzhorn, for coming
to our hearing today and offering that extraordinary insight
from your experiences as a prosecutor in South Africa.
I want to call now upon Ms. Kimberly Ann Elliott. She is
with the Institute for International Economics as a research
fellow. Please proceed, Ms. Elliott.
STATEMENT OF KIMBERLY ANN ELLIOTT, RESEARCH FELLOW, THE
INSTITUTE FOR INTERNATIONAL ECONOMICS
Ms. Elliott. Thank you, Mr. Chairman, and thank you for
inviting me to address you on this important topic. It's a
striking contrast to just a decade ago that it's no longer
necessary to begin such a statement by arguing that corruption
impedes economic development and that addressing it should be a
priority in international efforts to combat poverty.
Despite the change in attitudes, however, corruption does
remain a serious problem, and I commend you and the committee
for focusing attention on the important role that the
multilateral development banks should and do play in combating
in.
In assessing the performance of the development banks, I'd
like to begin with three contextual issues. First, as others
have emphasized, I think it is important to recognize that
substantial progress has been made over the past decade in
combating corruption. The MDBs have beefed up internal controls
to prevent corruption in projects they finance, and more
importantly, they now explicitly address corruption and
governance issues as impediments to development.
Second, there's no excuse for the MDBs taking so long to
confront corruption, but these institutions do operate in an
environment that is influenced by the broader political and
foreign policy priorities of major donor countries. During the
Cold War, security concerns often trumped development
objectives, and there is a risk of that happening again as part
of the war on terrorism.
Finally, as Mr. Thornburgh mentioned in his testimony with
respect to the triage approach to investigating cases, a zero
tolerance approach to corruption is appropriate for framing
institutional attitudes towards corruption, but it is also
important to remember that efforts to control corruption divert
time, money, and resources from other priorities. Rigorous cost
benefit analysis, as Mr. Thornburgh suggested, is as
appropriate for anti-corruption policies as it is in other
areas.
Though not perfect, improvements in internal controls do
appear to have been relatively effective in preventing large
scale corruption in projects that development banks directly
fund. The World Bank does appear to be ahead of the regional
development banks in some areas, and the U.S. Treasury should
continue, as Dr. Taylor emphasized this morning, to push for
improvements in the other regional development banks, for
example, mutual recognition of blacklists of firms involved in
bid rigging. Perhaps the MDBs should also consider extending
their procurement rules and disclosure requirements to parts of
projects they don't directly fund.
But as you noted earlier, Mr. Chairman, procurement reforms
may work less well for non-project lending or for smaller
community-based projects, like building schools or health
clinics. In these cases, competitive bidding, if possible,
rigorous auditing, and other technical safeguards are still
important. But the ultimate effectiveness of such projects
depends on local stakeholders being able to monitor officials
and hold them accountable for delivering services as promised.
For example, Dr. Taylor mentioned the case of the PTA
scrutinizing a local school and ensuring that books and other
supplies were delivered as promised.
Enhancing accountability means having maximum transparency
in government operations, independent media to uncover and
disseminate information, organized civil society groups like
the PTA. The World Bank has improved its disclosure policies
and has implemented programs in some countries to strengthen
the local media. It is also doing more to consult with local
groups about its projects. Such consultations are typically
focused on ensuring that local stakeholders support projects,
but they should also be explicitly geared to transmit
information about projects, to facilitate monitoring by local
groups, and to provide mechanisms for feedback on potential
corruption in projects.
In some countries, however, even the best safeguards will
not be enough. Earlier this year, my colleague, Steven Radelet,
testified before the House International Relations Committee on
the need for a more comprehensive and coherent U.S. foreign
assistance strategy. Among other things, he recommended that
how well a country is governed and how effective its
institutions are should determine the amount of money for which
it is eligible and the discretion that the government is
allowed in deciding how to spend it. Poorly governed countries
then would receive relatively less money, directed to
particular agencies that have demonstrated effectiveness in the
past, and mostly for specific projects with intensive
monitoring. If the corruption risks are unacceptably high and
cannot be mitigated, then the only option is to not lend.
The regional MDBs and the World Bank have been more
selective in their lending decisions in recent years, but the
World Bank's operations evaluation department just recently
released its annual report and concluded that the World Bank
could do even more in terms of selectivity.
Finally, the highest level of selectivity is needed in the
energy and mining sectors. Extensive research has shown that
countries rich in natural resources, if they also have weak
political and social institutions, often do not develop
economically and have high levels of poverty.
Recognizing these problems, the World Bank Group recently
commissioned an independent review of its lending for
extractive industry projects. In a draft response to that
review, bank management promises to better assess corruption
risks before providing support, to be more selective in lending
to high-risk countries, and to require transparency in relation
to the revenue from these projects as a condition for lending.
The bank's strategy depends crucially on the effectiveness
of its anti-corruption mechanisms, and the results of its
efforts to make the Chad-Cameroon pipeline project a model will
be an important test of whether transparency and revenue
control measures can be effective in controlling resource
corruption in poorly-governed countries.
In addition to this, a Center for Global Development-
sponsored Commission on Weak States recently recommended that
the Treasury could play a role in coordinating with other U.S.
Government agencies to ensure that our policies do not undercut
any reforms adopted by the multilateral development banks in
the area of extractive industries, for example, by requiring
disclosure for Ex-Im Bank and OPIC funding.
To close then, the multilateral development banks have
taken important steps to ensure that project funding is not
diverted for corrupt purposes and to promote anti-corruption
reforms in vulnerable countries. The U.S. Treasury should
continue pressing the regional development banks to match the
more far-reaching reforms of the World Bank, should support
more ongoing independent evaluations of the effectiveness of
bank lending, as Dr. Taylor mentioned, and take steps to ensure
that U.S. Government support for extractive industries does not
undermine efforts to increase transparency and improve
governance in resource-dependent countries. Thank you, Mr.
Chairman.
[The prepared statement of Ms. Elliott follows:]
Prepared Statement of Kimberly Ann Elliott
COMBATING CORRUPTION IN THE MULTILATERAL DEVELOPMENT BANKS
Chairman Lugar, Members of the Committee, I would like to thank you
for inviting me to address the Committee on this important topic. In
contrast to just a decade ago, it is no longer necessary to make the
argument that corruption impedes economic development in many poor
countries and that addressing it should be a priority in international
efforts to combat poverty. Despite the change in attitudes, however,
corruption remains a serious problem, and the Committee is to be
commended for focusing attention on the important roll that the
multilateral development banks (MDBs) should play in combating
corruption. I would like to begin by discussing the broader context in
which assessments of that role should be placed. I will then discuss
how different approaches could be tailored to different categories of
lending and to different types of countries and conclude with some
comments on the special problems related to extractive industries.
Assessing Multilateral Development Bank Performance on Corruption
Issues
Since President Wolfensohn's 1996 speech emphasizing the need for
the international development community to address the ``cancer of
corruption,'' substantial progress has been made in raising the profile
of the issue and in developing strategies to combat it. The MDBs, led
by the World Bank, have beefed up internal controls to prevent
corruption in projects they finance, and, more significantly, they now
explicitly address corruption and governance issues as impediments to
development at the country level. Thus, estimates of how many billions
of dollars have been lost to corruption since the World Bank was
created must be adjusted to reflect more recent experience.
In addition, while the MDBs should not be excused for taking so
long to confront corruption, these institutions operate in an
environment that is influenced by the broader political and foreign
policy priorities of major donor countries. During the Cold War,
security concerns often trumped development objectives. For example, it
was no secret that Zaire was pervasively corrupt in the 1980s under the
leadership of Mobutu Sese Seko. But U.S. policymakers at the time were
more concerned about maintaining Mobutu's cooperation against the
Soviet Union and access to strategic resources in Zaire than they were
about corruption or economic development.\1\
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\1\ Several years ago, the Financial Times (May 12, 1996, p. 1)
published a detailed report estimating that the International Monetary
Fund, under pressure from the U.S. government and other western donors,
lent Zaire more than $1 billion after a senior official warned that
much of the money was being wasted through corruption (cited in
Kimberly Ann Elliott, ``Corruption as an International Policy Problem:
Overview and Recommendations,'' p. 214, in Corruption and the Global
Economy, edited by Kimberly Ann Elliott, Washington: Institute for
International Economics, 1997).
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Since September 11, 2001, there is more recognition that economic
development often is a security objective and that poorly governed and
failed states can provide a haven for terrorists. Still, there is some
fear that corruption and broader governance concerns are once again
being put aside in some cases as part of the war on terror and that
pressures are being brought to bear on the international financial
institutions to lend to certain countries for foreign policy purposes,
regardless of the likely development effects.
Finally, in assessing the MDBs' performance in combating
corruption, there is a question as to the appropriate standard against
which to measure progress. World Bank officials, as well as outside
observers, frequently speak of a zero tolerance approach to corruption.
This is appropriate for framing institutional attitudes towards
corruption, particularly given the MDBs' past failures. But cost-
benefit analysis should be applied to anti-corruption policies, just as
it is to policies in other areas. This is not intended to revive the
old arguments that some forms of corruption--for example, ``greasing
the wheels'' of an unwieldy bureaucracy--are beneficial. (No one taking
that position has ever explained how a political and social environment
that permits ``efficient'' corruption can be structured to prevent
other more pernicious forms also developing.) But it is also important
to keep in mind that controlling and reducing corruption requires time,
money, and other scarce resources that cannot be used for other
priorities.
Addressing Vulnerabilities in Different Types of Lending and Countries
Despite the gains made over the past decade, corruption remains a
serious problem in many countries where the MDBs operate. Much of the
testimony presented to the committee in May noted this as well and
emphasized that the opportunities for corruption, and for controlling
it, differ by type of lending and by sector. Corruption related to non-
project lending is harder to detect and to control than corruption in
projects that the MDBs directly fund and oversee. More broadly,
corruption will inevitably be harder to control in countries with weak
institutions and governments that are able to avoid transparency and
accountability to the public.
Although not perfect, improvements in internal controls appear to
have been relatively effective in preventing large-scale corruption in
projects that the MDBs directly fund. The World Bank generally requires
international competitive bidding and has changed bidding documents to
beef up anti-corruption provisions. It now posts on its website a list
of firms that have been blacklisted because of corruption, and it has
created hotlines for reporting corruption and whistleblower protections
for staff who want to report corruption. The World Bank is often ahead
of the regional development banks, however, the U.S. Treasury should
push for further harmonization of anti-corruption procurement
policies--for example, mutual recognition of blacklists. For large
projects, exceptions to international competitive bidding should be
rare and fully explained with as much disclosure as possible.
Thus, a great deal has been done to guard against corruption in
project lending, and most analysts conclude that it is relatively rare
in parts of projects that the MDBs directly fund. On many projects,
however, the Banks provide only a fraction of the overall funding, and
they do not monitor procurements for portions of projects that do not
use MDB funds. But corruption anywhere in a project can undermine the
effectiveness or raise its costs, so it makes sense for the MDBs to
require competitive bidding and transparency in all parts of projects
for which they provide even partial funding. To be effective, however,
such a policy change would have to be coordinated with official export
credit and investment insurance agencies in the United States and other
OECD countries.
But these procurement safeguards may work less well for smaller,
community-based projects, such as building schools, health clinics, or
roads, where there may be fewer bidders in the initial construction
phase and where ultimate effectiveness depends on ongoing monitoring to
ensure that teachers show up and are qualified, that drugs and other
supplies are not stolen, and that maintenance is adequate. In these
cases, transparency in the procurement process, rigorous auditing,
whistleblower protection, and other safeguards are still essential. But
it is also crucial to engage local stakeholders to do ongoing
monitoring and to hold officials accountable for delivering services as
promised.
But in some countries, even the best safeguards may not be enough.
Earlier this year, my colleague, Steven Radelet, testified before the
House International Relations Committee on the need for further reform
of bilateral development assistance to make it more effective in
achieving U.S. goals.\2\ In discussing the need for a more
comprehensive and coherent foreign assistance strategy, he recommended
that the government develop different approaches for different types of
countries. In essence, he argued that how well governed a country is
and how effective its institutions are should determine the amount of
money for which it is eligible and the discretion that the government
is allowed in deciding how to spend it.
---------------------------------------------------------------------------
\2\ ``U.S. Foreign Assistance after September 11th,'' Testimony for
the House International Relations Committee, February 26, 2004.
---------------------------------------------------------------------------
Thus, high-performing countries, such as those that have qualified
for the new Millennium Challenge Account, should receive more funding,
most in the form of non-project lending and principally allocated to
the central government. The client government would be responsible for
demonstrating that the money was effectively used but would also have
broad discretion in setting priorities and allocating the money
accordingly.
Low-performing countries would receive fewer dollars, most of it
for specific projects with intensive monitoring and directed to
particular agencies that have demonstrated effectiveness in development
projects. In the context of U.S. aid, Radelet recommends that in cases
where the corruption risks of dealing with the government cannot be
mitigated, aid should be channeled through non-governmental
organizations. The only option in cases where corruption risks are
unacceptably high is to avoid lending. The World Bank has already moved
in the direction of more selectivity in its lending, but the Operations
Evaluation Department just released its report on ``development
effectiveness'' recommending that the Bank could do more.\3\
---------------------------------------------------------------------------
\3\ World Bank, Operations Evaluation Department, 2003 Annual
Review of Development Effectiveness, Washington, 2004.
---------------------------------------------------------------------------
At the same time, the development banks have also increased the
share of loans going to public-sector institutional reform in countries
with weak governance. The World Bank website notes that ``more than 40
percent of the Bank's lending operations now include public-sector
governance components.'' In some cases the World Bank has also
conditioned non-project lending on specific reforms, such as the
creation of anti-corruption commissions or agencies. But externally
imposed anti-corruption conditions are unlikely to be effective in
situations where the political will to adopt fundamental reforms is
weak or absent. Recent research by the World Bank's chief corruption
expert, Daniel Kaufmann, also finds that narrow civil service and
technocratic reforms have yielded relatively little in the battle
against corruption. Kaufmann concludes that reforms should, instead,
focus on ``external accountability mechanisms, with new participatory
approaches, providing voice and feedback mechanisms to stakeholders
outside the executive . . .'' (emphasis in original).\4\
---------------------------------------------------------------------------
\4\ Daniel Kaufmann, ``Rethinking Governance: Empirical Lessons
Challenge Orthodoxy,'' Discussion Draft, World Bank, March 11, 2003.
---------------------------------------------------------------------------
Such external accountability mechanisms depend on maximum
transparency in government operations, an independent media to uncover
and disseminate important information, and organized civil society
groups. The World Bank has implemented programs in some countries to
strengthen the local media, and it is doing more than previously to
consult with local groups that will be affected by its projects. Such
consultations are typically focused on ensuring that local stakeholders
support projects in their area, but they would also be useful in
transmitting information about projects, facilitating monitoring by
local groups, and providing mechanisms for feedback on potential
corruption in projects, as well as other aspects of effectiveness.
Kaufmann also recommends that the Bank develop ``citizen scorecards''
to help in the evaluation of projects and notes that ``Transparency-
enhancing mechanisms involving a multitude of stakeholders throughout
society can be thought of as creating millions of `auditors' '' (ibid.,
p. 35).
The Special Problem of Extractive Industries
Finally, extensive research has shown that countries rich in
natural resources, if they also have weak political and social
institutions, often have poor growth and development outcomes and high
levels of poverty. In these cases, corrupt governments often collude
with corrupt investors, bankers, and other private sector actors to
steal the proceeds of extractive industries, rather than investing them
in the country's development. In many countries, weak governance and
inadequate oversight by external funders have meant that publicly
financed projects in extractive industries have led to environmental
degradation, social problems, such as AIDS, and, in all too many cases,
human rights violations and violent conflict to gain control over
resources.
Recognizing these problems, the World Bank Group recently undertook
a review of its lending for extractive industry projects, including
creating an independent ``stakeholder consultation process,'' headed by
the former Minister for Population and Environment from Indonesia. In
part out of concern over global warming and other environmental
problems associated with carbon fuels, and in part because of the well-
documented problems in controlling corruption in extractive industries,
the independent Extractive Industries Review (EIR) recommended that the
Bank sharply reduce its lending for oil and gas, as it has already done
for coal, and increase lending for investment in renewable energy
sources (www.eireview.org).
In the draft response to the EIR, which has been released for
public comment before presentation to the Board of Executive Directors,
the Bank management promises to better assess the corruption risks
before it provides support for extractive industries, to be more
selective in lending to countries ``where the risks are deemed too
great and cannot be mitigated,'' and to require transparency in
relation to the revenue from these projects as a condition for lending.
But, while Bank management accepted the EIR recommendations on
selectivity, it rejected the recommendation to completely phase out
support for oil production by 2008 for environmental reasons. But the
Bank's strategy of continuing to finance such projects in resource-
dependent countries depends crucially on the effectiveness of the
mechanisms to guard against corruption. The success of the World Bank-
supported Chad-Cameroon pipeline project will be an important test of
whether transparency and intrusive resource revenue controls can be
effective in controlling corruption in poorly governed countries.
Careful evaluation of the results of this project should guide future
decision-making in this area.
In addition, MDB policies in relation to extractive industries need
to be coordinated with and supported by bilateral official credit and
insurance agencies. The Commission on Weak States and U.S. National
Security, sponsored by the Center for Global Development (CGD),
recently recommended that the U.S. government take steps to ensure that
Export-Import Bank and OPIC support for extractive industries be linked
to transparency conditions. The Commission recommended specifically
that the National Security Council should:
. . . broker an interagency agreement that outlines basic
principles of transparency and accountability in the handling
of natural resource revenues that must be met by governments
before the U.S. supports public-sector financing of extractive
industry projects.\5\
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\5\ Commission on Weak States and U.S. National Security, On the
Brink, Washington: Center for Global Development, 2004, p. 56.
The Commission recommends that the Treasury Department have
responsibility for overseeing the implementation of this agreement.
For countries with extractive industries that do not need public
financing, the report recommends that the Treasury Department
coordinate an interagency review of the options for regulating
multinational corporate payments to such countries. In particular, the
Commission proposes giving ``serious consideration'' to the
recommendations of the publish-what-you-pay campaign to have developed-
country stock market regulators require full disclosure as a condition
of being listed (ibid., p. 57). The U.S. Treasury and State Department
could also do more to support British Prime Minister Tony Blair's
Extractive Industries Transparency Initiative, which the World Bank
Group has already endorsed.
Conclusions
In sum, the World Bank Group has taken important steps to ensure
that project funding is not diverted for corrupt purposes, but
continued vigilance is essential and some further improvements in
transparency and accountability of Bank operations would be useful. The
U.S. Treasury needs to continue pressuring the regional development
banks to adopt similar reforms where they have not and use the U.S.
voice and vote to ensure that increased selectivity in lending is used
where anti-corruption safeguards are unlikely to be effective. The
Treasury should also ensure that the development banks do more thorough
and rigorous analysis of the effectiveness of various institutional and
governance reforms they support. As recommended by the CGD-sponsored
Commission on Weak States, the Treasury should also take steps to
ensure that U.S. government support for extractive industries does not
undermine efforts to increase transparency and improve governance in
resource-dependent countries.
Mr. Chairman, Members of the Committee, I thank you for the
opportunity to be heard on this important topic and look forward to
your questions.
The Chairman. Thank you very much, Ms. Elliott. Let me
begin questioning just by clarifying in my own mind, Mr.
Penzhorn, exactly what happened in Lesotho. Essentially, are
you saying that the agents for major firms offered money? In
other words, they attempted to compromise officials in the
Lesotho Government? And if so, how did all this come to public
scrutiny? Who blew the whistle, and why was there a
prosecution?
Mr. Penzhorn. Mr. Chairman, how this came about is that the
chief executive of the project was disciplined and dismissed
after an audit by Ernst & Young that discovered certain
irregularities. He was then taken to court civilly and in the
civil process it was discovered that he had bank accounts in
South Africa, which in turn showed payments from Switzerland.
An application was then made to the Swiss for these bank
records, and these records then showed an elaborate system of
payments by the contractors/consultants on the water project to
middlemen in Switzerland, and then payment by those middlemen
to the chief executive, also in Switzerland, and he then
brought the money back to South Africa. So there was no
whistleblower.
The case rested basically on those bank accounts, and it
was simply that as a basis that formed part of the other
evidential material. For instance, why would you use a Swiss
bank account to pay this particular agent while you're paying
your subcontractors in South Africa? Why didn't you tell
anybody else that this man was your agent? Why was it never
discovered, and so on? And it was this web of circumstantial
evidence that made the case against the chief executive.
The companies came along and the companies all said, he was
our agent, we trusted him, we vetted the agent, he was a very
well-known man. In the case of Acres, for instance, he was
Canada's honorary counsel in Lesotho. So we all trusted this
man. But the incontrovertible fact is that they paid him
certain amounts of money over a period of time, which he then
shared with the chief executive of the water project. Acres,
for instance, said--I'm simply using Acres as an example--they
said, show us anywhere where the tendering procedures were
violated, show us anywhere that we didn't get the contract on
merit. Now, we were not in a position to do so. We said, well,
we assume you got the contract on merit, the same with
Lahmeyer. But the fact of the matter is, you paid that person,
he paid the chief executive, what on earth were you paying him
for if not for him to help you in some way?
Then the question arose, how did he help us? We simply
don't know. All we know is that the moment you pay a chief
executive like that, you are undermining his ability to
exercise an independent discretion, and that's corruption. And
that is the level at which we proved our cases, and we proved
it on the basis of circumstantial evidence, and I suggest to
you circumstantial evidence that would be acceptable in any
court in the United States.
The Chairman. Well, you've described a very sophisticated
process. We of started this morning with the discussion with
our own United States Treasury and their oversight. We then
proceeded with Mr. Thornburgh's testimony about reforms that he
and his associates have suggested to the World Bank, and which
they have adopted. One of them is the debarment of companies.
But in this particular case, do you believe, Mr. Penzhorn,
that the World Bank moved rapidly enough to debar the companies
involved? On what basis would they have known all that you have
found out through circumstantial evidence?
Mr. Penzhorn. Mr. Chairman, the World Bank took the
information that it had at its disposal--I'm speaking as an
outsider, this is what I understand happened--and the
information at its disposal was supply-side information. It was
the information that they had, the procurement process, et
cetera, and what, of course, Acres and Lahmeyer and the other
companies told it. And on the basis of that evidence, I'm not
surprised that they were not able to come to a finding that
there was indeed corruption, because the explanations given by
these companies sounded reasonable.
It is from our vantage point where we were on the ground
that we were able to establish all these other circumstantial
facts, that together with what the World Bank already knew,
could make then a conclusive case. And that probably is, and I
was not party to the second hearing of Acres, that probably is
then what persuaded, if it did persuade, the sanctions
committee, because--and that is the sort of cooperation that
we're talking about. In other words, we can do the work
perfectly satisfactorily on the ground in Lesotho and in South
Africa, we can prosecute the people there.
So from our vantage point it's not a question of
strengthening the process, strengthening the transparency of
the process and so on. This was all done in a perfectly
transparent process. But running parallel to this transparent
process, there was this separate agreement with this agent that
would give you a second bite, as it were, at the chief
executive around the tendering process. So from our vantage
point, to strengthen the procedures and transparency and so on
is not really the point. From our vantage point, it is simply
what that agent does, and it all goes back to that agent or
that middleman.
The Chairman. What you have suggested, however, is that
this was an expensive process for Lesotho. The World Bank did
not assist with the financial problems that were involved in
prosecution. This situation involved a developing country with
vast problems. You cited the horrors of the HIV/AIDS pandemic.
They would be sorely tempted to use the money for those
purposes, as opposed to establishing an anti-corruption ethic.
Attorney General Thornburgh, can you give us any thoughts
as to what thinking in the World Bank has proceeded with regard
to the financing on the part of developing countries that are
very poor, and yet whose skills, with regard to prosecution in
these situations, may be critical to the whole process?
Mr. Thornburgh. There is a general commitment within the
Bank to supporting the strengthening of the rule of law and the
independence of courts and the professionalism of prosecutors
through program grants that are made by the Bank. But to my
knowledge, I know of no discussion that has taken place with
regard to the funding of individual investigations and
prosecutions. But that may be true, it's just something I'm not
aware of.
The Chairman. Do you agree that it is a consideration that
the Bank ought to be thinking about?
Mr. Thornburgh. It's an enormous problem, and I think one
of the things that's peculiar in my understanding of the
Lesotho case was that it kind of proceeded in reverse fashion.
What generally is contemplated within the Bank is that they
will develop a sufficient case to apply sanctions and then
refer that to the particular country. To the credit of Lesotho
authorities, they got ahead of the Bank and in fact outstripped
the Bank in pursuing this, but it was of necessity at their own
expense.
The Chairman. This is an important story because, as Mr.
Penzhorn has pointed out, the normal process didn't happen. It
worked the other way around in terms of supply and demand. I
suppose this is perhaps always the case, as you get into
discovery of how the world works. The dilemma, leaving aside
Lesotho, is probably going to be there for a number of other
countries, that may decide that this is simply not worth the
time and trouble and the alienation of others who may be
helpful, in terms of national objectives.
That's why I raise the question, maybe for some additional
thought, as you counsel the World Bank. Let me just indicate
that you've proceeded, I think, very comprehensively through
the three reports. You have likewise stated that the World Bank
adopted the recommendations in the reports. This therefore, I
suppose, negates a question that I would have had, and that is,
should the United States Government and our Treasury Department
do more to encourage the steps to be taken? I gather you're
indicating that the World Bank has already implemented all the
steps you have advised at this point.
Mr. Thornburgh. That's my understanding.
The Chairman. So it's a question now, I suppose, of
witnessing the experience of how well those recommendations
that have come from the three reports work. Are you continuing
your work with the World Bank, or are you of counsel to them?
Mr. Thornburgh. I have no present connection with the World
Bank. We completed our reports and we regard our engagement
having been completed with the adoption of those reports. As I
said at the outset, we have not been consultants on particular
cases or on particular procedures. We were to take a look from
a fresh vantage point of how their operations were proceeding
and to make such recommendations as we felt might improve them.
The Chairman. Ms. Elliott, as an independent viewer of all
of this, what is your judgment or those of your associates?
Have you looked at this, as to how well each of the parties
we've been talking about today are proceeding, and what more
could they do to address the questions with regard to the
Treasury Department, the Congress, and the World Bank? We've
had some testimony, some question and answer with regard to the
responsibilities of all three of these entities.
Ms. Elliott. Well, my impression from my own research, from
reading the other testimony that you've heard, and talking to
colleagues, is that the problem with respect to bank
procurement is relatively limited because of the various
reforms, because of the work that Mr. Thornburgh and others
have done, and while there is still more that can be done, that
that's really not where the problem is. It's the problem of
countries that are desperately poor that do need help but that
don't have the internal mechanisms to deal with corruption, the
sort of judicial system that Lesotho did have and was able to
use to prosecute these things. A lot of countries don't have
the will to even begin to prosecute, and that's really the
problem--how do you deal with these countries?
And that is something where I think the Banks and the
Treasury and with Congress' support are pushing in the
direction of more selectivity. But you don't want to abandon
countries, because you're abandoning people who are not to
blame for the sins of their government. There is a need to try
and find ways of either targeted lending that can be put behind
a corruption-safe fence if possible. But there is also a need
to work on--and there's some excellent research on this by
Daniel Kaufmann at the World Bank--on external accountability
measures, and Kaufmann doesn't mean by external, the
international community, but he means going beyond narrow,
technical, civil service reforms within governments to reforms
that empower people to be able to monitor their governments and
to be able to hold them accountable. And in the worst
countries, that's not easy, and you have to have at least the
acquiescence, if not the full support, of the government in
those cases.
I think it's those broader issues where we need to have
some more focus and some more creative thinking.
The Chairman. You make a very interesting point that I'll
just follow for a second. Clearly in our work in the Congress,
following the leadership of the President's proposal on the
Millennium Challenge Account idea, the thought was that
American foreign assistance by and large should go to countries
that have adequate controls against corruption, and that have
at least some democracy-building elements in them, even if they
have not yet come to fulfillment of all of that, as well as
respect for human rights and some additional things that we
believe are very important to support.
Sixteen countries have been nominated to come to the United
States Government with proposals for the expenditure of money,
not unlike the procedures of countries coming to the
international institutions. But we've already drawn up a pretty
rigorous set of requirements. Only 16 countries are going to be
involved. We must consider the humanitarian person who comes
into the committee and says, well, what about the other 147 or
so that are eligible right now with the international banks,
what happens to them? It is a very good question.
You can say, well, what happens to them is that they had
better get their act cleaned up, get institutions there that
don't have corruption, and get the authoritarianism out of
their governments, as well as the scandals with regard to human
rights and so forth. Easier said than done. For many citizens
suffering in those regimes already, this becomes a very
poignant dilemma.
So there's sympathy, I think, on the part of all of us for
the problems of the international banks, because they are
tackling 100 countries or more that are sort of beyond the pale
of what we feel we can devote our taxpayer funds to, in terms
of foreign assistance.
Having said that, however, it doesn't absolve all of us
from the thought that we're making, as a country, contributions
to these banks. Those funds are being utilized, along with
those of others. They are being leveraged a great deal. So the
question is, even if people don't measure up to our Millennium
Challenge standards, what kind of standards can we try to bring
about and enforce? How do we get cooperation from other
nations? How do we share equitably, as in the case of Mr.
Penzhorn's situation, with a very poor country that was trying
to do a very good job, but became poorer in the process, having
proved that at least they were able to fight corruption? I know
you have a thought, Mr. Thornburgh.
Mr. Thornburgh. I just wanted to take note of the sea
change that's occurred in international attitudes toward this
problem over the last 25 years. It is now an item, the problem
of corruption is now an item that's center stage on the
international agenda. I well remember when I came to the
Department of Justice to head the criminal division in the
1970s was the very first encounter we'd had with this
phenomenon in the Lockheed cases and the prosecution that took
place of American corporations for making bribes abroad,
followed by the enactment of the Foreign Corrupt Practices Act,
which in many quarters around the world made us laughing-
stocks, that people thought that the FCPA was simply an attempt
to impose American morality on business practices around the
world. Many countries, as you know, allowed bribes to be
deducted from their taxable income at that time.
When I came back as Attorney General in 1988, one of my
first assignments was to go to Zurich and to meet with the
leaders of the Swiss banks about more transparency and openness
and following that paper trail that has been described so aptly
in the Lesotho case. Once again, it was an attitude of derision
and kind of condescension toward what we were trying to get
done.
During the ensuing decade, however, extraordinary things
have happened. We now have a UN Convention on Corruption. We
have the UN creating its own internal operation, which I
recommended to them a decade ago, the World Bank beefing up
their capability, the OAS having a convention, the European
community having its own.
The stage is set for some real breakthroughs in this area,
and it's the kind of problems that the chairman has suggested,
the sophisticated problems that are going to have to require
some further attention, and I commend you for putting those on
the agenda, because it's the issues of implementation of all of
these high-sounding conventions and plans and what-have-you
that's going to occupy true center stage in this new century.
And I hope that you and your colleagues persist in monitoring
this and making the kinds of suggestions that can help
countries rid themselves of the scourge of corruption.
The Chairman. I thank you for that institutional history,
which is really very important. I remember vividly as a junior
member of the Banking Committee in 1977, Senator Proxmire of
Wisconsin was our chairman and Jake Garn of Utah our ranking
member. We were trying to wrestle with problems that American
business persons were having because they felt that our efforts
at morality around the world were cutting them out of business.
They simply came in to point that other competitors did not
have any fastidious ideas about paying bribes. They routinely
added these to their proposals. As a matter of fact, suddenly
the fact that we were going to have criminal prosecutions in
the United States because our business people were bribing
people seemed to be grossly unfair.
Now, that is barely a quarter of a century or so ago. I
trust there are still some people who feel that that's still
unfair, and that bribery does go on, and that they are still
disadvantaged in the international markets. But I would say
that this is one reason why the work of this committee, the
Banking Committee, and others in the Congress who have taken up
this issue, is important. It provides reassurance to our own
community that in fact the world is now working in a different
way, and that the international community has been moving in
the direction of integrity. This is certainly reassuring to
poor people in these countries. One of the greatest problems we
have in public diplomacy is often the feeling that we are
feathering the nests of the rich and not really aware of what
is occurring at the grassroots.
I appreciate the testimony of all three of you, and
likewise your patience in going through a very unusual hearing
schedule. You've proceeded with equanimity and with wisdom.
We thank you, and the hearing is adjourned.
[Whereupon, at 12:35 p.m., the hearing was adjourned.]
A P P E N D I X
----------
Responses to Additional Questions Submitted for
the Record by the Committee
RESPONSES TO QUESTIONS FOR THE RECORD SUBMITTED TO SECRETARY TAYLOR
BY CHAIRMAN RICHARD LUGAR
Question. When allegations of corruption related to the MDBs are
forwarded to Treasury, you noted that Treasury typically forwards the
allegations to the U.S. Executive Directors at the relevant MDBs? What
follow-up is done by Treasury to ensure bank's diligence in pursuing
the specific allegation? Since the Treasury Inspector General is not
investigating fraud and corruption related to the MDBs, what part of
the administration is?
Answer. If an allegation were to involve a contractor, supplier, or
consultant on an MDB financed contract or an MDB staff member, Treasury
staff, in coordination with the USED office, would report the
allegation to the institution through the Office of the U.S. Executive
Director and inform the Treasury Department's Office of the General
Counsel of it. The Treasury Department would, through the Office of the
U.S. Executive Director, monitor the process, while maintaining
sufficient distance from the investigation so as not to interfere, or
be perceived to be interfering, in the process. If the allegation were
to involve someone in the Office of the U.S. Executive Director,
Treasury staff would report the matter to Treasury's Office of the
General Counsel.
With respect to fraud and corruption related to the MDBs, as stated
in the July 21 testimony before the Senate Foreign Relations Committee,
we at the U.S. Treasury monitor the MDBs through a variety of practices
and processes. On a regular basis we work with the U.S. Executive
Directors (USEDs) on their participation in Board policy discussions
and with the managements of these institutions. With respect to
corruption, we urge the institutions to establish policies and
mechanisms to reduce the opportunities for corruption and to detect and
punish corruption when it occurs. Treasury reviews all loans, grants,
and policy proposals to make sure they include fiduciary safeguards and
measurable results. It is the responsibility of the individual MDBs to
investigate specific allegations of fraud and corruption and it is the
responsibility of the Treasury Department, through the USED's offices,
to work with other shareholders to see that the MDBs have systems in
place to investigate such allegations.
Question. In the past three or four years, the number of people
working on MDB issues at the U.S. Treasury Department has reportedly
declined from about 50 to about 30. The United States is one of the few
countries that routinely monitor MDB lending and MDB operations. All
told, the MDBs employ close to 17,000 people and in 2003 they loaned
nearly $44 billion to almost 150 countries. Does the Treasury
Department have enough people to effectively oversee the MDB program
and to assure that taxpayers' money is used effectively and proposed
reforms are being implemented appropriately?
Answer. In fact the number of professional staff working on MDB
issues has been on the increase in recent years. This number was about
18 in 1998, went to about 24 in 2001 and is expected to reach bout 27
by late fall 2004. This number does not include administrative staff
and Deputy Assistant Secretary level officials who devote all or most
of their time to MDB issues. In addition, it does not take into account
the offices of the U.S. Executive Directors at the MDBs, which number
more than 20 professionals, including USEDs and Alternates, all of whom
monitor MDB lending and operations. The professional staff in the
offices in Treasury covering regions of the world also review
individual MDB operations for the countries they cover. Finally,
Treasury chairs an interagency working group that also reviews MDB
operations. Thus, Treasury, assisted by a number of others in the U.S.
Government, has an efficient process to ensure the effectiveness of MDB
operations--both individual loans and grants and policy proposals/
reforms. However, due to the growing responsibilities of Treasury,
additional professional staff are needed. To further improve our
ability to ensure the highest quality of MDB operations, Treasury is
increasingly working ``upstream'' to monitor proposed operations and
strategies long before they come to the Board for formal approval.
Question. Currently, the multilateral banks do not disclose how
much money has been disbursed for individual projects and programs.
Hence it is very difficult for those outside the Banks to know whether
projects and programs are being implemented successfully. Likewise, one
cannot tell if money is being disbursed--perhaps for corrupt purposes--
even though little is actually being done on the ground. The World
Bank's Moscow office made disbursement information available on its web
site in order to promote public trust and dispel charges of clandestine
corruption. Do you believe that the MDBs should make this kind of
information public regularly and routinely?
Answer. We support making disbursement information publicly
available, with the exception of business sensitive information. In
fact, both the World Bank and the Inter-American Development Bank make
disbursement information publicly available on their websites on
individual projects. We are currently working with our Executive
Directors in the other MDBs to get them to implement similar disclosure
practices. It is important to note that all the institutions have in
place a variety of supervisory mechanisms and practices that are
intended to prevent the fraudulent and corrupt use of MDB resources and
ensure that money is spent for the purposes set out in the loan
contract.
Question. The multilateral banks are often faulted for having a
``loan approval culture'' where staff is rewarded for the amount of
money they move in new loans rather than the quality or effectiveness
of the activities funded by those loans. Many argue that this leads to
less emphasis on corruption control. Is this a fair criticism? If so,
how do you think the MDBs should alter their internal staff incentives
in order to lessen this problem?
Answer. Historically, there has been an institutional focus on
lending volumes at the MDBs. However, this culture of lending has
diminished in recent years largely as a result of concerted efforts by
donors such as the United States to focus on delivering measurable
results. For example, due to strong U.S. leadership, the IDA-13
replenishment agreement called for the development of a results
measurement system. The Bush Administration is now working with other
donors in the course of negotiating the various MDB replenishments to
expand upon the important recent progress. Among other things, we are
pressing for: (1) results frameworks for each project and program
including specific, quantifiable indicators connected to a timeline
with baseline data and periodic assessments of project and program
performance; (2) standardized country indicators covering governance,
human development and economic growth topics that will be used to
monitor progress and assess achievement of results; and (3) a set of
institutional-level indicators with results to be independently
verified.
To further promote the development of a results-focused culture, we
are also working in the course of negotiating the MDB replenishments to
create a stronger link between MDB staff incentives and these efforts
for broader and measurable results.
Question. What is your assessment of the magnitude of the
corruption problem at the MDBs? How much MDB funding has been siphoned
off due to fraud and corruption?
Answer. Corruption clearly reduces the effectiveness of countries'
economic development and poverty reduction efforts through the
diversion of scarce resources away from productive activities
benefiting the poor. Consequently, the Bush administration does not
tolerate any corrupt activities involving MDB projects. In an attempt
to minimize these activities to the greatest extent possible, we are
actively pursuing an ambitious anti-corruption and transparency agenda:
At the institutional level, we focus on improving the
functioning of the MDBs' internal control processes for
preventing and responding to corruption and fraud.
At the project level, we focus on encouraging the MDBs to
conduct analysis and design projects and lending policies that
help to reduce opportunities for corruption and ensure that
funds will be well spent.
At the country level, we are pushing for greater
transparency and disclosure of MDB operations and analysis.
This is something that we have worked hard on in concert with
Congress.
This comprehensive agenda builds off the significant efforts
already undertaken by the World Bank and other MDBs, which I elaborated
upon during my recent testimony on corruption and the MDBs.
Question. Though borrowing countries bear the ultimate
responsibility for MDB loans because they must repay the funds to the
MDBs, not all borrowing country parliaments have oversight authority
over MDB borrowing. Of the 147 countries eligible for WB lending, 77 of
them require parliamentary approval of multilateral development bank
loans or a ceiling within which the executive branch can accept loans.
What, if anything, is the U.S. government doing to encourage borrowing
countries to promote legislative oversight over MDB borrowing?
Answer. The U.S. government has pushed all the MDBs to consult with
a wide range of ``stakeholders'' on proposed MDB policies and
operations, based on evidence that such consultations have been shown
to improve the quality of the policies and operations. This includes
the legislative bodies in individual countries, as well as private
sector representatives, local representative bodies, NGOs, academics
and others. We have also consistently supported modernization of the
state programs that aim to increase the effectiveness of the
legislatures in developing countries. The U.S. government has not
specifically urged borrowing countries to promote legislative oversight
over MDB borrowing.
__________
RESPONSES TO ADDITIONAL QUESTIONS FOR THE RECORD SUBMITTED TO SECRETARY
TAYLOR BY SENATOR JOSEPH R. BIDEN, JR.
Question. Under Secretary Taylor, one project that has raised
significant environmental and social concerns is the Camisea gas
pipeline project in Peru. I am aware that the IDB is poised to move to
final closure on the loan, and that officials from USAID and your
department have been reviewing compliance with social and environmental
loan conditions. What actions are you taking to ensure full compliance
with all environmental and social loan conditions prior to financial
closure?
Answer. My staff has reviewed the documentation provided by the IDB
regarding compliance with the conditions precedent to loan closure.
While there has been substantial progress on meeting these conditions,
we are still working with IDB Management to resolve remaining issues.
Since loan closure is not a subject for formal discussion by the Board
of Directors, we will seek to address what we perceive as deficiencies
in certain loan conditions on an informal basis.
Question. I also understand that the IDB is in the process of
revising its 25-year-old environmental policy and that a draft of the
new, proposed standards have been released for comment. What actions
are you taking to support a thorough review of the IDB's core policies
and the strengthening of the Bank's environmental and social standards?
What actions are you taking to support that the new social and
environmental policies will be in line, if not exceed, those of the
IDB's peer institutions, such as the World Bank and the International
Finance Corporation?
Answer. My staff is undertaking a process that seeks to shape both
the draft environment and safeguard policy as well develop a U.S.
position on the version that is presented to the IDB Board. As part of
this process, we will solicit the views of other U.S. government
agencies and civil society, as well as engage with Bank staff
responsible for drafting the policy. We will also compare the draft
proposed by the IDB with best international practices for public and
private sector lending. Social and environmental policies of the World
Bank and IFC, however, are themselves in flux and new policies at these
institutions will not be finalized for several months.
Additional Information Submitted for the Record
Statement Submitted by Thomas Devine, Legal Director,
Government Accountability Project
WHISTLEBLOWER PROTECTION POLICIES OF MULTILATERAL DEVELOPMENT BANKS
Thank you for considering written testimony by the Government
Accountability Project (GAP) for this Committee's second hearing into
corruption at the Multilateral Development Banks (MDBs). The
Committee's leadership is badly needed for institutions that should be
a cornerstone of civility, integrity and stable markets necessary for
globalization to strengthen rather than destroy community development.
Unfortunately, due to lack of internal checks and balances, secrecy and
corruption, all too often the MDBs undermine their mission instead of
serving it.
Over the last year the Ford Foundation commissioned GAP to conduct
in-depth research on one key element of accountability at MDBs--the
free flow of information from whistleblowers, those employees who
exercise free speech rights to challenge abuses of power that betray
the public trust. Unfortunately, our organization found that all of the
MDB whistleblower policies flunk minimal standards of legitimacy, both
in terms of providing a safe channel to bear witness, and having a
realistic chance to make a difference against corruption. Our
organization could not responsibly recommend that employees risk
retaliation by trusting the current whistleblower policies as
administered at any of the MDBs. That means the current programs are
ineffective both inside and outside institutional walls at ending
abuses of power sustained by secrecy, the breeding ground for
corruption.
Our credentials for assessing whistleblower policies are grounded
in some 27 years of experience. GAP is a nonprofit, public interest law
firm dedicated to whistleblower advocacy. The organization's mission is
to advance governmental and corporate accountability by promoting
whistleblower rights, investigating their claims, litigating their
cases, sharing our expertise through publications, and developing
legislative and regulatory reforms. We have led the campaigns to enact
or defend virtually all national whistleblower laws in the United
States. On the international front, GAP works with national
governmental bodies, and with colleagues from American University Law
School co-authored a model whistleblower law approved by the
Organization of American States to implement its Inter-American
Convention Against Corruption.
The analysis below explains how whistleblower protection is
relevant for the Committee's oversight, and summarizes our findings
from the published studies already provided to Committee staff.
Relation to Hearing Testimony
At the July 21 hearing we were gratified that expert testimony
generically highlighted that strengthened whistleblower protection
means strengthened accountability. Four specific conclusions from that
day's testimony further reinforce the importance of an active role by
this Committee in achieving that goal.
Nearly all major reform recommendations to date have been
implemented, but corruption is still a significant problem.
Whistleblowers are the human factor to provide the free flow of
information that is the life-blood of anti-corruption
campaigns. Without their active participation, the campaigns
are lifeless, empty magnets for cynicism. The Banks badly need
visible proof that employees who participate can safely make a
difference. It will take breakthroughs of organizational
leadership and structure before that kind of trust could be
based in reality.
The Banks' progress against corruption must be assessed
through objective, measurable results. This conclusion applies
with an exclamation point to the Banks' whistleblower policies.
At every major institution, their track record at best is a
secret. None of the institutions have published a track record
detailing either (1) meaningful results when employees risk
harassment to testify against corruption; or (2) a reasonable
rate of alleged reprisal victims successfully defending their
rights through MDB policies. Last year in the No Fear Act for
U.S. agencies with merit system duties, Congress unanimously
required transparency for results of employment discrimination
and whistleblower protection programs. That basic ``show me''
principle needs to be extended to MDBs.
A major challenge for MDBs is corruption within member
nations receiving Bank loans. The risk of corruption is
inherent to all institutions--government, corporate and even
non-profit. Even the most vigilant institutions cannot
effectively oversee all the potential opportunities for
corruption, which are limited only by the imagination. This is
why GAP has urged the Banks to (1) extend their own
whistleblower policies to cover anyone making disclosures about
spending Bank funds throughout the life of a project, whether
or not the whistleblower is a Bank employee; and (2) make
effective whistleblower protection a precondition for receipt
of MDB funding. Continued congressional leadership will be
necessary to encourage this expansion of policies that too
often only cover MDB employees challenging corruption that
threatens institutional self-interest rather than the Banks'
public service mission.
The Treasury Department Office of Inspector General does not
believe it has jurisdiction to investigate fraud, waste of
abuse of taxpayer funds appropriated for the Banks. This
accountability vacuum places increased responsibility on
Congress and the Treasury Department's Office of Development
Policy. Continuing, stepped up congressional oversight is badly
needed, both to defend the taxpayers' investment generally, and
to enforce the accountability reforms passed by Congress this
January as appropriations requirements. The provision, known as
the Leahy-McConnell amendment, requires:
greater transparency, from project
preparation to publication of Board minutes;
resources and conditions in each loan and
strategy to ensure that applicable laws are obeyed;
public summaries of independent audits of
the institutions' operational effectiveness, policy
compliance, and internal control mechanisms;
effective complaint mechanisms that also
protect employee and other whistleblowers from
retaliation, consistent with standards in national and
international law;
website postings of case summaries resulting
from internal corruption investigations;
reports by the Treasury Department to
Congress on these and all other aspects of the section
by September 1, 2004 and March 1, 2005; and
completion of listed goals by June 2005.
(Administrative Provisions Related to Multilateral
Development Institutions, Sec. 581, Title XV of the
International Financial Institutions Act, 22 USC 262o-
262o-2.)
Based on GAP's experience to date, there will be a direct
relationship between the extent of Congress' oversight of Treasury on
this issue, and the extent of Treasury's oversight of the Banks.
Overview Summary of GAP Findings
The GAP study was prepared by our MDB project team of John
Fitzgerald, Charly Moore, Sophia Sahaf, myself and law students from
the University of District of Columbia Law School who participate in
our legal clinic. We found substantial deficiencies in each of these
Banks' whistleblower protection policies, affording insufficient
protection to those who seek to bring fraud, mismanagement or other
wrongdoing to light to protect the institution's integrity. Notably,
none of the Banks recognizes the concepts of external transparency or
external accountability, extending whistleblower protections only to
internal disclosures. At present, GAP would not recommend that
whistleblowers risk retaliation by utilizing the existing procedures.
Instead, GAP hopes to work constructively with the Banks in the coming
months to address these deficiencies in order to improve transparency
and accountability.
Whistleblowing: An Emerging Global Phenomenon
GAP has long defended U.S. whistleblowers who challenge abuses of
power that betray the public trust. Now, whistleblower rights are an
emerging global phenomenon. A human rights activist Helena Kennedy
explained in her foreword to the 2004 book Whistleblowing Around the
World: Law, Culture and Practice, ``[B]oth culturally and legally,
things are changing. Whistleblowing is coming of age. There is a
growing recognition around the world that people who encounter
corruption and wrongdoing must be given as safe an environment as
possible, to be able to tell someone in authority what they know.'' See
also, Vaughn et al., The Whistleblower Statute Prepared for the
Organization of American States and the Global Legal Revolution
Protecting Whistleblowers, 35 George Washington International Law
Review 857 (2003).
Whistleblower protection provisions have become standard in anti-
corruption conventions and treaties, such as those adopted by the
United Nations, Organization of American States and the Council of
Europe. As a leader in whistleblower advocacy, GAP has witnessed an
upsurge in international interest in whistleblowing as an integral
transparency measure in recent years. Governmental organizations across
the globe increasingly demonstrate their desire to work with those who
have witnessed abuses of power, and are eager to learn how best to
protect them from reprisal.
Strong whistleblower protection policies give those who bring
corruption to light a fighting chance to defend themselves, and serve
the Banks' institutional interest in preserving integrity. Weak
policies, on the other hand, will cause many individuals to remain
silent observers to corruption, and may actually harm some
whistleblowers by creating a false impression of adequate protections.
MDB whistleblower protection policies have particular significance,
because the MDBs can set the pace for anti-corruption standards in loan
recipient nations. Working with governments and national and
international businesses to implement development projects, the Banks'
influences are far reaching. Unfortunately, the Banks themselves remain
a focal point of corruption investigations. During the initial May 2004
Senate Foreign Relations Committee hearings, Chairman Lugar estimated
that the World Bank alone has lost $100 billion to corruption. These
problems significantly impede the MDBs' ability to advance their
humanitarian mission of promoting community development and economic
self sufficiency in developing countries.
GAP's Methodology
This study covered policies at the World Bank (WBG), Asian
Development Bank (ADB), European Bank for Reconstruction and
Development (EBRD), and Inter-American Development Bank (IDB). The
African Development Bank was not included, because it did not have
completed accountability policies relevant for whistleblowers. At each
other MDB, GAP researched all available data on whistleblower
protection policies and practices, and held at least one meeting with
representatives from each Bank. GAP staff also studied academic
research on the MDBs and interviewed whistleblowers, legislative staff,
nongovernmental organization (NGO) leaders, critics and representatives
from the four MDBs covered in the study. The resulting record was
compared to a 24-point-checklist developed by GAP to evaluate
whistleblower policies at each MDB. The checklists were distributed to
each MDB for comment several months prior to the drafting of the
reports. After completing the draft reports, GAP submitted them to each
bank for comment.
The 24-point-checklist evaluates whether the MDBs' policies (1) are
comprehensive in scope; (2) offer the chance for a hearing in an
impartial proceeding; (3) provide modern legal standards for
adjudication of claims; (4) provide sufficient relief for those who win
their cases; and (5) allow whistleblowers to make a difference against
abuses of power if they risk retaliation to speak out. Each bank
received a pass/fail rating for each criterion, along with a rating
system based on a 0-4 scale.
GAP's Conclusions
All four of the Banks surveyed received an overall failing grade
when compared with the legal norms compiled in the 24-point-checklist.
On a scale of 1-100, the scores were 45 at the EBRD, 49 at the IDB, 50
at the ADB and 60 at the World Bank. While the Banks have recognized
the value of whistleblowing, by limiting protections to internal
disclosures the Banks have effectively precluded external
accountability and transparency. The full reports can be found on our
website at www.whistleblower.org.
The good news is that the MDBs' policies and culture are evolving.
The Banks are beginning to recognize the benefits of whistleblowing as
an internal management tool, and have started the process of developing
effective whistleblower protection policies. In preliminary discussions
with MDB representatives, nearly all have expressed interest in
upgrading their policies. It will take a sustained, broad-based effort,
however, to establish fully effective whistleblower protection programs
at these Banks. This institutional effort must be led by the Banks'
presidents, whose leadership has been inconsistent to date.
Finally, while the Banks' overall efforts to date are deficient in
many ways, each bank has scored some passing grades on various specific
issues identified in the 24-point-checklist. These best practices,
coupled with strong executive leadership, can serve as a starting point
for the MDBs to improve their policies.
MDB Strengths
Common strengths among the surveyed MDBs' policies are summarized
below:
Except for the EBRD, the Banks GAP studied have embraced the
notion of whistleblower protection. This is a significant
prerequisite for developing a functioning whistleblower
protection program.
The MDBs have established a duty to disclose that helps
prevent retaliation. There generally is less hostility against
whistleblowers who act pursuant to a mandatory duty rather than
on personal initiative.
The MDBs have recently established anti-corruption units, a
useful first step toward the development of full-scale
whistleblower protection programs. These units are too new for
GAP to recommend them to whistleblowers as a safe avenue for
seeking relief from retaliation. (The only exception is the
World Bank's Department of Institutional Integrity, on a case
by case basis.)
The Banks provide a realistic limitations period within
which whistleblowers must act on their rights. Employees have
at least 90 days to file a grievance through administrative
processes.
MDB Challenges
The surveyed MDBs' policies contain numerous deficiencies in
whistleblower protection. These areas for improvement are summarized
below:
The Banks' existing whistleblower policies only cover
internal disclosures; external disclosures are not protected,
including even those made by witnesses to third-party citizen
complaint mechanisms. In fact, the Banks prohibit external
disclosures that could be detrimental to the Banks, including
disclosures to law enforcement agencies and legislatures of
member nations.
With the exception of the World Bank, the existence and
quality of confidential hotlines are unpredictable and
unreliable.
None of the Banks studied offer independent due process. All
of them limit enforcement of employee rights to in-house
grievance hearings, potentially tainted by conflict of interest
because the defendant institution acts as judge and jury.
The Banks fail to support stated promises of protection with
enforceable rights. While the World Bank adopts them on paper
for informal investigations, its Administrative Tribunal
consistently ignores such rights in formal hearings.
Whistleblowers appear to lose even when they win, because
none of the Banks has a record of returning them to their jobs
even when they prove that their removal was illegal. In
practice, the Banks limit relief to financial compensation,
which is small comfort to an employee deported for losing MDB
employment.
With anecdotal exceptions, the MDBs have no record of
protecting whistleblowers who rely on the MDBs' existing
protections.
MDB policies do not have credibility with would-be
whistleblowers. As a result, many would-be whistleblowers
remain silent about the fraud and mismanagement they have
witnessed.
The Banks fail to protect parties and witnesses who
participate in the newly-created citizen complaint mechanisms.
The MDBs created these mechanisms to give individuals who are
negatively impacted by a Bank loan decision the chance to
challenge that decision.
Recommended Actions for the MDBs
GAP recommends that each of the four MDBs take the following
actions to improve transparency and accountability:
Protect direct disclosures to external authorities when
necessary to avoid a significant threat to public health and
safety, damage to the Bank's mission or criminal violations of
national or international law.
Protect participation in the citizen complaint mechanisms
for addressing harm caused by MDB-financed activities.
Safeguards could be included to prevent public release of
proprietary information.
Provide a flow of information from secure hotlines to each
bank's Boards of Directors.
Offer alleged reprisal victims the opportunity to seek
justice through third-party, independent, binding arbitration
by a decision-maker selected through mutual consent.
Institutionalize the legal burdens of proof from the U.S.
Whistleblower Protection Act to judge whether a whistleblower's
rights have been violated, as the World Bank does for reprisal
investigations.
Provide prevailing whistleblowers full make-whole relief
from confirmed retaliation, including the right to
reinstatement as necessary to maintain national residency
rights.
Establish performance standards for bank investigative
agencies, to ensure that misconduct threatening the Banks'
public service missions is given a high priority.
Enfranchise whistleblowers to file complaints under the
citizen complaint mechanism regarding misconduct that threatens
the Banks' public service missions.
Provide visible institutional leadership by the Banks'
presidents, through broadly communicated policy statements,
active employee outreach, training for staff and management,
and personal intervention against retaliation.
GAP intends to continue its efforts to achieve genuine
whistleblower protections atthe MDBs. Next steps include the following:
Distribute GAP's MDB whistleblower protection assessment
reports to members of Congress, senior U.S. and foreign
government officials, the MDBs (including the U.S. Executive
Directors), the media and interested nongovernmental
organizations.
Offer to work directly with the Banks to help upgrade
existing policies, and to apply lessons learned for
constructive solutions to legitimate confidentiality concerns.
Keep the U.S. Treasury Department and congressional
oversight agencies informed of progress, as well as equivalent
ministries or legislative bodies from any other member nation
that requests such updates.
Analyze the U.S. Treasury's September 2004 and March 2005
reports to Congress on these issues, and provide feedback to
the Treasury and to Congress.
Monitor individual whistleblower cases, with consideration
for ``friend of the court'' briefs or representation to test
how the MDBs' policies are applied in practice.
Maintain and update the assessments presented in this study,
including the ultimate recommendation of whether or not to
recommend that whistleblowers work within a particular bank
system.
Whistleblowing is a concept whose time has come, as evidenced by
institutional leaders' routine rhetorical embrace of the principle, and
establishment of formal policies and structures. Now the challenge is
to make it effective. GAP calls genuine policies ``metal shields,''
because those who defend themselves with metal shields have a fighting
chance to survive. Unfortunately, so far the Banks have what we call
``cardboard shields,'' which guarantee doom to anyone relying on them.
The latter is worse than nothing, because the net result of
disingenuous whistleblower programs is to create victims and cynicism.
GAP looks forward to working with this Committee to turn the rhetorical
breakthrough for whistleblower rights into genuine, enforceable rights,
a metal shield both for those who ``commit the truth'' and for the
Banks' public service mission.
__________
Statement Submitted by Nancy Alexander,
Citizens' Network on Essential Services
moving money in middle-income countries (mics):
the bank's proposed strategy and implications for the issues of
corruption and infrastructure development \1\
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\1\ By Nancy Alexander, Citizens' Network on Essential Services,
Silver Spring, Maryland, USA, with assistance from Bea Edwards, Public
Services International and Tim Kessler, Citizens' Network on Essential
Services.
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I. Introduction
The U.S. Senate's Foreign Relations Committee is in the midst of
holding hearings on corruption at the multilateral development banks
(MDBs). The Congress wants to know where these institutions' money is
doing and whether it's going into some hidden pockets. However, in the
future, it may be difficult or impossible to answer that question. The
reason is that the World Bank's Board of Directors is moving toward
approval of a new strategy\2\ for middle-income countries (MICs), which
would move billions of dollars to certain governments with little ``red
tape.'' As is common practice, the regional development banks may
follow the lead of the World Bank and adopt similar policies.
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\2\ The working document describing the strategy is entitled
``Enhancing World Bank Support for Middle-Income Countries.''
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Middle-income countries\3\ produce 20% of the world's goods and
services, but have more than 80% of the world's population. They borrow
at near-market rates from the World Bank's International Bank for
Reconstruction and Development (IBRD). In categories from most to least
prosperous, middle-income countries include: (1) Korea, Mexico and
Hungary; (2) Poland, Malaysia, and Costa Rica; (3) Brazil, Turkey,
Colombia, Iran, and Egypt; and (4) the Philippines, Syria, the Ukraine
and Iraq. A few poorer countries obtain a blend of market-rate and
concessional resources, including Pakistan, India, Uzbekistan and
Indonesia.
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\3\ The World Bank defines middle-income countries as those with a
specified per capita income range (less than $9360 and more than $745
per year). High middle-income countries performed much better than low-
income countries, according to Bank measures.
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The MIC Strategy is intended to reduce or eliminate fiduciary and
safeguard (e.g., environmental and social policy) ``barriers'' to
borrowing to World Bank-certified countries, If the MIC Strategy is
approved, the institution will provide ``certification'' to those MIC
governments with acceptable national policies that are ``equivalent''
to the fiduciary and safeguard policies of the Bank. (The certification
process is described in part III.) It will also determine whether
borrowing countries follow appropriate macroeconomic and development
policies required to ease or eliminate specific loan conditionality.
The proposed MIC strategy poses three important questions for
borrowing countries:
1. Will national policies be enforced? It is true that standards
that curb corruption and protect vulnerable populations and ecosystems
may be inconvenient for borrowers to implement. However, it is unclear
why, when borrowers resist implementing the Bank's standards, they
should be expected to enforce their Own.
If approved, the MIC Strategy would increase the pace and volume of
lending to certified countries. As described in part H, the new
approach to lending to MICs would make it much more difficult, within
certain borrowing countries, to investigate where the Bank's money goes
or how it is used. The new strategy is particularly troubling in light
of findings by the Bank's own internal evaluators, who conclude that
the institution has had ``only modest success'' in curbing
corruption.\4\
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\4\ Annual Report on Development Effectiveness 2003 (ARDE), OED,
World Bank, p. 34.
2. Could the MIC strategy create a conflict of interest? Given that
the World Bank would both certify and profit from the increased volume
of lending, there is a potential for conflict of interest arising from
implementation of the MIC Strategy. The Bank's ability to avoid such a
conflict may determine its capacity to address corruption among
borrowers. Before they consider the MIC proposal, the U.S. government
and other shareholders should ask whether corruption and conflicts of
interest might be stemmed if an independent process for certifying MICs
is established. Such a process might include an agency that would be
accountable for monitoring and evaluating ``equivalence'' between the
fiduciary and safeguard policies of creditors and developing country
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governments.
3. Is more debt good for borrower or lenders? It is worth asking
whether lower levels of lending could benefit MICs--especially those in
which excessive amounts of hard currency debt hamper growth and
development potential. By increasing the volume and pace of Bank
lending, the MIC strategy seems to address the World Bank's current
predicament as much as, if more than, the situation facing most middle
income borrowers. At present, the institution is a kind of debt
collection agency, collecting more in debt service than it lends. This
situation has emerged largely as the result of a sharp drop in overall
lending and years of poorly-performing loans.\5\ While more new lending
could reverse that situation in the short term, unless it leads to
significantly higher growth rates, borrowing countries will eventually
face higher debt service burdens again--possibly worse than those
experienced today. Unfortunately, while the Bank is correct that faster
growth is one of the keys of poverty reduction, it has not shown that
Bank resources (and associated policies) lead to higher growth. In
short, expanding MIC lending represents a gamble that borrowing
countries will leverage new resources to grow much more quickly and
sustainably than they have over the last thirty years.\6\
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\5\ Bank lending to MICs has dropped precipitously; lending in the
2000-2003 period is only half as high as in 1999. According to the
Bank's US Executive Director, Carole Brookins, during the 1990s the
Bank's infrastructure investment lending declined by 50 percent, and
even more steeply in the middle-income countries. In 2002, Bank lending
for water and sanitation projects was only 25 percent of its annual
average during 1993-1997. Notwithstanding the World Bank's efforts to
bolster the legitimacy of private infrastructure and press borrowing
governments into adopting it, interest of private investors declined
sharply. From a 1997 peak of US $50 billion, private investment in
developing country energy projects dropped to $7 billion in 2002. See
Transition Newsletter (World Bank), Volume 14/15, April 2004.
\6\ In addition, the Boards of Governors of the IMF and World Bank
are considering the adoption of a ``Debt Sustainability'' Proposal at
the upcoming Annual Meeting of the institutions that will limit the
Bank's ability to lend to certain debt-distressed countries. The MIC
could compensate for any loss of business stemming from implementation
of the Debt Sustainability Proposal and reverse the Bank's decline in
infrastructure lending.
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II. The Proposed MIC Strategy
A. Corruption and Adjustment Loans
The primary defense against corruption is openness in the borrowing
and the repayment process. Any loan operation should provide factual,
quantitative and qualitative information to the public throughout the
loan cycle. How much is to be borrowed? What does it pay for? What is
the interest rate? From whom is it borrowed? How much is owed? To whom
is it owed? The answers to these questions allow the representatives of
the public to determine whether it is reasonable to conclude that
borrowed funds will be effectively used and that investments using
borrowed funds can produce the returns necessary for a sound repayment
program. Structural adjustment (or ``policy-based lending'') evades
these basic considerations.
Structural adjustment lending breaks the link between the loan and
its repayment. It makes the most relevant question about any loan--What
does it pay for?--a moot point. Through structural adjustment lending,
the Banks simply require that certain policies be implemented as a
condition for budget support in hard currency. No one is responsible
for producing any proof that the policies implemented have produced the
returns necessary to repay the loan. Nor do adjustment loans need to
generate hard currency for debt repayment. For example, the World Bank
claims that it is fighting poverty by requiring the protection of
certain social programs as a condition of a structural adjustment loan
(SAL). But the social programs are financed with local currency.
Rather than fortifying these programs, the infusion of capital in
hard currency to a central bank, in the absence of capital controls,
fuels capital flight and benefits corrupt insiders.\7\ Thus, loans
presented to the public as funds to ``fight poverty'' can actually
discourage economic growth by accelerating the loss of capital and
increase the debt, the worst possible scenario for a developing
country.
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\7\ Joseph Stiglitz made this point in Globalization and Its
Discontents.
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Further, we this consequence may be deliberate rather than an
unanticipated side effect of large-scale policy based lending because
increasingly these loans are ``fast-disbursing.'' The loans have become
like an insiders' signal to investors that it is time to withdraw. In
addition, the funds lent as structural adjustment programs become
``pork barrel'' spending because they are not tied to concrete
objectives. Funds that are not used to underwrite capital flight
disappear in bogus contracts and consultancies, or corrupt
privatization schemes.
Hence the debt crisis: after decades of SALs, there is deeper debt.
The required policies did not produce the returns--otherwise known as
sustained economic growth--necessary to repay. This occurred uniformly
across almost all borrowing countries and not in just a few.
To reduce corruption and politically-motivated legal spending on
activities that do nothing to stimulate development, the Banks should
eliminate the grace period attached to borrowing. With a grace period
on repayment of 3-5 years, the administration that negotiates the loan
is almost never responsible for repaying it. In the terminology of the
Bank, this is a ``perverse incentive.''
If the performance of certified countries does not measure up to
expectations, the consequences could be severe. Heretofore, there has
been little effort on the part of the Bank to monitor structural
adjustment loans. This could be an open invitation to corruption,
particularly countries such as Brazil. In 1992 the President of Brazil
was impeached for massive corruption and the last President, Henrique
Cardoso, narrowly avoided a broad Congressional probe into central bank
insider trading. According to Dow Jones, ``The original probe failed
after the government released some 80 million reals ($1=BRR2.325) in
budget funds to finance pet projects that were proposed by coalition
legislators between 1999 and 2000 but never materialized. This last-
ditch effort by President Fernando Henrique Cardoso and his allies
helped weaken support for the original request for the probe.'' (Dow
Jones Newswires, May 21, 2001)
Conditionality. If the MIC strategy is approved, policy conditions
will not be attached to SALs if the World Bank finds adequate
conditions in a few broad areas: the quality of a government's
macroeconomic policy framework,\8\ the quality of its development
policies at the sector and country le levels, and its institutional
capacity.
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\8\ With respect to the quality of policies, the IMF consistently
puts countries at a serious disadvantage because the wildly over-
optimistic growth projections. The actual and inevitably disappointing
growth rates reduce revenues I sharply curb expenditures. The Director
of the IMF's Independent Evaluation Office (IEO), Marcelo Selowsky's
that, in studying the IMF's record, ``We found very significant (IMF
staff) optimism in projecting private-sector activity and growth,
particularly when the program commences in very adverse situations . .
. optimism about growth means that expenditure ratios end up higher
than programmed ... Negative growth occurred 10 times as often as
projected.'' For full transcript, see: http://www.imf.org/external/np/
tr/2004/tr040608.htm
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The Bank conducts several assessments to discern whether it is
necessary to attach any conditions to adjustment loans. To ascertain
the quality of policies and institutions, the Bank conducts routine
assessments for each of 130+ borrowers. Two important annual
assessments are: the Country Policy and Institutional Assessment (CPIA)
and the Investment Climate Assessment. The Bank's ratings of the costs
to investors of ``doing business'' in a particular country are a
principal input to the country's Investment Climate Assessment. The
Bank's determination of whether to provide certification for a MIC will
de end significantly upon whether the country is creating an attractive
investment climate. (See Annex 2 and following section.)
``Doing Business'' Ratings. The Bank's ``Doing Business'' project
to eliminate the regulatory barriers in borrowing countries is
problematic because it does not seriously take into account that fact
that certain regulations are necessary to protect the public interest
and the interests of employees, including the right to collective
bargaining. Appropriate levels of regulation are also necessary to
ensure against corruption.
Each year, the Bank produces a ``Doing Business'' report for each
borrowing country. The recommendations of the Bank often constitute
violations of the Articles of Agreement, which prohibit the institution
from interfering in the internal political affairs of its borrowing
states. How can the Bank claim to promote ``good governance'' while
undermining regulations that have been established through national
political dialogue? How can the Bank claim to fight corruption while
weakening regulation on private sector activity, a locus of large-scale
corruption in both the developed and the developing world during the
1990s?
A 2001 Bank publication states, ``At a general level, it is
possible to say that the weaker the government system, the stronger the
case for choice for citizens (by means of private sector development
(PSD)) and free entry for entrepreneurs.'' \9\ This suggests that where
capacity for regulation is weakest, markets should be most open, (See
Annex 2.) and is clearly a broad-brush, openly ideological statement.
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\9\ PSD: Entrepreneurship, Markets and Development, The World Bank,
May 9, 2001.
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The ``Doing Business'' project puts greater emphasis on the
lowering the ``cost of doing business'' than lowering the ``cost of
living.'' The Bank's system of certifying MICs will put an emphasis on
the degree to which these countries are willing to create an investment
climate that is friendlier to investors, if current practice is any
indication, certification will encourage deregulation to attract
investors rather than regulation to protect the public interest, such
as the U.S. has established over the years and still, to some degree,
maintains.\10\
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\10\ For instance, the proposed MIC Strategy says that ``Loan
conditions are thus a means to an end, which is the fostering of good
policy environments, rather than the ends in themselves.'' Once upon a
time policies themselves were a means to an end, namely poverty
reduction.
---------------------------------------------------------------------------
Each year, the Bank profiles the cost of regulatory barriers faced
by potential investors in each of 130 countries, including
industrialized countries. Each country's profile assigns a rating to
its labor regulations, credit markets, entry regulation (ease of
establishing a business), contract enforcement, and bankruptcy
procedures. These ratings are a significant input to the Investment
Climate Assessment, which the Bank conducts for each borrowing
country.\11\
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\11\ To see how the Bank rates any country along these dimensions,
see http://rru.worldbank.org/DoingBusiness/. A chart that displays the
degree of rigidity or flexibility in labor markets in 130 countries can
be viewed at: http://rru.worldbank.org/DoingBusiness/ExploreTopics/
HiringFiringWorkers/CompareAll.aspx. To see an example of a major
country, see Brazil's ``Doing Business'' report at: http://
rru.worldbank.org/DocumentslDoingBusiness/EconomyProfiles/
BrazilReport.pdf. To understand how ``Doing Business'' ratings
influence lending programs, see http://rru.worldbank.org/Documents/
PSDForum/2004/klein.pdf
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B. Expanding of Lending for a Failed Infrastructure Model
For investment projects, the MIC strategy proposes attaching policy
conditions to loans only if they are proven necessary for the success
of the project. (By implication, the Bank seems to admit that is has
long made a practice of attaching unnecessary conditions to its
lending.) However, the Bank's underlying models for infrastructure
lending are deeply flawed. The Bank should be asked to account for its
systemic failure in a range of areas identified by the institution's
evaluators in their ``Annual Report on Development Effectiveness''
(2003) which include systemic failures (many of which contribute to
corruption) to:
tailor operations to country circumstances and policy
preferences;
monitor and evaluate operations during and especially after
project completion;
correct systemic problems with project performance in
sectors, such as water and sanitation, where two of every three
loans fail to succeed over the long-term;
correct a commercialization and privatization model that has
retarded development of the power sector and resulted in price
hikes that make infrastructure services unaffordable to poor
groups.
In addition, environmental sustainability is not adequately
integrated into Bank operations. This is due to basic differences among
member countries about the appropriate role of the World Bank. Indeed,
the burst of Bank interest in environmental sustainability in the years
just before and after the 1992 Earth Summit has almost entirely
fizzled. Now, for instance, a government can achieve an excellent
country performance rating even if it has ruinous environmental
policies. At best, the Bank has a mixed record in addressing systemic
problems in implementing policies and programs that protect the natural
environment and certain vulnerable groups. If the Bank itself cannot
comply with social and environmental safeguards, how can it ensure that
borrowers do?
Given the Bank's emphasis on extractive industries and
infrastructure, its lack of concern for the environment could be
calamitous, not only for the environment, but also for the poor and
vulnerable groups that are directly affected by Bank-financed projects.
This disregard is also seen with respect to the institution's gender
policy, even though the Bank cites very high performance ratings for
borrowers' gender policies.
Additional concerns include:
1. Commercializing infrastructure is not a strength of the Bank.
According to the institution's evaluators, Bank-financed
``(C)ommercialization turned out to be incompatible with the kinds of
potential and social considerations to which many governments gave
higher priority than commercial success.'' In the water and sanitation
area, the evaluators see the risk that the Bank will ``advocate or be
perceived to be advocating practices that may not turn out to be
``best'' or even ``good''--at least in all cases.''
Water and Sanitation. This problem is one of many that lead to
abysmal sustainability rates of water projects. Half of IDA resources
to Africa go through (mostly rural) community-driven development (CDD)
mechanisms, although all CDD resources do not reach communities and
only 24% of the water components of these projects are sustainable.
Only 40% of urban water supply projects are sustainable. Water supply
projects undercut the role of local governments in delivering services
and, often, in monitoring and regulating them.
Widespread opposition to water privatization exists throughout
Peru, but notwithstanding the will of the people, the management of the
Inter-American Bank will ask for Board approval of a loan to privatize
water in 54 municipalities in Peru. As privatization of ``model'' water
privatizations supported by the World Bank and the Netherlands move
toward the bidding stage, the Bank is not requiring that public private
contracts be disclosed to the public, even though they will bind the
municipalities for generations. Finally, the Peruvian water regulator,
SUNASS, does not have the capability to regulate privatizations. Even
if it did, the Bank's new operational guidance note for water and
sanitation lending instructs the Bank's staff to avoid giving any
central government regulator authority over subnational service
delivery.
Non-transparent and unaccountable policy and project lending
fosters corruption. When such lending results in populations being
deprived of their right to affordable water, it will be cause for
revolution, as has been the case in Bolivia.
Power. Evaluators find that the Bank's privatization model may have
``retarded the development'' of the power sector. In sum, they find
that ``The risks of promoting inappropriate policies appear to be most
pronounced in policy areas where progress on reform has been difficult
. . . as is the case in many in infrastructure sectors . . .\12\
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\12\ ARDE 2003, p. 35.
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In short, the Bank has a long and embarrassing history of unholy
alliances in its infrastructure lending. At best, project teams looked
the other way while corrupt governments looted investment projects. At
first, the Bank actively collaborated with the most unsavory political
and economic interests in the theft of national patrimonies.\13\
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\13\ The World Bank and the Inter-American Development Bank allowed
the government of Alberto Fujimori in Peru to move authority over loan
funds designated to reform the water sector in Peru to the newly
created Ministry of the Presidency from which they disappeared.
2. Financing of commercialized infrastructure will boom, if
proposed accounting practices are adopted. Although the removal of most
policy conditions from project loans is intended to facilitate the
financing of projects, many governments cannot borrow large sums and
continue to comply with IMF and World Bank budget targets. A solution
to this problem is being explored by the IMF in about ten cc unties
where it is piloting an approach that changes accounting standards so
its borrowers aren't forced to count commercialized infrastructure
investments as current expenditures in formulating budget targets.\14\
(The Presidents of Argentina and Brazil Summit proposed an approach,
such as this, at the Copacabana Summit earlier this year. The issue
also dominated the Inter-American Development Bank's annual meetings in
Peru at the end of March 2004.)
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\14\ For further details, see ``Public Infrastructure and Fiscal
Policy'' by Teresa Ter-Minassian and Mark Allen, IMF, 3/12/04: http://
www.imf.org/external/np/fad/2004/pifp/eng/PIFP.pdf
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In order to qualify for financing, governments would agree to
institute full cost recovery (including the cost of borrowing) for
infrastructure services. As a result of this policy, there is likely to
be a boom in commercialized (and privatized) infrastructure in 2005 and
beyond. This proposal seems to be proceeding toward approval in the
absence of adequate (or in some cases, any) regulatory oversight in
many countries. The proliferation of unregulated commercial and
privatized services could be a disaster for poor people for whom water
and electricity prices, among other things, could be prohibitively
high.\15\
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\15\ The IDB proposes an October approval for a loan to Peru that
would promote private provision of municipal water services in 54
cities, yet Peru lacks the capacity to oversee such processes.
Moreover, the World Bank-Netherlands Water Partnership is not requiring
the Government of Peru to disclose public-private water contracts in
Puira and Tumbes where bidding for water systems is currently underway.
Puira and Tumbes are model projects intended to prove that private
provision can reach the poor. The model was developed by donors and
creditors in an extensive ``Paris process'' that engaged dozens of
consultants. The citizens of Peru overwhelmingly oppose private
provision of water, yet the Banks continue to support leaders that will
even resort to force to suppress opposition to these policies.
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Moreover, approval of this proposal could significantly increase
pressure to cut spending on health care, education, and other social
purposes in hard budgetary times.
3. Expansion of Bank financing. The Bank estimates that there is a
need to ``potentially double'' actual financing for infrastructure from
the average of 3.5% of GDP in all developing countries to 7% of
GDP.\16\
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\16\ World Bank, ``Infrastructure Action Plan,'' April 8, 2004, p.
3.
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In FY 2005, the Bank is increasing infrastructure lending $7
billion, an increase of about $1 billion over FY 2004. (Infrastructure
projects had a 35% economic rate of return during the period FY 1999-
2003.) Expanding the financing for commercialization and privatization
models that are failures and disregard the need for regulation for
fiduciary and public interest purposes could doom efforts to curb
corruption. These failures could also reduce inequality and increase
poverty in much of the developing world.
Equally problematic is the fact that trade rules could ``lock in''
privatization and commercialization policies in and make many of them
almost irreversible. Some of these policies are good for economies and
good for people, but not in unregulated environments and not where
people and their elected representatives are unengaged in shaping their
own development future.
C. Providing ``Flexible'' Assistance to Certified Countries
Approximately every three years, the World Bank designs a CAS for
each borrowing country that identifies the operations that it plans to
finance and the rationale for these operations. The content of the CAS
is determined by each government's CPIA rating, its ``doing business''
rating, and the government's own aspirations. In the proposed MIC
Strategy, the CAS would function more as a ``strategic compass than a
detailed blueprint.'' Aspects of flexible CASs are described in Annex
3. While the Bank should not be rigid in its approach to governments,
its Bank's track record in complying with its own policies do not merit
expansion of lending. Nor does the Bank's record in project lending
(e.g., infrastructure) and adjustment lending merit expansion of
lending.
D. Making Other Institutional Changes
The Bank is already making internal changes, including:
A revision of promotion criteria. Although staff performance
appears tightly linked their ability and willingness to ``move
money,'' the proposed MIC Strategy says that staff incentives
reward complex lending programs that are divided into many
small operations and that that must change. It also asserts
that MICs also need simple, repeater operations to expand and
replicate successful operations on a larger scale. Hence,
promotion criteria will be revised and the evaluation criteria
for proposed projects could be revised as well.
Improvement in staff skills.
Expanding the use of existing Bank financial services and
products and the invention of new ones.
Piloting of joint IBRD, IFC and MIGA offices. For instance,
the Bank is establishing joint IDA IFC offices in several
African countries.
Development of a framework for lending to financial
institutions (including municipal development funds) and for
advisory services.
III. Certification of Qualified MICs
A. Identifying MICs as First Class or Second Class
Should the MIC Strategy be approved, the political stakes for the
World Bank and the U.S. could be high. As the major shareholder of the
World Bank, the U.S. could be seen as facilitating the assignment of
middle-income countries to first class or second class status depending
upon whether the institution grants or withholds certification.
If the World Bank denies certification to an MIC government and,
thus, disqualifies it for streamlined lending, the international
financial community could see that government as a bad bet. If their
debt burdens are not too high, MIC governments with World Bank
certification will obtain significant, streamlined loans with few
strings attached. This may produce competition for World Bank
certification or it may produce tensions and resentments. Poorly done,
the MIC Strategy could exacerbate economic and political crises and
corruption among first and second class MICs.
B. Other Certification Issues
As noted above, if the MIC Strategy is approved, the World Bank
would ``certify'' governments with acceptable national policies that
are ``equivalent'' to the fiduciary and safeguard policies of the Bank.
The Bank's Board has expressed concern about what kind of
``equivalence'' should exist between national fiduciary, environmental
and social standards and the standards still embodied by the Bank's own
(watered down) operational policies. In addition, there is concern
about whether or how the World Bank's Inspection Panel would
investigate compliance with safeguards with regard to operations that
the Bank finances in credentialed low- and middle-income countries. The
Bank, itself, has been largely unable to provide adequate project
supervision. Examples are legion: around the developing world,
privatization projects financed and promoted by the World Bank and the
regional development banks produced poor quality services, corrupt
insider deals, bogus debt swaps, and political uproar. Vast
infrastructural investment projects, such as the Yacireta project or
Cana Brava in Latin America became internationally notorious. If the
Bank's record of compliance with its own safeguards was better, one
could have more confidence in the Bank's supervision of each borrower's
compliance.
Prior to country certification, the Bank's Board would examine the
methodology and results of management's assessments of the country's
willingness and capacity to comply with safeguards. The proposed MIC
Strategy says that ``Board approval of an operation relying on a
certified safeguard system implies that the national system constitutes
the reference point for any Inspection Panel investigation.'' Then, the
Bank's management signed a memo with the Inspection Panel that ensures
continued use of the Bank's operational policies as the reference
point. Given management's ambivalence or antipathy to the Inspection
Panel, it could be important to monitor implementation of this policy.
IV. Conclusion
At best, it is premature to approve and implement the MIC Strategy.
Before it is approved, the Bank's shareholders should ask questions
about whether the MIC Strategy would exacerbate existing problems with
corruption, accountability, and development effectiveness. For
instance:
Would it constitute a conflict of interest for the World
Bank to both certify MIC governments and profit from the
resulting surge in lending?
How might it be possible to follow the money trail of large
adjustment loans that the Bank is currently offering to most of
its borrowers?
Will the policy result in rampant non-compliance with
fiduciary and safeguard policies--or, especially, their
implementation? Already, the Bank has a mixed record of
complying with the spirit, if not the letter, of its own
policies. Thus, would it be equipped to help governments who,
heretofore have viewed Bank policies as a barrier to borrowing,
to upgrade and enforce their national policies and standards?
What would be involved in judging whether fiduciary and
safeguard standards are ``equivalent'' to it's the World Bank's
standards? How compliance could be effectively supervised, as
called for by the Strategy?
How could country ``ownership'' of lending policies be
improved? Most parliaments have little power over loan design
or approval. (They may approve increases in the debt ceiling).
The lack of country ownership can lead to unsustainable lending
and corruption. Moreover, policy-based loans, untied to
specific objectives, build in the possibility of pork barrel
spending to buy loan approval from potentially corrupt
parliamentarians.
How will democratic, fiduciary and safeguard controls be
created or maintained at the subnational and regional level? An
increasing number of loan/grant operations are being executed
at the subnational lending where consultation consists of
citizens being asked whether they want money for
commercializing/privatizing services or no money at all. (This
is the process in 54 municipalities in Peru and countless other
places.) An increasing number of loan/grant operations are also
being executed at the regional level, e.g., the Balkans
Infrastructure Development (BID) Facility, which is supported
by USAID, among others. Indeed, the World Bank has divided each
geographical region into infrastructure grids for
infrastructure lending purposes. However, it is unclear the
kinds of democratic governance, fiduciary and regulatory
structures and processes could govern regional infrastructure
development.
What will be the outcome of orchestrated pressure to
undercut labor rights and standards? The degree of labor
rigidity or flexibility in 130 countries is displayed here:
http://rru.worldbank.org/DoingBusiness/ExploreTopics/
HiringFiringWorkers/CompareAll.aspxT The large adjustment
programs will create much stronger pressure to liberalize
investment (which implement the Bank's ``Doing Business''
project) than currently exists.
Will the U.S. and other large shareholders join in the
implementation of the MIC Strategy? To implement the Strategy,
the Bank seeks to strengthen its relationship with partners,
particularly bilateral donors, since half of all bilateral aid
flows, about $25 billion, support MICs.
Such questions should be answered before the World Bank cast itself
as a ``partner of choice'' in development knowledge and finance for
MICs.\17\ The Bank should be obliged to account for its past failures.
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\17\ The situation is particularly dire for the Bank because new
lending to many ``debt distressed'' countries will slow or stop if, at
the 2004 Annual Meeting of the IMF and World Bank, the Governors of the
institutions approve the ``debt sustainability'' (DS) proposal
advocated by the U.S. government and its allies. If the DS proposal is
approved, the IMF and World Bank would assign a debt threshold to each
borrowing country corresponding to its debt burden, its vulnerability
to shocks and, especially its policy and institutional performance.
Except in emergencies, governments could not borrow after they
reach their debt threshold. Instead, they would rely upon a scarce
supply of grants that would be primarily directed to the governments
considered to have gone farthest in adopting policy and institutional
reforms prescribed by the World Bank. How will the U.S. government deal
with situations in which the World Bank will cease lending to
governments that have reached their debt thresholds? In some cases,
fiscal transitions can be maintained with grant flows, but the IMF and
World Bank acknowledge that the supply of grant resources will be too
meager to meet the demand.
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As democracies have emerged in borrowing countries, corrupt, non-
democratic regimes have been obliged to respond to questions about
corruption and repression, at least to some extent. In Latin America,
Argentina, Chile, Guatemala and Peru have established ``Truth
Commissions'' to investigate corruption and repression, which often
went hand-in-hand. The Banks, which comfortably did business with these
governments, have never been asked about their lending under past
dictatorships: what did the loans pay for? Who benefited? How much is
this debt worth now?
Particularly since Reagan and Thatcher revolutionized the goals and
functions of the World Bank about 25 years ago, the history of the
institution has been marked by waves of struggles between those who
would focus on the quantity of lending and those concerned with the
quality and impacts of lending. The year 1991, when Bank VP Willi
Wapenhans chaired a commission investigating the quality of Bank
lending, was historic in this regard. The eminent German's commission
exposed the miserable quality of most Bank lending. For many years, the
Bank diligently strove to improve its portfolio.
However, since 1990, there has been considerable conflict over the
institution's direction among the Bank's Board.\18\ In 1992, the U.S.-
led effort to have a Private Sector Development (PSD) Strategy adopted
as the overarching purpose of the World Bank and the regional
development banks overcame fierce opposition.
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\18\ Significant conflict led up to the Bank's approval of the
Private Sector Development (PSD) Strategy in February 2002 and has
continued since.
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Under the appropriate conditions, the role of the private sector
needs can be usefully expanded. But if appropriate conditions are
lacking--particularly in the regulation of the pricing and delivery of
basic services--the adverse implications are significant. The current
lack of regulation for fiduciary and public interest purposes should
stop consideration of the MIC strategy in its tracks.
The time to ask questions and get answers about the MIC strategy's
likely impacts is before, not after it is approved. There is still time
to donors, other creditors, parliaments, citizens, and the media in
industrialized and developing countries to pressure the Bank's Board
into considering the risks and costs of the proposed strategy, and to
search for ways to make the Bank more, not less accountable for the
results of projects and policies that its resources help finance.
Annex's
ANNEX 1
The Bank's Draft CAS for India: What is the Future of
Basic Services for the Poor?
In adjustment lending, policy impacts may not be taken into
account. Top priorities in the draft Indian CAS include reforming power
and water policies. In the area of water, the Bank promotes
reallocation of water from low-value users (subsistence farmers) to
high-value users (agribusiness, industry, cities). This policy will hit
the most vulnerable people the hardest, since the overwhelming majority
of poor people are subsistence farmers who rely on affordable drinking
water and, sometimes, access to water for irrigation.\1\
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\1\ In the Bank's water project in Senegal, reallocation is
facilitated by raising water prices higher for rural consumers of water
from standpipes than for any other classification of rate payers.
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The Bank would help those Indian states that meet ``guidelines for
engagement'' by implementing a comprehensive reform effort. Eligible
states could receive up to 15% of total lending as adjustment lending
over five years (governments that are off-track will have their loan
disbursements suspended). Adjustment lending will be particularly
appropriate for states with a good track record, but problems with debt
sustainability.
In the cities, the Bank is working to make cities less dependent on
financial transfers from the central government, obtain more access to
finance, and facilitate private sector participation in the delivery of
basic services. At the state level, the Bank will bolster service
provision programs that improve cost recovery and shape regulatory
systems that will encourage private sector participation. Such policies
have a poor rate of expanding affordable basic services.\2\
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\2\ The Bank often argues that simply increasing access to piped
water reduces poverty, since the poor are more likely to have no
connection at all, and are forced to rely on higher-priced (per unit)
alternatives, such as water from private tankers. However, for cost
recovery programs to affectively address poverty, they must ensure
network investment in poor areas, and also include some kind of subsidy
component for household connections and, where incomes are below
poverty levels, consumption itself.
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Since its adoption of the Private Sector Development Strategy (PSD)
as the overarching strategy of the World Bank Group in February 2002,
the World Bank has accelerated privatization of basic services--health
care, education and water, despite the facts that, for low-income
countries: 55% of PSD projects were likely to be sustainable; the
distributional impact of PSD projects were frequently negative; and
that benefits depend on how well the state regulates private behavior.
Strong claims are also made that these shortcomings are equally
apparent in MICs, where poverty and, especially distributional,
problems are often exacerbated.\3\
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\3\ In the last three years, the Bank has tripled lending for the
water sector, despite the facts that: (a) urban water projects have a
40% sustainability rate and the water components of rural loans have a
23% sustainability rate. This means that, by a substantial margin,
water projects fail after the Bank stops financing them. And, (b)
according to World Bank evaluators ``substantial room remains for
targeting the poor and vulnerable populations within water sector
operations. Of most concern across the Bank is the scant attention
given to the direct impact of these operations on the poor . . . and
tailoring project design to meet the needs of target populations.''
From ``Bridging Troubled Waters . . .'' OED, The World Bank, 2002, p.
11.
ANNEX 2
The Country Policy and Institutional Assessment (CPIA)
Over the period of 1999-2003, Bank lending was concentrated . . .
with 89.4% of Bank lending going to countries with average or above
average CPIA ranking.
The World Bank performs CPIA ratings annually for its 136 borrowers
that produce an overall performance ranking for each borrowing
government. The ratings are based on assessments of each country's
governance as well as its economic, structural, social, and public
reform policies.
Poor performance on the part of a borrower is assumed to be the
borrower's fault rather than the flawed application of ``indicators
like the CPIA--which are based implicitly on the premise that their
underlying criteria reflect good policies at all times and in all
places,'' as the Bank's evaluators put it. (ARDE, p. 41)
The whole strategy for providing aid to developing countries was
revolutionized by the claim of ``Assessing Aid'' (2000) by World Bank
economist David Dollar. Dollar said that aid only produces results in
good policy environments. In order to prove this, he used a rating
system--the CPIA--to judge the policy and institutional performance of
borrowing governments. However, the CPIA is not transparent. The
ratings and the methodology for all MICs are secret, even from
bilateral and other multilateral donors. Reportedly, Brazil received
relatively high CPIA ratings, yet its growth was below average for
developing countries during the period 1998-2002. But, without access
to Brazil's CPIA, observers are at a loss to understand the signals
that the Bank is sending to the country.
The content, methodology and secrecy in which most of the CPIA is
shrouded is a matter for hot debate among the World Bank's management
and Board.\1\ Some Board members claim that the CPIA is a reasonably
accurate system that rates performance of borrowing countries in
critical areas--namely, with regard to governance, including the
effectiveness with which governments disburse and manage Bank loan
resources--and with regard to economic, structural, social and public
sector reform policies. Other Board members accuse the CPIA as being a
one-size-fits-all instrument imposed on governments in a top down
manner replete with subjective judgments about their performance.
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\1\ For a description of the CPIA, see: http://
www.servicesforall.org/html/worldbank/sheep--into--goats.shtml
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Interestingly, the ratings of those government that are eligible
for the U.S. Millennium Challenge Account (MCA) are usually different
from those of the World Bank's CPIA, sometimes remarkably so.
ANNEX 3
Flexible Country Assistance Strategies (CASs) for Brazil and India
In the past, the Bank provided scenarios for lending at low, medium
and high lending levels, dependent upon the degree of borrower
compliance (or non-compliance) with ``trigger conditions''--that is,
reforms that the Bank identified as necessary. For MICs with
certification, the Bank will permit flexibility in the CASs prepared
for each borrower with respect to the composition of the lending
program, determination of loan sizes for good performers, and possible
increases in the volume of lending. Among other things, new policies on
supplemental financing could expedite enlargement of Bank-financed
operations. In sum, the CAS would function more as a ``strategic
compass than a detailed blueprint.'' In the future, the CAS may be
called a ``Country Partnership Strategy'' (CPS). In the Bank's view,
the CAS for Brazil (2004-2007) and the draft CAS for India demonstrate
a desirable flexibility.
Brazil. Over the 2005-07 CAS timeframe, ``understandings'' between
the Bank and the Government of Brazil (GOB) will determine the level of
access the GOB has to Bank financing. Excellent performance will
qualify the Government of Brazil (GOB) for support over in the range of
$6 to $7.5 billion over the 3 years with adjustment lending up to half
of the total amount. Reasonable performance will qualify Brazil for
access to $4 billion to $6 billion. The CAS does not include trigger
conditions. The Brazil CAS is a model for forthcoming guidelines to
staff on ``good practice'' with regard to flexible lending programs.
The Bank is also giving the GOB greater flexibility in providing
counterpart funding, to help match the Bank's resources, for
implementing investment projects. Difficulty in providing counterpart
funding has been a barrier to lending in the past.
India. The Bank identifies the ceiling for IBRD lending as $2.15
billion per year or $6.45 billion in the three-year, 2005-08 timeframe
of the draft CAS. Access to resources will depend upon how quickly
India prepares projects and the quality of its project implementation,
particularly the timeliness of disbursing loan resources. The access to
loan resources by India's 24 states will depend upon the seriousness
with which they apply ``self regulating'' reform policies (i.e.,
``trigger'' policies). While the states may ``self-regulate'' their
adoption of reforms, there will be little ambiguity with regard to the
types of reforms required by the Bank, as these will be designated in
the Bank's ``guidelines for engagement.'' In another departure from
past practice, the Bank's CAS does not designate a specific fiscal
policy target, or ``trigger.'' Instead, the Bank will periodically
review India's macroeconomic situation and, particularly, its
stability.