[Senate Hearing 108-734]
[From the U.S. Government Publishing Office]
S. Hrg. 108-734
COMBATING CORRUPTION IN THE MULTILATERAL DEVELOPMENT BANKS [PART I]
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON FOREIGN RELATIONS
UNITED STATES SENATE
ONE HUNDRED EIGHTH CONGRESS
SECOND SESSION
__________
MAY 13, 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 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
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Page
Bapna, Mr. Manish, executive director, Bank Information Center,
Washington, DC................................................. 32
Prepared statement........................................... 35
Boswell, Ms. Nancy Zucker, managing director, Transparency
International USA, Washington, DC.............................. 43
Prepared statement........................................... 46
Brookins, Ms. Carole, U.S. Executive Director, The World Bank,
Washington, DC................................................. 3
Prepared statement........................................... 8
Levinson, Professor Jerome I., distinguished lawyer in residence,
Washington College of Law, American University, Washington, DC. 52
Prepared statement........................................... 56
Lugar, Hon. Richard G., U.S. Senator from Indiana, opening
statement...................................................... 1
Morales, Mr. Hector, Alternate U.S. Executive Director, Inter-
American Development Bank, Washington, DC...................... 12
Prepared statement........................................... 13
Winters, Dr. Jeffrey A., associate professor, Northwestern
University, Evanston, IL....................................... 25
Prepared statement........................................... 28
Additional Statements Submitted for the Record
Adams, Patricia, economist and executive director, Probe
International, statement for the record........................ 76
Perry, Ambassador Cynthia S., statement for the record........... 73
Rich, Bruce M., Environmental Defense, statement for the record.. 79
Watters, Kate, executive director, Crude Accountability,
statement for the record....................................... 86
(iii)
COMBATING CORRUPTION IN THE MULTI-
LATERAL DEVELOPMENT BANKS [PART I]
----------
THURSDAY, MAY 13, 2004
U.S. Senate,
Committee on Foreign Relations,
Washington, DC.
The committee met at 9:33 a.m., in room SD-419, Dirksen
Senate Office Building, Hon. Richard G. Lugar (chairman of the
committee), presiding.
Present: Senators Lugar and Hagel.
OPENING STATEMENT OF SENATOR RICHARD G. LUGAR, CHAIRMAN
The Chairman. This hearing of the Senate Foreign Relations
Committee is called to order.
Today the committee meets to examine the problem of
corruption related to the activities of the multilateral
development banks. The United States has a strong national
security and humanitarian interest in alleviating poverty and
promoting progress around the world. That is why the Congress
funds multilateral development banks such as the World Bank,
which can leverage our resources and promote economic growth
and reduce poverty around the world. Of the 6 billion people
living in the world today, more than 1 billion barely survive
on less than $1 of income a day.
In the last fiscal year, the multilateral development banks
financed projects totaling more than $35 billion. These
projects helped poor countries pursue critical improvements in
public administration, transportation, health, education, and
many other vital areas. The development banks have in recent
years introduced innovative programs that have enhanced their
primary mission of poverty reduction. But even the most
innovative policies will not be effective if they are distorted
by corruption. It is critical that every development bank
dollar reaches its intended recipient. Unfortunately, that has
not occurred in all instances.
Over the past year, the Senate Foreign Relations Committee
staff has collected information from public and confidential
sources related to alleged corruption involving multilateral
development bank activities and projects. The committee is
engaging in a multi-track process to review specific
allegations and to determine the effectiveness of the
multilateral development banks' anti-corruption strategies.
This is a process that hopefully will result in a stronger
anti-corruption infrastructure within the development banks.
From the outset, I would recognize that the World Bank
itself has identified corruption as the single greatest
obstacle to economic and social development. James Wolfensohn,
President of the World Bank, understands the importance of
anti-corruption efforts and has brought greater resources to
bear on the corruption problem. The World Bank has increased
its anti-corruption efforts in developing countries over the
past 5 years through education, training, procurement
restrictions, and other important methods.
But corruption remains a serious problem. Dr. Jeffrey
Winters of Northwestern University, who will testify before us
today, estimates that the World Bank--and I quote Dr. Winters--
``has participated mostly passively in the corruption of
roughly $100 billion of its loan funds intended for
development.'' Other experts estimate that between 5 percent
and 25 percent of the $525 billion that the World Bank has lent
since 1946 has been misused. This is equivalent to between $26
billion and $130 billion. Even if the corruption is at the low
end of the estimates, millions of people living in poverty may
have lost opportunities to improve their health, education, and
economic conditions.
Corruption thwarts development efforts in many ways. Bribes
can influence important bank decisions on projects and on
contractors. Misuse of funds can inflate project costs, deny
needed assistance to the poor, and cause projects to fail.
Stolen money may prop up dictatorships and finance human rights
abuses. Moreover, when developing countries lose development
bank funds through corruption, the taxpayers in those poor
countries are still obligated to repay the development banks.
So, not only are the impoverished cheated out of development
benefits, they are left to repay the resulting debts to the
banks.
The Foreign Relations Committee intends to illuminate more
brightly the problem of corruption surrounding the development
banks. Those of us who support the valuable work of these
institutions--and they do have vital and important support in
our committee--know how important it is to ensure that the
development banks are doing everything they can to prevent and
expose corruption within their own institutions, the borrowing
governments, and the community of contractors who receive
money.
This hearing is intended to give the committee an
opportunity to examine ways that the U.S. Congress and our
Government can contribute to the anti-corruption efforts
already underway. We are engaged in what is sometimes called
congressional oversight. I look forward to insights on how to
improve the development banks' ability to limit misuse of
funds, how to strengthen internal controls, how to impede
corruption in project design, and how to ensure that audits are
conducted in a thorough manner. I also would like to hear the
views of witnesses about the impact of immunity privileges that
apply to development bank employees.
Throughout this examination, we will keep in mind that the
poor suffer most from the harmful effects of corruption because
they are hardest hit by economic crime and are most reliant on
the provision of public services and, finally, are the least
capable of paying the extra costs associated with bribery and
fraud.
We welcome two panels to discuss corruption and the
multilateral development banks. On the first panel, we will
hear from Ms. Carole Brookins, United States Executive Director
at the World Bank, and Mr. Hector Morales, United States
Alternate Executive Director at the Inter-American Development
Bank. On our second panel, we will hear from Professor Jeffrey
Winters of Northwestern University, Mr. Manish Bapna of the
Bank Information Center, Ms. Nancy Zucker Boswell from
Transparency International USA, and Professor Jerome Levinson
from American University.
I would also note that we did invite the President of the
World Bank, James Wolfensohn; the President of the Inter-
American Development Bank, Enrique Iglesias; and the President
of the African Development Bank, Omar Kabbaj to testify before
the committee. They declined the invitations, citing the
established practice of bank officials not to testify before
the legislatures of their numerous member countries, but their
letters \1\ of regret will be included in the official record.
---------------------------------------------------------------------------
\1\ The letters the chairman refers to can be found beginning on
page 70.
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We do thank our witnesses who will be joining us today for
their testimony. We look forward to their insights.
Let me indicate that the statements of all the witnesses in
both panels will be made a part of the record in full. Perhaps
the witnesses could summarize their testimony in 10-minute
increments. The Chair will be liberal but, nevertheless, we
want to make certain that all questions are heard.
We anticipate that if there are to be rollcall votes this
morning, we are advised that they may come in about the 11:30-
11:40 neighborhood. That could be disruptive in that there may
be two or three votes at that point. Therefore, it is our hope
in the next 2 hours to complete our testimony and our
questioning.
Let me call now upon my colleague, Senator Hagel, to ask
whether he has an opening comment or statement.
Senator Hagel. No, Mr. Chairman, I do not. I want to
compliment you on your leadership and focus on a very, very
critical part of not only America's foreign policy
responsibilities and the tools that we have to develop our
relationships, but the other responsibilities that developed
nations have in the world and your institutions that you
represent are very, very critical institutions in that effort.
So, Mr. Chairman, thank you. I look forward to their testimony.
The Chairman. Well, thank you, Senator Hagel.
I will ask for testimony in the order that I have
introduced you. That would be Ms. Brookins to begin with and
then Mr. Morales. Ms. Brookins.
STATEMENT OF CAROLE BROOKINS, U.S. EXECUTIVE DIRECTOR, THE
WORLD BANK
Ms. Brookins. Thank you very much, Mr. Chairman, for your
opening remarks which I think set the very important tone for
these hearings today and for your leadership and the leadership
of the committee. Senator Hagel, thank you for your opening
remarks.
I welcome your invitation to come and speak with the
committee today on a subject which is fundamental to economic
development and poverty reduction. Improving governance,
increasing transparency, and combating corruption are a major
focus of President Bush and our agenda at the World Bank. As
the President said, when he announced the Millennium Challenge
Account, ``Money that is not accompanied by legal and economic
reform are oftentimes wasted. In many poor nations, corruption
runs deep. When nations refuse to enact sound policies,
progress against poverty is nearly impossible.''
Our administration's view is well supported by the bank. In
fact, combating corruption and building good governance have
been major ongoing priorities of the World Bank since 1996. At
the most recent annual meeting in Dubai of the World Bank and
the International Monetary Fund last September, President
Wolfensohn said, ``There is still too much cronyism and
corruption in the developing countries. In nearly every
country, it is a matter of common knowledge where the problems
are and who is responsible. Frankly, there is not enough bold
and consistent action against corruption, particularly at the
higher levels of influence.''
During my tenure as Executive Director, representing the
United States on the bank's board, I have seen up front the
real impact of the World Bank on people's lives and
opportunities to emerge out of poverty that good governance
supported by the World Bank can make, whether it is delivering
textbooks to children in Nairobi, Kenya, or building a needed
rural road to a village in Malang, Indonesia. But
notwithstanding the compelling nature of these personal
experiences, the question before us today is, how effective is
the bank as an institution in its anti-corruption efforts,
thereby ensuring that its assistance can be delivered
effectively and efficiently to reduce poverty?
The World Bank continues to be the leader among
international development institutions in a broad range of
country-based initiatives to strengthen governance, to build
effective local institutions and increase transparency. These
three components are the infrastructure for fighting
corruption, both its systemic causes and in specific cases
where it appears. The bank has built a comprehensive structure
that includes international advocacy, internal controls,
analytical tools, education and training, and country and
project operations. Among the MDBs, the bank provides the
largest amount of finance to support good governance programs,
lending over $5 billion per year for reforms to strengthen
public sector institutions. Since 1996, the World Bank has
launched more than 600 anti-corruption programs in nearly 100
countries.
The bank's anti-corruption infrastructure has performed
effectively in many aspects and in managing many challenges.
However, there is much more that could be done to strengthen
the system. Our administration is directly focused on getting
results, both internally and on the ground in countries where
the bank operates. Under the committee's 2003 legislation,
section 581 of the fiscal year 2004 Consolidated Appropriations
Act, which the committee worked, along with Treasury, to craft,
this is an important tool for our efforts to enhance
accountability and transparency.
The bank's mandate is to end poverty in member countries by
strengthening their investment climates in support of jobs and
growth, and in creating local capacity to deliver services to
the poor. In many cases, the bank's services are in the
greatest demand in countries where governance standards and
institutional capacities are lacking. Corruption problems are
complex and in many cases deeply rooted, cutting across both
the public and the private sectors. By the very nature of the
mandate that the bank has, the bank needs to be involved in
these countries to help improve their governance structures.
The challenge is to establish procedures that successfully
mitigate the risks posed by corruption and effectively deliver
on the bank's mandate. The United States is fully committed to
meeting this challenge.
My office has an ambitious agenda with respect to anti-
corruption and transparency. We approach this at three levels.
At the institutional level, we focus on improving the
functioning of the bank's internal control processes for
preventing and responding to corruption and fraud. At the
project level, we focus on encouraging the bank to conduct
analysis and design projects and lending policies that are
directed to reduce opportunities for corruption and ensure that
bank funds will be properly spent. And at the country level, my
office is a driving force to increase transparency and
disclosure of bank operations and analysis.
I will just very briefly address these areas.
As a major provider of development expertise and funding,
the bank recognizes that it must lead by example. Therefore,
the bank has established systems to ensure institutional
integrity, accountability, and the rigorous investigation and
resolution of cases involving fraud and corruption. There are
12 units responsible for internal controls.
What is most important I think in this hearing today is the
Department of Institutional Integrity, which was created in
November 2000 out of two preexisting offices tasked with
combating corruption. INT has played an important role in
investigating allegations of misconduct by firms, by
individuals, and by bank staff. It supports training for bank
staff to identify ways to detect and deter fraud and corruption
in bank operations. It is proactive and does anti-fraud and
anti-corruption training to all new bank operations staff as
part of their introductory training, and additionally, there is
training of field staff which includes integrity awareness in
this 8-day program. The bank has a hotline, 1-800-831-0463,
where the public or staff can report incidents of corruption or
other inappropriate practices.
Whistleblower protection is ensured and complaints may be
made anonymously or confidentially. And staff rules require
that there can be no harassment or retaliation. The fact that
the number of cases coming to INT right now from staff has
risen from 20 percent to 50 percent I think attests to the
effectiveness of whistleblower protection.
The bank has instituted several reforms that attempt to
eliminate conflicts of interest and any possible corrupt
practices among its staff and the board. The bank's internal
auditing department guides World Bank management in
establishing and maintaining strong internal controls and risk
management procedures. The bank has also taken formal steps to
review its internal controls. Beginning in 1995, the bank
adopted the internationally recognized internal control
framework known as COSO, Committee on Sponsoring Organizations.
In the area of accountability, the World Bank has two key
institutions, the Operations and Evaluation Department and its
equivalents at the IFC and MIGA, OEG and OEU, and the Quality
Assessment Group.
The World Bank also has actively supported the creation of
the U.N. Convention Against Corruption in December 2003.
At the project level, the World Bank utilizes a number of
effective tools to mitigate the risk of corruption in designing
projects, as well as mechanisms to address instances when it
finds that corrupt practices have occurred in the course of
project implementation.
First, the bank's 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. If the World Bank procurement guidelines
have not been followed, then the bank can declare a
misprocurement and the borrowing government will lose the
relevant funding.
Related to this, the bank has actively enforced its
administrative sanctions policy through the Sanctions
Committee. Under this policy, the bank debars firms and
individuals from participating in any further bank or bank-
financed projects if they are determined to have engaged in
corrupt, fraudulent, collusive, or coercive practices in
competing for or in executing a bank contract. More than 180
companies and individuals have been debarred from doing
business with the bank either temporarily or permanently, and
the bank does make the list of the debarred firms and
individuals publicly available on its Web site.
In 1993, the World Bank created the Inspection Panel as an
independent forum to private citizens who believe that they
have been or could be directly harmed by a project financed by
the World Bank. Panel reports are publicly available as well on
the bank's Web site.
However, more work is needed to address project level
concerns. Currently the United States is pushing for the bank
to adopt a more systemic approach to measuring project results.
This will facilitate a proactive examination early and
regularly in the project life cycle of whether bank projects
are meeting their objectives, particularly where there are
governance components. Such examination, we believe, can be a
useful tool in identifying if corruption is playing a role.
Anti-corruption efforts are also taking place at the
country level. As I mentioned before, the World Bank is
providing over $5 billion a year to help countries reform and
strengthen their systems and to punish corruption. Numerous
examples of these programs are found in the annual report that
the U.S. Treasury provides to Congress on anti-corruption
actions taken by countries as a result of multilateral
development bank assistance. They include programs that promote
a wide range of judicial, fiscal procurement, and regulatory
reform. The World Bank is also at the forefront of supporting
anti-money laundering and anti-terrorist financing initiatives,
and I believe that there have been as many as 40 projects up to
date benefiting more than 115 countries. This is to deal with
systemic problems.
The World Bank and other IFI's have intensified efforts to
assist countries to improve the quality of public expenditures
which can be the very root of corruption and bad governance.
The bank has increased its assessment of the content and
overall efficiency of public expenditures and of country
procurement. My office is pushing hard to get these reports in
all borrowing countries and to followup these assessments with
technical assistance and projects that address the weaknesses
identified. This is particularly necessary in our view in
countries that are receiving or will receive adjustment lending
funds or other direct budget support.
Another important bank diagnostic is the investment climate
assessment which attempts to systematically analyze conditions
for private investment and enterprise development in World Bank
countries and includes surveys done and conducted with the
private sector.
The bank has been a leader in the research and analysis of
corruption. Particularly notable is the work of the World Bank
Institute's Director of Governance which has developed new
approaches to the measuring corruption and assessing its
monetary and developmental impact.
The bank's commitment to governance and fighting corruption
is also illustrated in the way in which the International
Development Association, or IDA, resources are allocated to the
77 recipient countries, which include the world's poorest
nations. Governance is the most important factor in the IDA
performance-based allocation system which the U.S. championed
beginning with IDA 12 and then again with IDA 13. The amount of
money that countries can receive is based upon this assessment.
Those who have poor governance receive less money or, in many
cases, very little money versus those who perform well, and
they are coming back to the bank now to try to find ways that
they can better improve their policies because of this fact.
Another key element is the work on transparency in the
battle against corruption where the bank has been at the
forefront in terms of disclosure of documents and consultation
with civil society. The bank has frequently updated its
information disclosure policy to establish and institute best
practices among the multilateral development banks. My office
continues ongoing efforts to work with the board and management
to ensure that further transparency is achieved in the context
of additional improvements in the bank's disclosure policy,
particularly consistent with legislation from Congress in the
fiscal year 2004 appropriations process, as well as the
international commitments made at the G-8 at last year's Evian
summit.
In conclusion, Mr. Chairman, the bank has made considerable
progress in establishing the foundation needed to address
governance and corruption in its operations and in the
countries where it works. The bank also has the leadership of
senior management at the forefront of this critical issue. We
cannot afford complacency, however. Continued work must be done
both institutionally and in countries receiving assistance. We
need to update and respond to new knowledge, new technologies,
and new demands and structural problems that are identified.
Going forward, we particularly need to achieve greater
coherence across international institutions on such issues as
public disclosure of debarment listings, procurement,
consultant guidelines, fiduciary standards, and transparency.
The greatest leverage we have is where all the institutions
work together in a public and transparent way.
But most important to building a sustainable anti-
corruption culture in the world is building ownership in
borrowing countries. The goal must be to increase their demand
for good governance so that they are accountable to their own
citizens. Mr. Chairman, the United States is committed to the
full scope of this effort and we will continue to exercise our
leadership and influence in this vital cause.
Thank you.
[The prepared statement of Ms. Brookins follows:]
Prepared Statement of Carole Brookins
ANTI-CORRUPTION EFFORTS OF THE MDBS
Mr. Chairman, Members of the Committee, I welcome your invitation
to come and speak with the Committee today on a subject which is
fundamental to economic development and poverty reduction. Improving
governance, increasing transparency and combating corruption are a
major focus of President Bush and our agenda at the World Bank (the
Bank). As the President said when he announced the Millennium Challenge
Account (MCA) on March 14, 2002: ``Money that is not accompanied by
legal and economic reform are often times wasted. In many poor nations,
corruption runs deep . . . When nations refuse to enact sound policies,
progress against poverty is nearly impossible.''
Our Administration's view is well supported by the Bank. In fact,
combating corruption and building good governance have been major
ongoing priorities of the World Bank since 1996. At the most recent
Annual Meeting in Dubai of the World Bank and International Monetary
Fund (September 23, 2003), Bank President Wolfensohn said: ``There is
still too much cronyism and corruption (in the developing countries).
In nearly every country, it is a matter of common knowledge where the
problems are and who is responsible. Frankly, there is not enough bold
and consistent action against corruption, particularly at the higher
levels of influence.''
During my tenure as Executive Director representing the United
States on the Bank's Board, I have seen up front the real impact of the
World Bank on people's lives and opportunities to emerge out of poverty
that good governance supported by the World Bank can make in delivering
textbooks to children in Nairobi, Kenya or building a needed rural road
to a village in Malang, Indonesia. Notwithstanding the compelling
nature of these personal experiences, the question before us today is:
How effective is the Bank in its anti-corruption efforts, thereby
ensuring that its assistance can be delivered effectively and
efficiently to promote economic growth and reduce poverty?
The World Bank continues to be the leader among international
development institutions in a broad range of country-based initiatives
to strengthen governance, build effective local institutions and
increase transparency. These three components are the infrastructure
for fighting corruption--both its systemic causes and in specific cases
where it appears. The Bank has built a comprehensive structure that
includes international advocacy, internal controls, analytical/
diagnostic tools, education and training, and country operations. Among
the MDBs, the Bank provides the largest amount of finance to support
good governance programs, lending over $5 billion per year for reforms
to strengthen public sector institutions.
The Bank's anti-corruption infrastructure has performed effectively
in many aspects and in managing many challenges. However, there is more
that could be done to strengthen the system. Our Administration is
directly pursuing ways to get the desired results both internally and
on the ground in countries where the Bank operates. This Committee's
2003 legislation, Section 581 of the FY2004 Consolidated Appropriations
Act, which the Committee (working with Treasury) crafted, is an
important tool for our efforts to enhance accountability and
transparency.
The Bank's mandate is to end poverty in member countries by
strengthening their investment climates in support of jobs and growth,
and by creating local capacity to deliver services to the poor. In many
cases, the Bank's services are in great demand in countries where
governance standards and institutional capacities are lacking. By the
very nature of its mandate, the Bank needs to be involved in these
countries to help improve their governance structures. The challenge is
to establish procedures that successfully mitigate the risks posed by
corruption and effectively deliver on the Bank's mandate. The U.S. is
fully committed to meeting this challenge.
My office has an ambitious agenda with respect to anti-corruption
and transparency efforts. It approaches this issue at three levels. At
the institutional level, we focus on improving the functioning of the
Bank's internal control processes for preventing and responding to
corruption and fraud. At the project level, we focus on encouraging the
Bank to conduct analysis and design projects and lending policies that
help to reduce opportunities for corruption and ensure that Bank funds
will be well spent. At the country level, my office is a driving force
to increase transparency and disclosure of Bank operations and
anaylsis.
Institutional Efforts
As a major provider of development expertise and funding, the Bank
recognizes that it must lead by example. Therefore, the World Bank has
established systems to ensure institutional integrity, accountability
and the rigorous investigation and resolution of cases involving fraud
and corruption.
In November 2000, the World Bank created the Department of
Institutional Integrity (INT) out of two preexisting offices tasked
with combating corruption. The INT has played an important role in
investigating allegations of misconduct by firms, individuals, and Bank
staff. INT also supports training for Bank staff to identify ways to
detect and deter fraud and corruption in Bank operations. In order to
be proactive, anti-fraud and corruption training is provided by INT to
all new Bank operations staff as part of their introductory training.
The Bank has a hotline (1-800-831-0463) where the public or staff can
report incidents of corruption or other inappropriate practices.
Whistleblower protection is ensured and complaints may be made
annonomously or confidentially.
The Bank has instituted several reforms that attempt to eliminate
conflicts of interests and any possible corrupt practices among its
staff. In 2003, the Bank announced the strengthening of its financial
disclosure obligations for senior staff. All of the Bank's senior
managers and Board members are now required to provide an annual
statement listing their financial interests and those of their
immediate families.
The Bank's Internal Auditing Department (IAD) guides World Bank
management in establishing and maintaining strong internal controls and
risk management procedures. IAD performs audits of the internal
controls of business processes to assess their integrity, and provides
advice on the design, implementation, and operation of internal control
systems. In 1997, a special unit within IAD was created specifically to
review all allegations and guard against fraud or corruption within the
World Bank Group. This group works with an Oversight Committee Against
Fraud and Corruption.
The Bank has taken formal steps to review its internal controls.
Beginning in 1995, the Bank adopted the internationally recognized
internal control framework known as COSO (Committee on Sponsoring
Organizations). More recently, as part of Bank management's annual
assessment of internal controls, management and the independent auditor
provide letters regarding the adequacy of internal controls over
external financial reporting. The two letters are published with the
financial statements in the Bank's annual report.
In the area of accountability the World Bank has two key
institutions, the Operations and Evaluation Department (OED) and its
equivalents at the IFC and MIGA (OEG and OEU) and the Quality
Assessment Group (QAG). Established in 1973, the Operations Evaluation
Department (OED) is independent of management and reports directly to
the Bank's Board of Executive Directors. OED evaluates the
effectiveness of the Bank's operations at the project, sector, and
country level, and assesses its lasting contribution to a country's
overall development. Quality Assurance Group (QAG) was created in 1996
with the express purpose of improving the quality of Bank output within
the broad context of alleviating poverty and achieving development
impacts. QAG's mandate is to increase management and staff
accountability by conducting real-time assessments of the quality of
the Bank's portfolio under implementation as well as the quality of the
initial formulation of projects and programs.
A related unit, The Quality Assurance and Compliance Unit (QACU)
was established in 2001 as part of the World Bank's Environmentally and
Socially Sustainable Development Vice Presidency. QACU ensures that
safeguard policies are implemented consistently across the regions, and
gives advice on compliance with the safeguard policies in projects.
Safeguard coordinators, with dedicated funding, are appointed in each
region to oversee project compliance with the policies and assure that
the proper steps have been taken to avoid or mitigate negative impacts.
Project-Level Efforts
The World Bank utilizes a number of effective tools to mitigate the
risk of corruption in designing projects, as well as mechanisms to
address instances when it finds that corrupt practices have occurred in
the course of project implementation.
First, the Bank has 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, the importance of transparency in the
procurement process, and 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 relevant funding.
Related to this, the Bank has actively enforced its administrative
sanctions policy. Under this policy, the Bank debars firms and
individuals from participating in any further Bank, or Bank-financed,
projects if they are determined to have engaged in corrupt, fraudulent,
collusive, or coercive practices in competing for, or in executing, a
Bank contract. More than 180 companies and individuals have been
debarred from doing business with the Bank, either temporarily or
permanently. In addition, the World Bank refers matters to national
justice officials for prosecution in cases when its internal compliance
unit uncovers evidence that laws have been broken. The Bank makes the
list of the debarred firms and individuals publicly available on its
website. This illustrates the strong commitment the Bank has to
eliminating corruption at the project-level, as well as the financial
and reputational costs to the private sector of engaging in corrupt or
non-compliant activities.
In 1993, the World Bank created the Inspection Panel as an
independent forum to private citizens who believe that they have been
or could be directly harmed by a project financed by the World Bank.
Twenty-seven formal requests have been received since Inspection Panel
operations began in September 1994. Panel reports are publicly
available on the Bank's website. The IFC, the Bank's private sector
institution, and MIGA have a Compliance Advisor/Ombudsman whose role is
three fold: (1) To advise and assist IFC/MIGA to address complaints by
people directly impacted by projects in a manner that is fair,
objective and constructive, (2) To oversee compliance audits of IFC/
MIGA, overall environmental and social performance, and specific
projects, and (3) To provide independent advice to the President and
management on specific projects as well as broader environmental and
social policies, guidelines, procedures and resources.
The IFC has also been crucial in developing the Equator Principles
that were adopted by ten leading banks from seven countries announced
on June 4, 2003. The Equator Principles are a voluntary set of
guidelines for managing social and environmental issues related to the
financing of development projects that are based on the policies and
guidelines of the World Bank and the IFC. Together, these banks
represent approximately 70% of the project loan syndication market
globally. In adopting the Equator Principles, a bank undertakes to
provide loans only to those projects whose sponsors can demonstrate, to
the satisfaction of the bank, their ability and willingness to comply
with comprehensive processes aimed at ensuring that projects are
developed in a socially responsible manner and according to sound
environmental management practices.
However, more work is needed to address project-level concerns.
Currently, the U.S. is pushing for the Bank to adopt a more systematic
approach to measuring project results. This will facilitate a proactive
examination early and regularly in the project life-cycle of whether
Bank projects are meeting their objectives. Such examination can be a
useful tool in identifying if corruption is playing a role.
Anti-Corruption Efforts at the Country Level
As mentioned above, the World Bank provides over $5 billion per
year to help countries reform and strengthen governance measures that
prevent and punish corruption. Numerous examples of these programs can
be found in the annual report that the U.S. Treasury provides to
Congress on anti-corruption actions taken by countries as a result of
MDB assistance. They include programs that promote a wide range of
judicial, fiscal, procurement and regulatory reform.
The World Bank and other IFIs have intensified efforts to assist
countries to improve the quality of public expenditures. The Bank has
increased assessment of the content and overall efficiency of public
expenditures with the help of Public Expenditure Reviews (PERs),
Country Financial Accountability Assessments (CFAAs), and Country
Procurement Assessment Reports (CPARs). Expenditure Tracking
Assessments for Highly Indebted Poor Countries (HIPCs) have also been
used to evaluate budget formulation, execution and reporting in twenty-
four HIPCs over the last several years. My office is pushing hard to
get the Bank to conduct PERs, CPARs, and CFAAs in all borrowing
countries and follow up these assessments with technical assistance and
projects that address the weaknesses identified. This is particularly
necessary in countries that will be receiving adjustment lending funds
or direct budget support.
Another important Bank diagnostic is the Investment Climate
Assessment (ICAs), which attempts to systematically analyze conditions
for private investment and enterprise development in World Bank
countries. These assessments examine the factors constraining market
activity, in particular, the weaknesses in a country's legal,
regulatory, and institutional framework. As a result, ICAs are a useful
tool in identifying those areas where country reforms could have the
greatest impact in stimulating private sector activity and reducing
official corruption.
The World Bank has also been a leader in the research and analysis
of corruption. Particularly notable is the work of the World Bank
Institute (WBI) which has developed new approaches to measuring
corruption and assessing its monetary and developmental impact. The
World Bank has joined with some of the very civil society groups
represented on one of today's panels--Transparency International--to
co-host an anti-corruption workshop highlighting the challenges in
overcoming vested interests against reform. Through this and similar
conferences the Bank is creating a frank dialogue about the roots of
corruption in the hope of building a stronger social consensus on
values and ethics in borrowing member countries.
The Bank's commitment to governance and fighting corruption is
further illustrated by the way in which International Development
Association (IDA) resources are allocated to the seventy-seven
recipient countries, which include the world's poorest nations.
Governance is a major factor in the IDA performance-based allocation
system, which the Bank utilizes on an annual basis to determine the
amount of resources countries are eligible to receive. Consequently,
countries that improve governance and efforts to combat corruption are
rewarded with additional IDA resources, while those whose governance
scores decline receive fewer resources. As a result, the Bank has had
many requests from countries for advice and assistance in addressing
issues that would improve their governance scores.
Another key element in the battle against corruption is
transparency, where the Bank has been at the forefront in terms of
disclosure of documents and consultation with civil society. The Bank
has frequently updated its information disclosure policy to establish
and institute best practices among the MDBs. My office continues to
work with the Board and Management to ensure that further transparency
is achieved in the context of additional improvements to the Bank's
disclosure policy, consistent with legislation from Congress in the
FY04 appropriations process as well as international commitments by the
G-8 at last year's summit in Evian, France.
CONCLUSION
The Bank has made considerable progress in establishing the
foundation required to address governance and corruption in its
operations and in the countries where it works. The Bank also has the
leadership of senior management at the forefront on this critical
issue. We cannot afford complacency however; continued effort and
vigilance are required, both institutionally and in countries receiving
assistance. Among the challenges going forward will be to achieve
greater coherence across international institutions on issues like
debarment, procurement and consultant guidelines, fiduciary standards
and transparency. Most important to building a sustainable anti-
corruption culture is building ownership in borrowing countries. The
goal must be to increase their demand for good governance, so that they
are accountable to their own citizens, who will then be better able to
benefit directly from their own country's development. Mr. Chairman,
the U.S. is committed to the full scope of this effort and we will
continue to exercise our leadership and influence in this vital cause.
The Chairman. Well, thank you very much, Ms. Brookins. I
very much appreciate your emphasis on transparency and the
building of a culture in countries all over the world. As you
know, just this week, the President announced 16 countries that
will be a part of the Millennium Challenge situation, in which
good governance and some of the items that we are talking about
today are very much paramount, in terms of taxpayer funds that
will go in foreign assistance on our own. The parallel work at
the World Bank is much appreciated.
Mr. Morales.
STATEMENT OF HECTOR MORALES, ALTERNATE U.S. EXECUTIVE DIRECTOR,
INTER-AMERICAN DEVELOPMENT BANK
Mr. Morales. Thank you, Mr. Chairman. Senator Hagel, thank
you for your opening remarks.
I am extremely pleased to be here to discuss the efforts of
the Inter-American Development Bank to address corruption and
increase transparency. Although I have not been in my current
position for very long, I hope that I can answer the
committee's questions and shed light on this important area of
the IDB's work.
I would like to focus my remarks today on three levels of
anti-corruption efforts that the IDB has undertaken, at the
institutional level, at the project level, and at the country
level.
With regard to institutional, although much remains to be
done, the IDB has made significant strides toward creating an
institutional culture that promotes transparency. A new
information disclosure policy, strongly advocated by this chair
and adopted by the bank late last year, requires that
information concerning the bank and its activities be made
public in the absence of a compelling reason for
confidentiality and that such information also be made
available in the bank's member countries.
The policy also features mandates for release of the
minutes of the executive board meetings and for an annual
review of implementation to measure how effective its projects
have been.
The bank has also created an Office of Institutional
Integrity and gave it the responsibility of pursuing
allegations of impropriety through committees on oversight,
fraud, and corruption, conduct review, and ethics. Allegations
may be reported anonymously via a toll-free hotline and
informants receive full whistleblower protection.
The IDB also has an independent mechanism to investigate
allegations that the bank has failed to correctly apply its own
operational policies.
The U.S. chair is also championing reform of the IDB's
corporate and project procurement systems, including the
evaluation of both systems by outside consultants. When this
review is completed, I will work diligently with IDB management
and my fellow members of the board of directors to push for
implementation of those recommendations that are consistent
with the best practices at other MDBs.
Going forward, I see two areas of focus to improve
institutional transparency at the IDB. First, increased
disclosure of financial information and creation of an
independent audit committee to identify and eliminate conflicts
of interest. Second, an adoption of a policy of debarment for
corruption to which firms participating in IDB-financed
projects must adhere.
With regard to projects financed by the IDB, the bank's
independent evaluation office recently completed a study of its
system of project review and found that not all supervision
requirements are being met on a regular basis and that there is
no centralized authority responsible for monitoring compliance.
The U.S. chair has urged the management to address flaws in the
current system immediately by reducing the number of reporting
requirements, while at the same time strengthening the
consistency and the quality of the reporting.
Another fundamental area of reform is the project
procurement system. This chair has urged IDB management to
adopt the guidelines issued by the working group of the IFI
heads of procurement so that that there are uniform policies
and procedures at all MDBs. This includes the mandatory use of
standardized bidding documents and a project procurement policy
that is available to the public.
With respect to the private sector, the IDB group's new
development strategy will promote best practices for corporate
governance and social responsibility in line with the IFC's
Equator Principles. The United States has strongly advocated
that the MDB work exclusively with private sector firms that
are committed to good corporate governance and to the use of
environmental and social safeguards. I am disappointed more
U.S. firms do not participate in IDB project procurement and I
hope that by creating a more transparent mechanism, we can
encourage American companies to become more actively involved
in the bank's work.
With regard to efforts at the country level, the IDB's
institutional mandate includes encouragement of governmental
reforms to foster commerce and productivity. The IDB, through
its long relationship with the countries in the region, is well
placed to dig deeply into governmental policies and structures
and to improve these governments' use of the IDB resources for
the benefit of their societies.
In this same area, the IDB has created its business climate
initiative which draws on the work of the World Bank and other
multilateral institutions to assess weaknesses in the business
climates of various countries in the region and proposes
programs to target those weaknesses.
In conclusion, I am encouraged that the pace and number of
institutional reforms to combat corruption have accelerated
recently and I am hopeful that a positive synergy has emerged.
Because the bank is a leader in the region, the United States
is committed to seeing that this leadership is utilized to send
a strong signal of the importance of anti-corruption and
transparency and to seeing that these reforms have exponential
effects.
Mr. Chairman, thank you.
[The prepared statement of Mr. Morales follows:]
Prepared Statement of Hector Morales
ANTI-CORRUPTION EFFORTS OF THE MDBS
Mr. Chairman, members of the Committee, I am extremely pleased to
be here today to discuss efforts of the Inter-American Development Bank
to address corruption and increase transparency. Although I have not
been in my current position for very long, I hope I can answer the
Committee's questions and shed light on how the IDB operates.
One of my primary concerns is development effectiveness; by
effectiveness I mean that the development efforts of the IDB can only
have their intended impact if projects and policies are implemented
transparently and free of corruption from inception to completion. When
the bank provides loans and technical assistance grants to the most
vulnerable populations of the Western Hemisphere, guaranteeing the
efficacy of those resources is critical. While multilateral development
banks are accountable to all shareholders, they can be important
vehicles to transmit U.S. policy interests.
I would like to focus my remarks today on three levels of anti-
corruption efforts by the IDB: within the institution, by project, and
by country, and provide you with a U.S. view of the Bank's progress in
each of these areas. The IDB has accelerated its progress in these
areas recently, but still has much work to do. The Office of the U.S.
Executive Director has been, and will continue to be, a strong advocate
for reform at the IDB. I am aware of the considerable challenges facing
the IDB in the area of anti-corruption. My focus in the U.S. Executive
Director's Office will continue to be on critical areas that impact the
Bank's core development mandates. Among my current priorities are: an
overhaul of the IDB's corporate and country project procurement
systems, creation of a separate audit committee of the Board and
adoption and implementation of an internationally recognized framework
of internal controls, and further work on disclosure and transparency
in IDB projects and policies.
Institutional Efforts
The IDB has made significant strides with respect to institutional
anti-corruption issues. Progress is being made on creating an
institutional culture which promotes transparency. The new Information
Disclosure policy, adopted late last year, contains a strong statement
on the presumption of disclosure. As a result of strong U.S. advocacy,
the policy, including release of the Minutes of Executive Board
meetings, advances the IDB beyond many of the standards in other MDBs
and includes several of the objectives of the transparency language in
Section 581 of the FY 2004 Appropriations Legislation on which the
Treasury Department worked closely with this Committee. As part of the
IDB policy, an annual review of implementation will be conducted. I
will use this opportunity to advocate for additional measures to
enhance disclosure.
As you may know, President Iglesias has made a strong commitment to
fight against corruption within the Bank and in the Bank's member
countries. To strengthen his pledge to fight corruption at the IDB, the
Office of Institutional Integrity was created in 2003, and is now
responsible for pursuing allegations of impropriety through three
different Bank committees--the Oversight Committee on Fraud and
Corruption, the Conduct Review Committee and the Ethics Committee.
Allegations may be reported anonymously, via a toll-free hotline, with
full whistleblower protections afforded as the result of a new policy
in 2003. Semimonthly reports on the activities of the Oversight
Committee on Fraud and Corruption are available on the IDB's public
website. Since its inception in April 2002 through April of this year,
183 allegations have been received, averaging 7 per month. The OCFC/OII
has opened 92 investigations during the past two years. Also in 2003,
the Board of Executive Directors adopted for the first time its own
Code of Ethics as distinct from the Code of Ethics for Bank Management.
These are important steps, but they need to be strengthened by
encouraging participants in IDB projects to come forward with
allegations, and for those allegations to be vigorously prosecuted.
There are two additional transparency-enhancing mechanisms at the
IDB which I would like to highlight: the inspection panel and the
Office of Oversight and Evaluation. The IDB's independent inspection
mechanism was established in 1994 as part of the implementation of the
Eighth General Increases in Resources of the Bank. During the
negotiations for the Eighth Replenishment, the Governors of the Bank
expressed a desire to increase the transparency, accountability and
effectiveness of the Bank's performance by the introduction of an
inspection function, to be performed independently of Management, which
would investigate allegations by affected parties that the Bank had
failed to apply correctly its own operational policies. To date there
have been five requests for inspections and information on the
activities of the inspection mechanism are available on the Bank's
website.
The Office of Evaluation and Oversight reports directly to the
Board of Directors and is independent of Bank management. The office
undertakes independent and systematic evaluations of the Bank's
strategies, policies, programs, activities, delivery support functions
and systems. The evaluation office provides the Board of Directors with
a vehicle for obtaining independent views of the effectiveness of the
Bank's operations, policies, and programs. The Auditor General performs
audits, reviews, and investigations designed to help assure management
of the adequacy, effectiveness and efficiency of the Bank's internal
controls and resource utilization.
The U.S. Chair has been a strong advocate for reform of the IDB's
corporate and project procurement systems. We pushed for a review of
both systems by external consultants and management is expected to
recommend concrete reforms in the near future. The U.S. will continue
to drive the agenda on this issue with the objective of creating a
best-practice, transparent and accountable project procurement system
at the IDB which is fully harmonized with that of the other MDBs.
Going forward, in addition to Section 581 reforms, I see three
areas of focus to improve institutional transparency efforts at the
IDB: mandatory disclosure of financial information for IDB employees,
creation of an audit committee of the Board, and adoption and
implementation of an internationally recognized framework of internal
controls. To avoid conflicts of interest at the staff level, financial
disclosure is a key component. The establishment of an audit committee
and the adoption of a formal internal controls framework are consistent
with U.S. policy.
IDB Financed Projects
To address corruption in the execution of bank-financed projects,
the IDB has a supervision system of reviews and evaluations during the
project cycle. The IDB's independent evaluation office recently
completed a study of this system and found it to be deficient. Bank-
wide, not all supervision requirements are met on a consistent basis,
and there is no centralized authority in the Bank responsible for
monitoring compliance on all of the supervision instruments. The U.S.
Chair was supportive of the evaluation's recommendations for reform,
and has urged the Management to immediately address flaws in the
current system. By reducing the number of reporting requirements to key
reports at the beginning, mid-term, and end of a project's
implementation and at the same time strengthening the consistency and
quality of reporting, we expect to see improved project supervision. I
intend to hold IDB management accountable for addressing the weaknesses
identified by the evaluation.
Another fundamental area where the IDB can play a role in improving
governance at the project level is through reform of the project
procurement system. This Chair has urged the IDB to work with the other
MDBs to agree on a best-practice set of procurement and consultant
guidelines, standard documents and processes. Updated project
procurement and consultants policies must be available to the public
and referenced in all IDB investment loan agreements with Borrowers and
must mandate the use of appropriate standard documents.
With respect to the private sector, the IDB Group's new private
sector development strategy will promote best practices for corporate
governance and social responsibility. The U.S. has been a strong
advocate of the MDBs working exclusively with those private sector
firms committed to corporate governance. We have also encouraged the
IDB to promote capacity building and best-practice awareness among
smaller firms so that they might improve competitiveness along with
governance and safeguards.
The IDB representation in each of the borrowing member countries is
a key factor in improving project performance. The IDB needs to focus
additional energy and resources, if necessary, on properly staffing and
training the country offices so that they are capable of providing
project supervision, exercising fiduciary oversight over procurement
processes, and reporting back to the Bank when participants in local
projects are unsatisfied with any of the fiduciary or governance
aspects of IDB projects.
Anti-Corruption Efforts at the Country Level
I would like to highlight to the Committee that the Treasury
Department prepares an annual report on the anti-corruption efforts of
all of the Multilateral Development Banks. The report focuses on the
country impact of MDB actions to improve governance.
The IDB's institutional strategy explicitly prioritizes
modernization of the state as an area of Bank action. Before projects
are developed, the country strategy which defines IDB's engagement will
consider anti-corruption, governance, and institutional strengthening
in the strategy. Public sector reform and modernization of public
administration are key components in virtually every country strategy
paper the IDB adopts.
In 2003, the IDB financed 19 projects for a total of $772 million
for public sector reform and modernization. These projects ranged from
strengthening internal controls in Brazil's Federal Court of Accounts
to promoting fiscal reform in Bolivia and Peru. In 2004, the IDB has
financed several projects of note: $7.8 million for capacity building
of municipal governments in Panama; $25 million in concessional finance
to Honduras to improve bank supervision; and a grant of $150,000 to
Paraguay to improve management between the Executive and Legislative
branches.
Through the Multilateral Investment Fund, the IDB also makes
extensive use of grant financing for demonstration projects to show the
benefits of politically difficult commitments that benefit the private
sector, such as strengthening auditing and accounting standards in the
Caribbean, and developing benchmarks to combat money laundering across
the region. The MIF focuses on innovative private sector projects with
large demonstration effects. Recent areas of activity include:
accounting and auditing standards, financial sector reform and
supervision, and improving regulatory frameworks.
To encourage market forces to provide a strong positive
demonstration effect, the IDB has created its Business Climate
Initiative, which will draw on the work of the World Bank and other
multilateral institutions. The initiative will fund a diagnostic
assessment of the weaknesses in country business climates, and then
propose a program to target these weaknesses.
Results from early governance and anti-corruption elements of
larger loans have shown that conditions for disbursement related to
anti-corruption efforts such as sub-national financial reporting and
investigation of financial crimes have largely been met. We need to
capitalize on these incentive mechanisms and enhance the Bank's ability
to achieve improvements in anti-corruption activities.
In my view, a critical area for further reform at the country level
is building the capacity of project executing agencies in the country,
usually Ministries or coordinating bodies of the executive branch.
Executing agencies are subject to tremendous political pressures and a
governing culture which often does not lend itself to full
transparency. The IDB, through its long relationship with countries, is
well-placed to dig deeper into the institutional culture and improve
the government's use of IDB resources for the benefit of civil society.
Conclusion
In conclusion, while the pace of institutional reforms to combat
corruption has accelerated recently, I recognize that the IDB still has
much work to do. Because the bank is a leader in the region, a strong
signal of the importance of anti-corruption and transparency
initiatives in the Bank's institutional culture will have exponential
effects in the countries of the region. This is an aggressive agenda,
but as the largest shareholder in the Bank, the U.S. is working
aggressively on the need for further reform.
In his address to the IDB Board of Executive Directors last July,
Secretary Snow remarked on the critical need to improve the investment
climate in Latin America, saying that ``capital is a coward'' and only
goes to places where it feels adequately protected. It is our job to
enhance anti-corruption and transparency activities at the IDB to
create the conditions for capital to flourish and for our development
assistance to be effective.
The Chairman. Well, thank you very much, Mr. Morales, for
that excellent report of work at the bank.
We will have a period of questioning now and we will limit
ourselves to 10 minutes per Senator. Then we will have another
round, if required, to complete our questioning.
Before I begin my questioning, I want to mention that in
our audience today are women from Indiana. They are from the
Women of Excellence series. This is a program that encourages
outstanding leaders in Indiana to become more effective in
public leadership in our State and in our Nation. We are proud
of them, and we are especially pleased they could join this
hearing this morning.
Let me begin by asking two questions about employees of
your banks. I think that there is some recognition that, given
the international quality of this lending, at some stage the
country that receives the money is most responsible for the
outcome. Employees of the banks cannot always foray into a
sovereign country to pursue all of the aspects under
consideration. On the other hand, the design of the loan, the
criteria, the basis on which this money is disbursed are all
factors that fall under the responsibility of employees of your
institutions.
Is the quality of these loans an important factor in terms
of staff evaluations? In other words, as people's careers
proceed through the banks, is there some scrutiny of what kind
of a batting average they have, or what kind of loans were
made, how well designed they were, and their outcomes as
criteria for how well they succeed in those careers? Ms.
Brookins, do you have a comment on that?
Ms. Brookins. Mr. Chairman, first of all, I would like to
join your welcome to the women from Indiana. I am from Indiana.
I am a constituent of yours.
The Chairman. Yes, indeed.
Ms. Brookins. So I have met in the past in a former life
with the leadership groups from Indiana. So I want to also
personally welcome them.
The Chairman. That makes your testimony especially welcome
on this occasion.
Ms. Brookins. I think the issue of quality of loans and
whether there is an incentive for bank staff to push out money
and not be responsible for results is always an issue. In any
situation with a financial institution the incentive must be to
have quality loans which will be repaid and will be managed
properly. And it is particularly an issue with development
institutions where this money is so precious to the people who
are receiving it.
There has been, I think, in recent years much more focus on
getting a results agenda going and the United States has been
at the forefront of this. The bank has begun to implement a
major results framework, in fact, designing loans from the very
outset with impacts, outputs, outcomes, and with the type of
interim indicators that are necessary. I think there still are
some areas where people will try to get loans through for their
clients, for the countries, but I think the bank is doing a
great deal to change incentives, and we, the United States,
have been at the forefront of moving in that direction. I agree
with you totally that this is the core of the issue of
effectiveness.
The Chairman. Given the extraordinary needs, just looking
at this in a humanitarian way, a country comes along, and says,
we have a lot of people that are near starvation. We very badly
need this money for a particular humanitarian project. It could
make an enormous difference for us. Now, the bank employees
take a look at this situation. Here is a country that appears
to have a long history of corruption. Its leadership siphons
off money routinely. This is not only public knowledge, but it
is almost respected in the culture of the country. How do you
approach a situation of that variety?
Clearly, the development and humanitarian aspects, are
enormous. There is some desire to push money toward the needy,
but clearly you would have to be very hard-hearted not to
understand that these folks who happen to be citizens, poor
people in such a country, are between a rock and a hard place,
with corrupt leadership, and poverty besides. How do you deal
with that?
Ms. Brookins. Well, I think there are two to three
different responses I would like to make to you because that is
at the heart of the bank's work, which is to relieve poverty
and certainly to address really chronic poverty conditions for
people.
First of all, that was the purpose of the whole
performance-based allocation system of IDA, where the United
States took leadership beginning with IDA 12. We are now
beginning the negotiations for IDA 14. So countries who do not
perform well, who do not respond to their citizens properly,
with governance being a key component, do not receive as much
money. So if they are not receiving the money from IDA, be it
in the form of grants or credits, which are highly
concessional, they feel the pinch at the national level. So
that is one way of controlling the amount of money going into
less favorable or perceived corrupt environments.
The second area is the problem in terms of how to deal with
areas in terms of post-conflict or where there has been an
emergency or a crisis, in which case money can go in for
preventing starvation or for particular issues like HIV/AIDS,
but it is done in a very controlled way with a positive list of
imports that the money can be paid out for. So it is controlled
in that way to go for those purposes.
The other way, which is a deeper issue which I think you
raised, is what do you do where your overall national
environment is not conducive to clean government? The bank has
found that there are many ways to go and get involved at the
community level, with sub-national governments, or putting
money through with NGOs involved and monitoring it so the money
actually goes to those people affected.
I have been in Indonesia and I have been in Kenya over the
past several months. In Indonesia I have seen what happens with
a community project where half of the funds that the bank is
lending are only going, in the past few years, to those
community projects and good governance being taught, because
the money that is being lent is posted right on the project
wall. You have a committee of civil society and government
people at that level. So that if there's a project of $12,000
or $14,000 to build a feeder road from that farm community, the
people know it is being spent and it is tracked and there are
criminal corruption procedures if it is not being spent
properly. These funds are given to villages based on
competition. So if there is a corrupt village, they cannot
compete in the future for any funding. So this is beginning to
work.
In Kenya or Uganda they are posting the amount of money
that is supposed to be going into the school on the wall of the
school, and there is a committee of local authorities.
I did not mean to go on so long, but I am pretty passionate
about this and I know that you are also. I think that the issue
for the bank is identifying where can we work, how can we work,
and to tailor the interventions that the U.S. sees are
appropriate for the bank and conveys this to bank authorities
as to where the bank can be effective in getting funds to
people who need it.
The Chairman. I appreciate your detail, because the common
impression is that these loans are made to corrupt officials at
a central spot. What you are pointing out is that the
sophistication of this lending now comes down through NGOs or
through specific village councils with a sophisticated level of
accountability. That is a very different impression than I
think is commonly held.
Let me ask about this problem of staff immunity.
Essentially, immunity is conferred upon World Bank employees,
for example, from prosecution by various countries. This is a
common circumstance in international dealings, to ensure that
there will not be discrimination or intimidation by
participating countries that have all sorts of political
systems.
What is the impact upon performance and behavior? In the
first round of questions I was asking, we got into the batting
average of how well these loans do. If there cannot be
prosecution by all sorts of governments that are involved, how
do you try to mitigate the problems that this might cause, in
countries where people have this sense of immunity?
Ms. Brookins. Well, I think the immunity for employees
arises from the founding documents of the institution, of the
articles of agreement, and all officers and employees of the
bank shall be immune from legal process with respect to acts
performed by them in their official capacity except when the
bank waives this immunity. So I do not know all the legal
details of this, but I would certainly be happy to get back to
you and also ask the bank and ask the Treasury legal counsel to
give you any indication of where these waivers have applied.
[At the time of publication no information had been
forwarded.]
The Chairman. That would be important to have in our
committee record. There is some anecdotal evidence that these
investigations start with maybe tens of people, say, out of
10,000, but then they sort of simmer down, and cases are
dismissed, and ultimately almost no one is found culpable. I
would like to get some track record of how your investigations
go, if there are internal controls, leaving aside prosecution
by sovereign nations. How is wrongdoing met?
Ms. Brookins. There are internal controls and the bank has
conducted and very definitely does enforce these complaints--
the hotline is very important also in terms of potential staff
abuse.
The Chairman. What is the hotline?
Ms. Brookins. The hotline is the 1-800 number, 831-0463,
where the public or staff can report incidents of corruption or
other inappropriate policies or inappropriate practices. I
think what is important, as I mentioned before, is that the
number of cases being reported or complaints being reported by
staff has risen from 20 percent of all complaints to the
Department of Institutional Integrity up to 50 percent, and
this is because of the proactive work of the bank in training
both at the institutional level at the bank in Washington, but
also in the field staff, training field staff to identify
problems not just of staff but of outside procurement issues.
There have been I understand--and I can check these numbers
for you, Mr. Chairman--27 cases that have come to the
Department of Institutional Integrity regarding alleged staff
misconduct, of which 8 members of staff have been terminated
from the institution. And one member of staff was severely
reprimanded because that staff member had been approached by
someone to take a bribe, had not taken it, but had not reported
it.
So I think that the internal controls of the institution
are extraordinarily important to the United States and we, the
United States, very much want to have a culture of zero
tolerance, particularly of bank staff. If the staff of the
World Bank is not fully compliant with zero tolerance, this is
a very serious problem in terms of what the World Bank is
expecting of the borrowing countries.
The Chairman. Senator Hagel.
Senator Hagel. Mr. Chairman, thank you.
Mr. Chairman, just on a personal note, it is always good,
reassuring to have a room full of Hoosiers with us.
I do not know if there are any Cornhuskers present. But we
always appreciate the chairman's hospitality. He is very
gracious with asking various groups from around the country to
come and be part of these hearings and I think it is important
that these various individuals, leaders of communities and
States have an opportunity to get some sense of what we do
here. We do not allow much criticism, however. That is part of
the contract.
Thank you both for coming before us this morning and for
what you do. Give your colleagues our regards and pass on our
thanks as well.
Ms. Brookins, you mentioned in your statement that your
office--I am reading from your statement--``has an ambitious
agenda with respect to anti-corruption and transparency efforts
and approaches this issue at three levels.'' And you define
those three levels, starting with institutional efforts. If I
could read one of your last points in that area. ``In 1997, a
special unit within IAD was created specifically to review all
allegations and guard against fraud or corruption within the
World Bank Group. This group works with an oversight committee
against fraud and corruption.''
My question is, is there an outside, independent oversight
effort, an outside, independent oversight board, or do you use
oversight from the inside?
Ms. Brookins. We have our own oversight committee, but we
will bring outside attorneys or others, as needed, to conduct
the investigations conducted by the bank units or to deal with
specific issues when it is needed. I can get back to you with
details of when they have been called in or under what
conditions.
Senator Hagel. But not a regular system or a regular
oversight body that you would use.
Ms. Brookins. No.
Senator Hagel. Staying in that general universe, in your
response to one of Chairman Lugar's questions, you were talking
about results criteria developed by the bank, established by
internal guidelines. Again, that results criteria that you were
talking about, is that only internally driven by internal
guidelines or, again, is there any outside input? For example,
NGOs, other institutions. Do you ask them for their input into
this results criteria?
Ms. Brookins. There is regular consultation and discussion
with members of civil society and with other organizations like
Transparency International. In fact, on governance and
corruption, the World Bank actually sponsored a meeting with
Transparency International. The bank also has the Office of
Operations and Evaluation Department which is the bank's audit
group that reports directly to the board on evaluating the
effectiveness of the bank's operations at the project, sector,
and country level and assesses the contribution of whether
these projects have been effective, whether the strategy in a
certain area, like agricultural or rural development, is
effective. As the bank calls it, OED, the Operations and
Evaluation Department does use outside experts and does call
them in and has independent review bodies, and these are
presented then to the board and to management.
Senator Hagel. Thank you.
Following in this same area here under the second group of
priorities that you listed, project level efforts, a specific
question. You mentioned related to this, the bank has actively
enforced its administrative sanctions policy, and then you
develop that and other points in the following paragraph.
Here is my question. Is there a recovery mechanism for
money lost at the World Bank? You spend a lot of time talking
about what you are trying to do to prevent it, to enhance
transparency, good governance. But go back and reflect on how
do you recover or can you or what do you do about that?
Ms. Brookins. Yes, there is. On an investment loan--and I
will refer to legal counsel to clarify it and give you the
exact terms on this, but as I understand it, when there has
been a misprocurement on an investment loan--let us say there
is a $50 million loan and it is discovered that the contractor
has not done the right things with the road and that is $2
million or $3 million or $5 million or $10 million--it is the
policy of the bank then, if it declares a misprocurement, to
cancel that portion of the loan allocated to the goods and
works that have been misprocured. So that is taken out of that
country's money which has been lent to it for that loan. So it
is deducted from that. So the money, in a sense, is taken back
by the bank from the country.
Senator Hagel. And that is a well-established process,
mechanism.
Ms. Brookins. Yes, it is. It is in the bank's legal
guidelines and I would be happy to get a copy of that to you.
Senator Hagel. Thank you.
You mentioned later on in the testimony--I quote from your
testimony--``currently the U.S. is pushing for the bank to
adopt a more systematic approach to measuring project results.
This will facilitate a proactive examination early and
regularly in the project life cycle of whether bank projects
are meeting their objectives.''
Would you explain that in a little more detail,
specifically the measuring? You referenced measuring project
results. What do you mean by that and how do you do that?
Ms. Brookins. That is a very, very good question, Senator.
In many cases--I think that Senator Lugar alluded to this
earlier--money was being lent to countries in some cases
because it let us lend money. We focus on whether the bank is
spending the money effectively and whether it is meeting all
our time tables to get the money spent. In some cases the loan
design did not have the kind of outputs and impacts and
outcomes desired. Results are not just whether money is going
in to build schools. As the U.S., we ask: Do we have a baseline
to identify how many children are in school in this village,
how many girls are in school in this village, how many children
over 10 years, how many children have completed a certain
number of years in school?
So these types of data are being put in right in the
beginning of the project cycle so that as you measure it over 1
year or 2 years or 3 years, your interim indicators can tell,
No. 1, are you getting the results that you want. No. 2, if you
are not, is it because the funds are not being properly spent,
or is this village not performing and another city performing
or one school district versus another because you have the data
that you need and you have also set the outcome or the targets
that you want.
This has been particularly important in the IDA 13
replenishment where there are absolutely measurable results
data on measles immunization rates, on primary completion
rates, which are required as part of IDA 13 for the poorest
countries, and the third one is how many days does it take, as
you all understand, to start a business and what is the cost of
starting a business. Are you able to reduce those so that your
private sector, your small and medium enterprises can start up.
So it is getting very specific.
Many of the bank's loans in the past did have outcomes and
impacts; the bank was looking for results, but in many cases
lacked the specificity that we are trying to get built into
that. And the bank has been very enthusiastic in the past 2
years about embracing this type of deeper and richer results
agenda.
Senator Hagel. Thank you.
Let me ask a question for each of you. Mr. Morales, we will
let Ms. Brookins take a rest and we will go to you.
The same question. The chairman referenced the Millennium
Challenge Account program, the Millennium Challenge
Corporation. I think the chairman's points here are very much
on target with each of your testimony this morning and what
your institutions are attempting to do.
My question is explain to me how each of your institutions
intends to, is now working in parallel with MCA because as you
both know, the objectives of MCA are much the same as your
institutions and cut right to the core issues and challenges
and problems.
Mr. Morales.
Mr. Morales. Thank you, Senator.
You are absolutely right. The same goals and initiatives
that MCA has are very much in line with the Inter-American
Bank. Fighting corruption is critical. We want to reward
countries that are implementing the kind of policies that we
know will lead to increased productivity and eventually reduce
poverty.
In terms of outreach, the bank's management--and I have
encouraged bank's management to do this, is to initiate
discussions with MCA to specifically identify how we can work
together. There are three countries, Bolivia, Nicaragua, and
Honduras, that have been mentioned under the MCA designation.
So clearly, we want to make certain that we work very closely
with MCA to align those interests.
Senator Hagel. Thank you.
Ms. Brookins.
Ms. Brookins. That is a great question because much of the
bank's diagnostic or analytical work has gone in to help found
or be part of the core work in terms of identifying who makes
the cut in MCA. So there is work that is being provided by the
banks to MCA in terms of making these determinations, in terms
of tracking countries. I think it has been extraordinarily
valuable and there has been an interaction between the MCA team
from the very beginning and the World Bank in a very
constructive way to see how the bank can be useful.
Most importantly, I think that MCA has created a whole new
higher benchmark for countries. As I mentioned in my earlier
testimony, the performance allocation for IDA and the poorest
countries has been helpful in trying to get countries to better
perform. But setting up this real carrot with MCA of having
access to a really significant amount of money to help your
people under the Millennium Challenge Account funding is just
another example of how the United States has led this move
toward excellence in terms of improving governance and
improving the fight against poverty.
So I think MCA will continue to be strongly related to the
World Bank's work. The bank will work in any way that it can
and my office will facilitate. We will facilitate in any way we
can knowledge or information that helps to strengthen MCA.
Senator Hagel. Thank you. Thank you, each, very much. Mr.
Chairman.
The Chairman. Thank you, Senator Hagel.
Let me ask just one final question of both of you. We have
talked principally today about project loans. You have even
described Ms. Brookins down to the school level or the
community level or what have you. How do we evaluate loans that
are not project loans but really do go to the governments
themselves for dispensing the funds or administration of that?
Can you describe? Are there criteria or methods that you found
are most helpful in that respect?
Ms. Brookins. Well, as you work in the bank, you have a lot
of acronyms, but this term ``fiduciary diagnostics'' is not
exactly an acronym but it sometimes makes me feel like a
doctor. The fiduciary diagnostics the bank conducts with
countries in terms of public expenditure reviews, country
financial accountability assessments, and country procurement
assessment reports. These are all used to look at the country
level to identify where there are weaknesses in terms of
whether a country is ready to have budget support lending or
programmatic lending. The key is to have a certain threshold of
accountability so that money can go into the government budget
directly without having to be accounted for under bank
procurement guidelines and under investment lending
restrictions.
So I think this is a very big issue. It is one that has to
be constantly updated, when we raise the thresholds. There are
these fiduciary controls in place and we take them very
seriously and we, the United States, have been leading the
efforts in the board to make sure that we improve the
thresholds under which countries can be eligible for this type
of direct budget support lending. It is a crucial issue.
The Chairman. You mentioned the term of diagnostics. Does
the bank have a computer program, for example, in which you
plug in various evaluations, much like the credit scores that
average Americans have, and they can phone in, and find out
what their score is? Does that pertain to this?
Ms. Brookins. Yes, absolutely. It includes governance. It
is particularly used, as I said, for allocating funds to IDA
countries who get the highly concessional moneys. But this is
done for every country that is a recipient of bank lending.
The Chairman. That is helpful to know.
Mr. Morales, do you have a further comment on this subject?
Mr. Morales. Mr. Chairman, we at the IDB use a
macroeconomic debt sustainability analysis, and it is a series
of ratios that are evaluated. Obviously, depending on the
country, those ratios may change, but the point is before any
policy based lending or emergency lending is made, there has to
be a program that is in place and sustainable. In fact, with
regard to emergency lending, the bank looks to the fund
programs to make certain that they are in compliance. So
clearly, before any of that type of lending is done, there is a
check that is made.
The Chairman. Thank you.
Senator Hagel, do you have further questions of the
witnesses?
Senator Hagel. One brief question for each of our
witnesses. We have spent the last hour talking about the U.S.
effort to clean up the process, transparency, good governance,
all the other areas that you have spent some time developing.
What about other nations, the other developed nations, senior
nations like the United States who are large contributors to
this effort? Are they putting commensurate efforts into
cleaning up the process, doing the things that you have talked
about? Are they lagging behind? If so, why and who, and what do
we need to do to encourage their efforts? Or are we all on the
same frequency here and working intensely to accomplish your
objectives?
Ms. Brookins. The G-8 at the Evian summit did fully support
disclosure and transparency efforts at the institution. Working
with the other 23 board members and the other 183 countries who
are shareholders of the bank, there has been a very strong
support for anti-corruption efforts and a very strong support
for strengthening bank policies and practices in both the
Committee on Development Effectiveness, and the Audit
Committee. There has not been any indication that we have seen
that there is not a full ownership into this.
There is a recognition, in fact, among many of the
developing countries, who are also represented on the board.
They have to face these issues day in and day out in their
countries and we see very strong support, by and large, from
them as well because they see this as truly impeding their
efforts at improving the lives of the people in their
countries. There may be specific issues where we oftentimes
will want to see more investment lending, some other countries
will want to see more adjustment lending going into budget
support, and we will discuss these and try to build consensus
on it. But I think overall the leadership of the head of the
institution, President Wolfensohn, and his senior management
team and the leadership of the other developed countries is
very unanimous on this.
Senator Hagel. Thank you.
Mr. Morales.
Mr. Morales. Senator, in my experience the environment is
certainly pointed in the right direction. I think an example of
that is the information disclosure policy that was recently
passed. That could not have been passed without strong support.
So clearly there is a message that transparency is important
and corruption only serves to undermine the development
effectiveness of the bank. So I think the trend is in the right
direction.
Having said that, a lot more needs to be done and that is
certainly the charge of this chair and I am making it a
priority.
Senator Hagel. Thank you, Mr. Chairman.
The Chairman. Thank you very much, Senator Hagel.
We thank both of you for your testimony, for your papers,
and for your responses. Please followup on the additional
questions and information that you have indicated you would
supply for the record.
Mr. Morales. Thank you, Mr. Chairman. Thank you, Senator.
The Chairman. The chair would now like to introduce our
second panel. It will be comprised of Dr. Jeffrey Winters,
associate professor, Northwestern University, Evanston,
Illinois; Mr. Manish Bapna, executive director, Bank
Information Center, Washington, DC; Ms. Nancy Zucker Boswell,
managing director, Transparency International USA, Washington,
DC; and Professor Jerome Levinson, distinguished lawyer in
residence, Washington College of Law, American University in
Washington, DC.
I mentioned to the earlier panel that the statements you
have written will be placed in the record in full. My hope is
that you might be able to summarize your testimony in 10
minutes, more or less. We will then proceed with questions, as
we did with the first panel.
I will ask you to testify in the order that I introduced
you, which would mean, first of all, Dr. Winters, then Mr.
Bapna, Ms. Boswell, and Professor Levinson. Would you please
proceed, Dr. Winters?
STATEMENT OF DR. JEFFREY A. WINTERS, ASSOCIATE PROFESSOR,
NORTHWESTERN UNIVERSITY
Dr. Winters. Chairman Lugar, thank you very much. I am
grateful for this opportunity to present the results of nearly
15 years of research on the multilateral development banks, the
matter of corruption, and particularly how the problem is
manifested in the region of Southeast Asia, my geographical
area of specialization.
I am co-editor of a recently published book entitled
``Reinventing the World Bank,'' and this book contains two
chapters devoted to the problem of corruption, specifically in
the World Bank.
Since its founding, the World Bank has participated mostly
passively in the corruption of roughly $100 billion of its loan
funds intended for development. If we include the corruption of
loan funds from other multilateral development banks over the
same period, the figure roughly doubles to $200 billion.
I refer to these loan funds as criminal debt. The debt is
criminal in two senses: first, because it was a crime to allow
the development funds to be stolen in the first place, and
second, because it is, as you mentioned, an injustice to expect
poor populations around the world that never received these
funds to bear the heavy burden of repayment. On average, the
poor have received about 70 cents on the dollar in loan funds
from MDBs and yet they are obligated to repay 100 percent of
the loans, plus interest.
Although part of my scholarly work has been devoted to
criticisms of the MDBs, I would like to preface my comments by
saying that I am deeply committed to public sector lending. I
do not sign onto those who think that institutions like the
World Bank should be shut down. I think this is a problem which
can be addressed and I am happy that this committee's work is
part of getting to that problem.
I would like to make a few specific points and then make a
couple of observations and close.
For a very long time, the MDBs, and in particular the World
Bank, has had what I refer to as a ``don't ask/don't tell''
posture on corruption. More recently, especially since the mid
and late 1990s, the World Bank and other MDBs have paid more
attention to the problem of corruption, but the impact of this
attention has been, in my view, minimal in stopping most of the
theft of loans because the bank's approach is inappropriate to
the problem.
Most of the way that the bank has approached the problem is
to try to lend its way out of the criminal debt problem. That
is, it comes as a natural response to the bank to increase
programs, spend more money to try to solve the problem of the
theft of money.
I would like to emphasize that the problem of corruption
occurs mainly at three levels, what I would call the micro, the
middle, and the macro level. The macro level is, of course, the
global governance problem related to corruption, and I would
admit that that is a governance issue. At the middle level,
that is, the problem of corruption across whole societies, that
is also a governance issue. But at the micro level--and that is
the nexus between the multilateral development banks and their
clients in their projects and in their programmatic loans--I
would argue that this is not a governance issue. This is an
issue of supervision and auditing.
Unfortunately, the bank's greatest core competence should
and ought to be in watching its own programmatic and loan
funds, but this happens to be the area in which the least
effort is made. In fact, the greatest effort is made, as we
heard in the testimony just a moment ago, in trying to deal
with governance and corruption at the broader societal level.
That is an admirable goal, but I do not think it is the most
effective way. I think what the bank needs to do is get its own
programmatic and project money safeguarded first and deal
secondarily with the broader problem of corruption across whole
societies, which by the way is not the bank's job. That is the
job of civil society and the people struggling in their own
countries.
The MDBs must do a much better job supervising and auditing
projects and loans, but the only effective way, in my view, to
protect against corruption of development funds is to establish
an international auditing body that is independent of the MDBs
and of private sector auditing firms, nearly all of which have
deep conflicts of interest. This multilateral auditing agency
should be empowered to spot-audit all MDB operations, loans,
and projects. Career advancement within what I am calling the
MAA, the multilateral auditing agency, must be linked to
success in detecting fraud and the theft of development funds.
All of the incentives built into MDB operations facilitate
rather than retard the criminal debt problem. A pressure to
lend creates a bias in favor of quantitative rather than
qualitative results, and corrupt elements in client governments
know this. No matter how much money is stolen, the MDBs
currently bear no financial burden for these losses.
The vast majority of criminal debt arises in the
relationship between the MDBs and borrowing governments, and
yet this is the nexus where the least effort has been made to
stem losses. While it is admirable that the World Bank now
investigates its own employees and has caught a few of them
red-handed, corruption among these individuals is actually
minimal. Similarly, the black-listing of international firms
engaged in corrupt practices is also a positive move. However,
the scale of losses through corrupt firms internationally is
also minimal.
My research indicates that at the rhetorical there has,
indeed, been progress. No one ever used to talk about
corruption. We are now talking about it. We now have Senate
hearings about it. But on the ground, the progress has been
much more limited.
There was mention of whistleblowing. One of the problems
with having an 800 number is that you cannot dial an 800 number
from outside of the United States, and the vast majority of the
places where one would need to have access to a whistleblower
are actually in the client countries themselves.
Let me mention a couple specific cases. The case of Dennis
DeTray, who was a top World Bank official in Jakarta in the
1990s, is illuminating. When an individual running a bank-
funded project in Indonesia came to Mr. DeTray to ask the bank
to do something about blatant theft of project funds, he was
told, ``Wrong address, call the police.''
When I blew the whistle in 1997 on the fact that a third of
all World Bank loan funds to Indonesia had been stolen, a
senior vice president at the bank headquarters in Washington
issued a press release denying the allegations and labeling me
an irresponsible scholar. Within a year, two secret documents
from inside the bank would leak fully supporting the
allegations I had made.
Does the World Bank make effective arrangements to
safeguard the loans and the loan process and project
implementation? Is supervision really taken seriously? My
research and interviews indicate, especially with task
managers, those people who work most closely with projects and
the distribution of money, suggest that it is not.
Let me give you a quote. Katharine Marshall, a senior bank
official in a direct interview with me, said the following.
``We look more than anything else at what the project achieves,
not really the money. We look, for instance, at whether schools
get built, not how the money was spent to build them.''
Julian Schweitzer, another senior bank official, went even
further in our joint interview, making direct reference to the
estimate that a third of the bank's funds loaned to Indonesia
had been stolen. He said, ``If you take the amount of a 30
percent loss, it means 70 cents on the dollar got used for
development after all. That's a lot better than in some places
with only 10 cents on the dollar,'' actually being used
effectively.
I will just close by saying we will never have precise
figures on levels of criminal debt accumulated since the MDBs
began operation. However, citizens groups in the client
countries have already begun demonstrating. It is more
fashionable to demonstrate against the IMF. The World Bank has
begun to have demonstrations outside their headquarters in
countries around the world on the criminal debt issue.
Those who are demanding relief for criminal debt, between
$100 billion and $200 billion globally, are not trying to
repudiate their debts. What they are trying to do is gain
relief for funds for having to repay funds that they never
received, and that is something that I think would be very good
for the lender countries such as the United States to get on
board with.
Thank you.
[The prepared statement of Dr. Winters follows:]
Prepared Statement of Dr. Jeffrey A. Winters
Chairman Lugar, Senator Biden, distinguished Senators:
I am grateful for this opportunity to present the results of nearly
15 years of research on the MDBs, the matter of corruption, and
particularly how the problem is manifested in the region of Southeast
Asia, my geographical area of specialization. Together with my co-
editor, Jonathan Pincus from the University of London, we have recently
published a book entitled ``Reinventing the World Bank.'' The book
contains two chapters devoted to the problem of corruption and the
World Bank.
Since its founding, the World Bank has participated mostly
passively in the corruption of roughly $100 billion of its loan funds
intended for development. If we include the corruption of loan funds
from the other Multilateral Development Banks (MDBs) over the same
period, the figure roughly doubles to $200 billion.
In our book I refer to these lost funds as ``Criminal Debt.'' \1\
The debt is criminal in two senses--first because it was a crime to
allow the development funds to be stolen, and second because it is an
injustice to expect poor populations around the world that never
received these funds to bear the heavy burden of repayment. On average,
the poor have received about 70 cents on the dollar in loan funds from
MDBs. And yet they are obligated to repay 100% of the loans plus
interest.
---------------------------------------------------------------------------
\1\ Jeffrey A. Winters, ``Criminal Debt,'' in Reinventing the World
Bank, Jonathan R. Pincus and Jeffrey A. Winters, eds. (Ithaca, N.Y. and
London: Cornell University Press, 2002), pp. 101-130. Criminal debt is
distinct from ``odious debt,'' which refers to loans that help an
oppressive government further oppress its citizens. Criminal debt
refers more narrowly to only that portion of loan funds that are stolen
by officials before they can be used for development.
---------------------------------------------------------------------------
I would like to begin by making a few key points, followed by
additional explanation:
1. The World Bank and other MDBs have paid more attention to
the problem of corruption since the late 1990s. But the impact
of this attention has been minimal in stopping most of the
theft of loan funds because the Bank's approach is
inappropriate to the problem.
2. The MDBs must do a much better job supervising and
auditing projects and loans. But the only effective way to
protect against corruption of development funds is to establish
an international auditing body that is independent of the MDBs
and of private sector auditing firms (nearly all of which have
deep conflicts of interest). This Multilateral Auditing Agency
should be empowered to spot-audit all MDB operations, loans,
and projects. Career advancement within the MAA must be linked
to success in detecting fraud and theft of development funds.
3. All the incentives built into MDB operations facilitate
rather than retard the criminal debt problem. The ``pressure to
lend'' creates a bias in favor of quantitative rather than
qualitative results, and corrupt elements in client governments
know this. No matter how much money is stolen, the MDBs
currently bear no financial burden for the losses.
4. Under international law, the Articles of Agreement
explicitly require the World Bank to make arrangements to
ensure that the funds it lends or guarantees are used for their
intended purpose. For decades it did not do this, despite
extensive knowledge that loan funds were being systematically
stolen. Recent efforts to stem corruption have had minimal
effects. And current immunities for the MDBs block aggrieved
populations from pursuing legal relief from having to repay
funds they never received. It is the people who repay debt, not
governments. But the people have no advocate and no legal
standing to seek debt relief. Also, no one is protecting the
money of taxpayers in the lender countries from falling into
the hands of kleptocrats in borrower states.
5. The more fundamental question behind the corruption
problem is: what are institutions like the World Bank supposed
to be and do? Our position is that the Bank's core competence
is in being a public sector lender. The MDBs have evolved over
the decades into unwieldy bodies, the components of which
function poorly. The World Bank is not an effective ``knowledge
bank,'' nor do its thousands of economists produce cutting edge
research. The World Bank is not an effective environmental
agency, nor a development agency, nor anti-poverty crusader,
nor is it an NGO well suited to advance gender relations or
``participation.'' The World Bank will work best if it is
scaled back to its core function as a public sector lender. As
such, it can devote more resources to ensuring that its loan
portfolio is well protected against systematic theft. The other
elements of the MDBs should be spun off, unpacked, or closed.
6. Whether on corruption or other MDB matters, it is
unrealistic to expect an institution that has grown to
unmanageable proportions on the basis of internally driven
change to manage its own reform program. The World Bank cannot
be reformed and certainly cannot reform itself. It must be
reinvented. It is the responsibility of the major shareholding
countries to undertake this task. Anything else will be
patchwork on a broken system.
CRIMINAL DEBT
The vast majority of criminal debt arises in the relationship
between the MDBs and borrowing governments. And yet this is the nexus
where the least effort has been made to stem losses from theft. While
it is admirable that the World Bank now investigates its own employees
(and has caught a few red-handed), corruption among these individuals
is minimal. Similarly, the blacklisting of international firms engaged
in corrupt practices is a positive move. But the scale of losses
through corrupt firms is also minimal.
The lion's share of the theft of development funds occurs in the
implementation of projects and the use of loan funds by client
governments.
Not everyone at the MDBs is to blame for allowing so much of their
loan funds to be systematically stolen. Many individual task managers,
who deal with projects at a more micro level, have long complained that
too much theft was going on and that projects and the broader
developmental effort were being compromised.
But for decades, the top management at the MDBs averted their eyes
from the abundant evidence of systematic corruption in almost every
country where they were operating--as did the major shareholder
governments such as the U.S. Institutions like the World Bank had a
global ``don't ask, don't tell'' policy regarding criminal debt. Why?
Because the only people with an incentive to speak up--the world's poor
and indebted--were not being listened to, and they lacked the power to
restrain greedy and powerful elites.
From the end of WWII until the mid-1990s, the MDBs themselves had
no incentive even to speak or write the word ``corruption'' regarding
their own loans, and indeed they did not. No matter how much was
stolen, the MDBs were confident they would not have to shoulder any of
the financial burdens. And moving up in the Bank hierarchy is a
function of successful lending, defined almost entirely by the
impressive size of one's lending portfolio, not how much of the money
was actually used for its intended purpose.
For an ambitious Bank employee, there are still no career rewards
today for focusing on corruption at any stage in the lending process.
And a key problem is that there never will be.
The case of Dennis DeTray, the top World Bank official in Jakarta
in the 1990s, is illuminating. When an individual running a Bank-funded
project in Indonesia came to Mr. DeTray to ask the Bank to do something
about the blatant theft of project funds, he was told, ``Wrong address,
call the police.''
When I blew the whistle in 1997 on the fact that a third of all
World Bank loan funds to Indonesia had been stolen, a senior vice-
president at Bank headquarters in Washington issued a press release
denying the allegations and labeling me an irresponsible scholar.
Within a year, two secret documents from inside the Bank would leak
fully supporting the allegations.
CORRUPTION AND GOVERNANCE--THE BANKS' MISTAKEN APPROACH
It is fashionable in MDB circles to cast the criminal debt problem
as a broader ``governance'' matter. Corruption at the societal level
does indeed reflect a national governance failure, just as corruption
at the global level reflects an international governance failure.
But corruption in World Bank lending operations reflects a World
Bank supervisory and auditing failure. Before the MDBs attempt to solve
the daunting problem of reducing corruption across entire societies, it
would be far more useful to do a competent job of reducing the theft of
funds within the Banks' own lending and project portfolios.
The World Bank's misguided answer to the corruption problem is
driven primarily by an institutional compulsion to respond in ways that
generate additional lending and require the provision of expensive
technical expertise.
Power relations and impunity lie at the heart of corruption. It is
the absence of effective detection, constraint, and punishment that
makes corruption possible and probable. At the national level, these
are absent because power is concentrated in ways that block effective
checks and balances in politics.
Corruption ranges in scale from petty to grand, in scope from
personal to systemic, and in impact from negligible to ruinous. But it
is rarely caused by a lack of education or training (everyone knows
what corruption is) and can rarely be addressed significantly by
writing better laws, reorganizing institutions, or upgrading personnel
through ``integrity'' workshops.
Most countries where corruption is endemic have reasonably good
laws on the books. The problem is implementation and enforcement. This
leads to an immediate question: What should be the primary focus of the
MDBs' response to the challenge of corruption? To answer, it is
important first to distinguish clearly between efforts directed at
reducing corruption on a micro level, in projects and programs financed
by the Banks, at a middle level, within and across whole societies, and
at a macro level, in the relations and transactions among countries
globally.
Recommendation: The MDBs currently focus most of their
efforts at the middle level (corruption across whole
societies), when they should instead focus on the micro and
macro levels (that is, on supervision and auditing of their own
lending, and on strengthening international coordination and
safeguards).
It is precisely in the nexus between the Banks and their borrowers
that the Banks have both the leverage and the legal justification to
act forcefully and consistently against corrupt practices. As
multilateral bodies, they also can play an effective coordinating and
legitimating role to strengthen international institutions, norms, and
sanctions linked to corruption.
The Banks are at their weakest, most ineffective, and most
politically vulnerable in the middle zone--in the battle against
systemic corruption across whole governments. The Banks will have a
muted impact at this level while encountering the greatest disruptions
in their relations with borrower countries, the Banks' Boards of
Directors, and the international community.
Moreover, it is not the World Bank's job to solve a society's
corruption problem. It is the proper task of groups and actors in each
society where corruption is rampant to challenge the power relations
that make the abuses possible. The MDBs are ill-equipped to put checks
and balances in place--except in their own projects and activities, and
in the international environment.
And yet, it is precisely in this middle range of the corruption
problem that the MDBs have decided to focus their efforts. ``The main
thrust of the Bank's support for countries' anticorruption efforts,''
declares a key World Bank document on the subject, ``will be in helping
to design and implement government programs.''
The MDBs cannot lend their way out of the criminal debt problem.
The benefits for the Bank of focusing its efforts at the micro and
macro levels and avoiding a mezzo approach are several. First, because
the Bank can control through internal decisions how its loans are used,
it can respond rapidly and credibly to the chorus of critics charging
that Bank funds are being stolen on a massive scale (which damages the
reputation of the Bank and exposes the institution to legal
challenges).
Second, it quite properly removes responsibility from the Bank's
shoulders for any lack of progress in reducing corruption at the
broader societal level. The Bank's own studies recognize that systemic
corruption is complex and cannot be addressed quickly. Reducing
corruption across the country should not be the centerpiece of the
Bank's response to kleptocracy.
And third, by using tighter fiscal supervision built into its own
projects as a ``best practices'' model, the Bank can more credibly
position itself as a leader in the international effort to combat
corruption in bilateral and multilateral lending.
THE ARTICLES OF AGREEMENT--FAILURE ON THE GROUND
The Articles of Agreement represent the founding charter of the
World Bank, setting forth the Bank's purpose, membership, operations,
rights, limitations, and responsibilities. It is a binding Constitution
subject to all the rules and norms of international law. For purposes
of the present discussion of corruption and accountability, the most
relevant part of the charter is Article III, Section 5, Paragraph (c),
which states: ``The Bank shall make arrangements to ensure that the
proceeds of any loan are used only for the purposes for which the loan
was granted, with due attention to considerations of economy and
efficiency and without regard to political or other non-economic
influences or considerations.''
This is an unambiguous statement against allowing Bank funds to be
corrupted. It places a clear burden and responsibility on the Bank to
make arrangements that ensure its funds are not stolen or misallocated,
and it admonishes the Bank to carry out this function in a manner that
is economical, efficient, and unbiased politically.
Does the World Bank make effective arrangements to safeguard the
loan process and project implementation? Is supervision taken
seriously? My research and interviews with Bank officials and task
managers suggest it is not.
``We look more than anything else at what the project achieves,''
explained Katharine Marshall, a senior official with the Bank, ``not
really the money. We look, for instance, at whether schools get built,
not how the money was spent to build them.''
Julian Schweitzer, another senior official at the Bank, went even
further in our joint interview, making direct reference to the estimate
that a third of the Bank's funds loaned to Indonesia had been stolen
and became criminal debt. ``If you take the amount of 30 percent
loss,'' Schweitzer stated, ``it means 70 cents [on the dollar] got used
for development after all. That's a lot better than some places with
only 10 cents on the dollar.'' \2\ He was referring to certain Bank
clients in Africa where nearly all of the loan funds are misallocated,
diverted, unaccounted for, or simply stolen.
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\2\ See Winters, ``Criminal Debt,'' 2002, p. 111.
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One World Bank task manager who struggled for years to get his
employer to take the corruption issue seriously responded to the
``glass is 70% full'' perspective:
That's the old argument, isn't it? They've been saying that
for years. [. . . .] There are a couple fallacies there, and it
is much too cavalier an attitude. That's because, in fact, my
experience has been--and it's the experience of a lot of other
people there [on the operations side of the Bank]--if they're
busy stealing 30 percent, they're not paying any real attention
to the other 70, even assuming 30 percent is all they're
taking. What you're really doing is really ruining the whole
effectiveness of the investment itself. I try to tell people [.
. . .] it's like giving the money to buy a car but they're
stealing the money that would buy the gasoline. So what good is
the car? It is a fact, I can demonstrate it, and I'll stand by
it. I'll prove it anytime.
He offered the following example:
You cut corners and nobody cares. If you let out a contract
for $2 million, and you get the few civil servants at the top
sharing $600,000 or 30 percent, do they care if the contractor
puts in concrete that is just sand and water? Do they care if
the contractor doesn't put reinforcing steel in the structures?
They don't care. So when Bank people say we're at least getting
70 cents of good development on the dollar, no you don't.
Because the contractor either has to make back the money that
he's kicked back, or he just figures, ``hey, it's open season,
I do what I want and no one is going to challenge me.'' And so
you have this feeding frenzy, and the end result is you get
very little development.
Putting aside who is fiscally responsible to repay the lost 30
percent, he questioned what genuine value a country or the poor really
get from projects conducted in ways where such levels of theft are
tolerated.
If you get only one dollar out of ten that goes to the poor,
is that really worth it? And have you done anything to
strengthen the economy for the long term? No. You've only
nourished a corrupt government that has no intention of
providing services. To me, those arguments are hollow.
RELIEF FROM CRIMINAL DEBT
The primary concern of the Senate in these hearings is combating
corruption in MDB operations. This is a forward-looking agenda, and it
is to be commended. There are a range of likely motivations for
engaging in this combat. U.S. representatives want to ensure that the
development funds from U.S. taxpayers are not wasted or used to buy
mansions or fund sectarian militias. They must also be motivated by a
desire to make development spending effective in alleviating the
poverty around the world, which carries too many benefits to list here.
In the spirit of being forward-looking, I have offered some
specific ideas about what approaches or reforms can and should be
adopted. But being forward-looking leaves an important part of the
criminal debt problem untouched.
One problem with accumulated debt burdens is that they have this
tendency to be mired in the past. Since it is unlikely that the debt
slate is going to be wiped clean for borrowing countries, it is simply
not possible to be exclusively forward-looking.
We will never have precise figures on levels of criminal debt
accumulated since the MDBs began operations. My own research suggests
that the figure of $200 billion presented at the outset is, if
anything, an under-estimate. When citizens groups and NGO in developing
countries demand, as they have several times in demonstrations in
Indonesia and elsewhere, that the criminal portion of their debt be
written off, they are not acting irresponsibly or trying to repudiate
their obligations.
They are simply pointing out that there is something very wrong
about demanding repayment for funds the people never received. The
money was delivered from the World Bank and other MDBs, but it was
intercepted along the way and ``privatized'' illegally. It is easy to
demonstrate that officials in the MDBs were aware of these practices
for decades and, in violation of legal obligations under the Articles
of Agreement, did nothing at all to stop the corruption. On the
contrary, in almost every case, flows of funds from the MDBs increased
as pressures to lend mounted.
This was a bonanza for those positioned to skim the riches. And the
populations below could do little or nothing to constrain the behavior
of the authoritarian leaders over them. The only powerful actors with
the leverage to make arrangements to ensure that development funds were
used for their intended purpose, the MDBs themselves, cooperated with
the foxes raiding the chicken coop.
The indebted poor of the world are legally entitled to an immediate
debt reduction of $200 billion, not as an act of charity or generosity,
but because the debt is criminal in every sense of the word.
The Chairman. Thank you very much, Dr. Winters.
Mr. Bapna.
STATEMENT OF MANISH BAPNA, EXECUTIVE DIRECTOR, BANK INFORMATION
CENTER
Mr. Bapna. I would like to begin by thanking you, Chairman
Lugar, and the committee for organizing this important and
timely hearing on corruption in the multilateral development
banks.
I am the executive director of the Bank Information Center.
BIC's mission is to empower citizens and civil society
organizations in developing countries to influence the projects
and policies of the World Bank and multilateral development
banks in a manner that fosters social justice and ecological
sustainability. BIC has promoted transparency, citizen
participation, and public accountability in the activities of
the multilateral development banks since 1987.
Previously, I had worked as a senior economist and a task
team leader at the World Bank itself for 7 years.
I am grateful to Professor Winters for describing the
context, a bit about the nature and impacts of corruption in
MDB activities. I would like to make just one more kind of
initial contextual statement on corruption.
MDBs can and must clearly do more to reduce corruption and
thereby improved development outcomes. Success at a more
systemic level will require positive steps and commitment from
multiple actors in a multi-pronged approach, including strong
political commitment from governments and a vibrant and
independent society, in addition to major substantive
improvements in anti-corruption efforts by MDBs themselves.
I would like to concentrate my oral testimony on five
specific policy and program recommendations related to MDB
operations that, if taken collectively and with strong
political commitments, would help meaningfully mitigate
corruption in MDB-financed projects.
First, MDBs need to more explicitly evaluate corruption
risks in project and sector operations. As a first step, MDBs
should develop and implement clear diagnostic tools for staff
to conduct a rigorous assessment of corruption risks in project
and sector operations. These methodologies should clearly set
out guidelines for preparing country and sector strategy
documents, project appraisal reports, and project monitoring
reports.
More specifically, the methodologies should provide
guidance to staff to determine the nature and scale of
corruption risks; assess the likely impacts of corruption;
design appropriate mitigation and supervision action plans;
importantly, to avoid financing certain operations where the
risks in the project or in the sector are too high; and last,
to report periodically on the impacts of the above activities
in reducing corruption.
It is critical that these tools actually inform the design
and implementation of project and country operations. This has
been the main failing in the past. Diagnostics are done, but no
changes are actually made.
BIC has done recently a study on the Asian Development
Bank's ability to comply with its own policy and has concluded
that there has been major shortcomings in the ability to
implement the policy effectively because, in large part, the
failure to implement these tools as I just described.
Second, MDBs should focus first on public and corporate
governance, especially in controversial sectors. Corruption is
especially acute in extractive industries, oil, mining, gas, in
large infrastructure and in certain private sector operations
because of the unique investments in these particular sectors.
Arguably, the most important step that can be taken to reduce
corruption and ensure that investments generate positive
development impact is to focus first on public and corporate
governance. Investment lending in controversial sectors should
only take place after adequate governance exists to manage the
inherent risks. Moreover, early lessons from MDB experiences in
extractive industries indicate that transparent and accountable
revenue management systems is a prerequisite to addressing
corruption in extractives and enhancing participation in the
overall public budgeting processes can help mitigate corruption
in the broad societal country level.
With respect to private sector operations, focusing on
partner selection and improving transparency, including a more
nuanced interpretation of business confidentiality, are also
critical steps.
Third, domestic and international donors should promote the
active participation of civil society and the media. Civil
society organizations, media, churches, and the general public
are the most important resources that can be deployed in the
fight against corruption. In order to address the systemic
nature of corruption, civil society actors will need to be at
the center of anti-corruption efforts.
Steps at two levels should be promoted.
First, MDBs should encourage stronger civil society
participation in their operations. Although some improvements
have been made, clearly more needs to be done.
Second, we need to recognize and support more generally the
role of independent civil society organizations and media to
play a watch dog role in ensuring that country, sector, and
project level revenues and expenditures are managed
transparently and appropriately.
Fourth, transparency and disclosure needs to be enhanced in
MDB operations. Openness is essential to guard against
corruption. Congress, the Treasury Department, and the U.S.
executive directors can do more, especially during the IDA
replenishment process to enhance transparency and improve
information disclosure by promoting greater openness and
information disclosure throughout the project cycle from
project preparation through board approval to project
completion and evaluation; to promote disclosure of draft
policies and strategies, including draft country strategies, in
order to allow for public comment or consultation prior to
policy or strategy approval; to ensure full disclosure of a
list of debarred firms ineligible for funding at the
multilateral development banks; stronger whistleblower
protection to provide protection to employees when seeking to
report corruption, fraud, violations of law, or other serious
problems; and disclosure of all written statements from the
U.S. executive directors to the board of directors at the
multilateral development banks.
Fifth is the importance of aligning institutional
incentives to strengthen anti-corruption initiatives. Critical
to mitigating corruption is to get the incentives right, and
this is getting at the heart of the matter. Although
improvements have been made in some multilateral development
banks, management incentives still reflect a pressure to lend
and a culture of approval where promotions and rewards are
based more on the amount of loans approved than on development
impact, quality, and compliance with key safeguard and
fiduciary policies. This incentive bias manifests itself in
many ways such as it underpins pressure to engage in countries
and sectors with poor governance. It gives a preference for
large projects. It is also reflected in the resources dedicated
to project preparation versus project supervision.
Aligning institutional incentives to the multilateral
development banks' missions is ultimately required if the
multifaceted anti-corruption initiatives proposed above are to
take route. Changing management and staff incentives is a
difficult and fundamental challenge but one that I suggest we
consider carefully, and I think this requires further thought.
I have outlined more concrete policy steps including
specific actions related to existing or future legislation in
my written testimony, including reviewing the International
Organization Immunities Act to explore trimming back immunity
that it or the courts may have granted that is in excess of
what is required. Stronger committee oversight to ensure full
implementation of title 13 of the International Financial
Institutions Act, in particular, implementation of the new
legislation, section 1504 of this act, which establishes
important accountability, transparency, audit, law enforcement,
and policy enforcement goals. And third, to ensure timely
authorization of U.S. participation in the MDBs in order to
provide the committee greater voice in these important matters.
To conclude, I believe that establishing a more effective
model to channel development aid resources is critical in
overcoming poverty. It deserves the dedicated attention of the
entire development community. Mitigating corruption in MDB
operations is an important but one of many steps in this
process.
Thank you for this opportunity to talk.
[The prepared statement of Mr. Bapna follows:]
Prepared Statement of Manish Bapna
I. INTRODUCTORY REMARKS
It is an honor to be invited to share my views on the deep-rooted
and systemic problem of corruption in multilateral development bank
financed operations, and to suggest some steps that the banks should
take to overcome it. I would like to thank you, Mr. Chairman, and
Senator Biden, for the leadership you and your staff have demonstrated
in advancing dialogue on the important role of multilateral development
banks (MDBs) in international development and the challenges that these
global institutions face in fulfilling their missions.
I am testifying today on behalf of a number of US-based non-
governmental organizations: Bank Information Center, Environmental
Defense, Government Accountability Project, and Public Services
International. I am the Executive Director of the Bank Information
Center (BIC). BIC's mission is to empower citizens and civil society
organizations in developing countries to influence World Bank and other
Multilateral Development Bank projects and policies in a manner that
fosters social justice and ecological sustainability. BIC has promoted
transparency, citizen participation, and public accountability in the
activities of MDBs since 1987.
II. THE MULTIPLE IMPACTS OF CORRUPTION
Corruption, generally defined as ``the abuse of public office or
private office for personal gain,'' \1\ can notably undermine the
overarching missions of the MDBs. These institutions are important
conduits for financing development projects to reduce poverty and
stimulate sustainable and equitable growth in borrowing countries. The
misuse of these scarce public resources, and the MDBs failure to
properly discharge their fiduciary duty to safeguard them, has several
significant impacts that undercut these objectives, including:
---------------------------------------------------------------------------
Footnote references are at end of statement.
increases debt in developing countries. Corruption diverts
resources from their intended use to benefit society at large
and instead confers benefits on an elite few. However, citizens
(most of whom are poor) of developing countries that borrow
from the MDBs bear the burden of the debt that their
governments are still contractually liable to repay. In
countries where corrupt regimes have incurred large foreign
debt burdens, an increasing number of citizen groups view this
debt as criminal and illicit, for which subsequent governments
should not be obliged to repay in full. (Professor Jeffrey
Winters addresses this issue in more detail concerning the case
of Indonesia.) Given the unsustainable levels of debt in many
low-income countries, the additional burden posed by corruption
---------------------------------------------------------------------------
is unacceptable and undermines their prospects for development.
undermines the development objectives of MDB financed
projects and programs. Equally important, corruption in MDB-
financed projects often causes significant negative economic,
social, and environmental impacts. Corruption can undermine the
development impact of these projects in countless ways.
Examples of project-level corruption impacts include diluting
the quality of cement in civil works (e.g. rural roads,
irrigation canals, etc.) which reduces the safety, efficiency
and sustainability of these investments; permitting illegal
timber harvesting in restricted forest areas; and granting
profitable public contracts to well-connected cronies of
Government officials. Corruption can also be a major issue in
non-project, policy-based adjustment lending, which is an
increasing proportion of MDB loans (recently 30-40% in the
World Bank).
undermines the legitimacy of MDB financed projects and
programs. Corruption in MDB financed development projects and
programs also contributes to a loss of confidence in public
decision-making. Public decisions taken for private gain lack
legitimacy under any defensible understanding of representative
or democratic governance, especially where they entail the
allocation of considerable social benefits and costs.
Corruption also breeds public cynicism towards political
processes--which in turn diminishes the credibility of the
Government to serve the interests of its citizens. This poses a
particular problem for MDBs whose principal counterpart is the
Government.
diverts resources from priority sectors. Corruption can
divert scarce public resources from priority sectors such as
health and education and squander them on uneconomic projects
that generate lucrative payoffs. Political and commercial
pressures often create a bias towards large projects and large
contracts (extractive industries, infrastructure).
Despite the fact that corruption threatens their core missions,
most MDBs have been slow to address it in a forthright and
comprehensive manner. While MDBs profess ``zero tolerance'' for
corruption in their projects and programs, this rhetorical commitment
has not always been meaningfully implemented. Pressure to lend and a
``culture of loan approval'' have inhibited a ``culture of
accountability'' from taking root--although this does vary across MDBs.
As a result, there is little if any internal or external accountability
for anticorruption results. For example, BIC's recent review of the
ADB's anticorruption policy and its implementation found that ADB was
not doing enough and almost never complied with its policy commitments
to explicitly address corruption issues in its country and project
level reports, assessments, and evaluations.\2\
III. THE NATURE AND SCALE OF CORRUPTION
Corruption and initiatives to reduce it take place at different
levels, and though the levels are distinct they are also inter-related
and inter-connected. There is corruption at the level of individual MDB
staff. In any large organization with thousands of employees there will
be problems with a few individuals. Funds from internal MDB
administrative budgets can be diverted, or the corruption could
involve, for example, kickbacks from borrowing country and/or
contracting company officials. There is corruption at the level of
procurement with local and international companies for goods and
services for specific projects. Individual MDB staff, local government
officials and ministries, and employees and management of contracting
companies may all be involved. A number of fairly notorious MDB
financed projects have been associated with allegations of large-scale
procurement corruption. It is these first two areas that have received
the most attention from the donor community in general and the World
Bank in particular, which several years ago established a Department of
Institutional Integrity to investigate corruption allegations.
However, the most systemic corruption is the pervasive, across the
board corruption embedded in governments. Here whole government
ministries and governments themselves have semi-institutionalized the
systematic diversion of funds from international and domestic sources,
including from MDBs and other donor agencies. In the case of Indonesia,
which Professor Winters discusses in more detail, for some three
decades through the late 1990s the World Bank Jakarta office itself
estimated in a leaked 1997 memorandum and reiterated in subsequent Bank
documents in 1998 and 1999, that an average of 30% of World Bank
lending was diverted for corrupt purposes--and in some government
ministries, as much as 50%. The total amount stolen from World Bank
lending in Indonesia was estimated to be more than US$8 billion
dollars.
Although the World Bank claims it is addressing corruption better
in its current lending to Indonesia, there is an important question of
how much MDB lending is being systematically diverted in other major
borrowing countries with weak governance and well publicized problems
of corruption. If the average amount of corrupt diversion for all MDB
lending is only ten or fifteen percent, and this is a rather
conservative estimate--this would total billions annually.
The MDBs have unique institutional characteristics which make
accountability for corruption more difficult and thus, if not
counteracted by specific measures to address the problem, facilitate
it. The notion of a bank is usually connected with the idea of
financial risk for the lending institution. If a private commercial
bank lends to notoriously corrupt borrowers, it may entail a higher
risk of default; and if it makes such lending a practice it may suffer
financial losses. But the MDBs are repaid by borrowing governments out
of general revenues as preferred creditors in the international system.
In the unlikely event of a whole government defaulting, then MDB losses
are covered by the paid-in and callable capital of donor governments.
In the world of MDB lending, there is no institutional financial risk
in approving loans which in significant part are not used for the
economic or social investments intended. Nor, because of the legal
immunity in the MDB charters, is there potential civil or criminal
liability for corrupt lending practices where gross negligence is
proved. Thus, the need for multifaceted strategies and measures to
address corruption in MDB lending is all the more necessary and urgent.
iv. policy and program recommendations to be adopted by the mdbs
Our recommendations below are intended to help provide an
organizing framework to understand the nature of corruption in
multilateral development bank financed operations and to describe steps
that can be taken to overcome this pervasive problem.\3\ The
recommendations should be adopted collectively and will require
commitment at the highest levels of management and at the Board of
Directors in each MDB. It is interesting to note that the varying
performance in anticorruption initiatives at the MDBs can be attributed
to differences in leadership commitment. Moreover, the respective MDB
Boards will need to play a more proactive role in reducing corruption
but the asymmetric nature of the Board (only developing countries are
to comply with anticorruption provisions) creates a real challenge that
requires further thought. That said, political commitment is an
absolute prerequisite--where the commitment is in place, the
recommendations can be usefully taken up, but without it there is
little hope for progress.
The organizing framework demonstrates that anticorruption
recommendations will require steps in multiple areas of MDB operations
\4\ including (i) improving tools and methodologies for evaluating
corruption risks explicitly; (ii) focusing first on public and
corporate governance; (iii) enhancing transparency and disclosure; (iv)
promoting the active participation of civil society and media; (v)
aligning institutional incentives; and (vi) developing strong recourse
mechanisms.
A. Evaluating Corruption Risks in Project and Sector Operations
Explicitly
Although MDB charters and operational policies require the
institutions to ensure that their funds are used for their intended
purposes, it is clear that both the political commitment and a
comprehensive system to fully implement these directives are absent.
The risks of corruption in a particular project or within a particular
sector are not systematically assessed by all of the MDBs. Measures to
mitigate corruption risks beyond existing procurement guidelines,
supervision missions, and audits are not regularly adopted, and these
financial controls are often inadequate. Perhaps most critically, there
appear to be no standard thresholds above which the risks of corruption
are so great that a particular project or an entire sector-lending
program in a country is reconsidered. (See Attachment 1 at end of
statement for an example from Thailand.)
As a first step, MDBs should develop clear diagnostic tools for
staff to conduct a rigorous assessment of corruption risks in project
and sector operations. These methodologies should clearly set out
guidelines for preparing country and sector strategy documents, project
appraisal reports, and project monitoring reports. Separate approaches
should be developed for project loans and budget support loans to
account for the different issues that arise in each context. More
specifically, the methodologies should provide guidance to staff to:
(i) determine the nature and scale of corruption risks in the
operation in question;
(ii) assess the likely impacts of corruption and factor these
impacts into the calculation of the project's economic rate of
return (the preferred metric for evaluating project viability)
and into the environmental and social impact assessments;
(iii) design appropriate mitigation and supervision action
plans;
(iv) avoid financing certain operations where the risks in
the project or in the sector are too high; and
(v) report periodically on the impact of the above activities
in reducing corruption.
It is critical that these actions inform the design of project and
country operations. This has historically been a major problem; key
studies are often conducted in isolation and do not affect project
design. Therefore, the analysis above should feed directly into the
selection and design of each project operation. Staff should be held
accountable for the quality and consistency with which they implement
these guidelines.
B. Focusing First on Public and Corporate Governance in Controversial
Sectors
Extractive Industries (Oil, Mining, and Gas)--Certain controversial
sectors, such as extractive industries or large-scale infrastructure,
are particularly vulnerable to corruption. It is at the sector and
country level where the most profound and devastating impacts of
corruption take place and where more rigorous scrutiny is required. The
World Bank recently commissioned an independent Extractive Industries
Review which concluded that extractive projects are not likely to
produce positive development outcomes in countries where governance is
weak and government commitment and ability to manage project risks is
questionable. Proceeding with these operations in an environment of
inadequate governance amounts to negligence: a layering of governance
risk upon environmental, social, technical and financial risks.
Moreover, large projects in small countries rife with corruption often
result in excessive public debt--creating an unacceptable burden for
the country's citizens for decades to come.
MDBs should not lend in controversial sectors like extractive
industries or large-scale infrastructure unless and until public and
corporate governance is strong enough to appropriately manage the
inherent risks. If the MDBs are to be involved, the institutions
should:
(i) ensure that the host country meets a minimum standard of
governance based on an open assessment of ``core macro'' (see
Attachment 2) and ``sector'' governance criteria;
(ii) carry out sector and project-level due diligence
(diagnostic tools described in previous recommendation) to
identify and mitigate corruption risks; and
(iii) help create an open environment conducive for civil
society and media to monitor the project (e.g. procurement,
revenue management, etc.) throughout implementation.
Importantly, another main recommendation from the Extractive
Industries Review and several other similar initiatives is the
importance of ensuring that revenues generated from extractive
industries are managed in a transparent and accountable manner. The
``resource curse'' which has affected many developing countries
highlights the challenges in revenue management and public
expenditures. This is especially true in small economies with limited
experience in democracy and a weak civil society. To help contain
arguably the most egregious opportunities for corruption, MDBs should
ensure that transparent and accountable revenue management systems are
in place before supporting an extractive project that has the potential
to generate income for the country.\5\ Experiences to date (for
example, see Attachment 3 on the Chad-Cameroon Pipeline Project)
demonstrate the profound difficulties in establishing an open,
transparent system that can counter the pervasive corruption that often
accompanies these projects.
Private Sector Operations. Annually, MDBs lend billions of dollars
to support private sector operations in developing countries. These
public resources are channeled through private and public loans and
represent a different yet major risk and source of corruption--in part
because of the more secretive nature of private sector operations. The
following issues deserve attention:
Partner Selection. The most important step to help reduce
corruption in private sector operations is to improve partner
selection. MDBs need to adopt a more rigorous process to screen their
private clients especially, with respect to corporate governance and
social responsibility. A more systematic and consistent approach to
identifying and debarring firms that misuse public resources needs to
be adopted by all MDBs. Moreover, penalties to engaging in corruption
are not severe and should be strengthened. For example, the Inter-
American Development Bank still does not disclose a list of private
firms that violate anticorruption policies.
Corporate Transparency. U.S. Executive Directors should request
MDBs to adopt much broader corporate transparency and disclosure
requirements for companies receiving public finance through the MDBs.
One interesting initiative, Publish What You Pay, calls on MDBs to
promote mandatory disclosure of extractive industries revenues in the
projects they finance as well as require disclosure of production
sharing agreements and related contracts.
Business Confidentiality. Private firms that borrow from MDBs often
refuse to divulge most project information on the grounds that the
information is commercially sensitive. While there are legitimate
reasons not to disclose certain information (e.g. loan terms), all too
often business confidentiality is overextended to include, for example,
royalty and other payments to Government; project sponsor's commitments
to the local community; environmental mitigation measures, etc.
Business confidentiality can give cover to corruption in the private
sector. The MDBs therefore need to address explicitly the extent to
which business confidentiality poses a legitimate constraint to the
public's interest in information disclosure. The U.S. Executive
Directors can help promote greater transparency in the private sector
operations of MDBs.
Public Sector Reform. Loans that finance privatization or
concession of public services have a particular history of corruption.
Without adequate controls or oversight, high-level government officials
use borrowed funds to renovate public service enterprises and sell or
concession them to ``associates'' at prices well below their actual
market values. As a result, the public suffers job losses, rate
increases, and debt increases at the same time. Often the deterioration
of services occur as well, as the contracted renovations do not take
place as specified. It is in this process that corruption manifests one
of its most dangerous consequences: popular disillusionment with
democratic governance.\6\
C. Promoting the Active Participation of Civil Society and the Media
Civil society organizations, media, churches, and the general
public are arguably the most important resources that can be deployed
in the fight against corruption. Often, citizens and civil society
organizations have the most nuanced understanding of the forms and
pathways of local corruption and can provide invaluable information on
where corruption may be occurring and how to prevent it. Moreover,
involving press and the public in overseeing projects and programs can
deter corruption by increasing the likelihood of exposure. By bringing
the insights and interests of the public to bear on the fight against
corruption, the public can be mobilized to serve as an ``army of
auditors'' of government operations. Citizen empowerment by
strengthening participation and public voice and increasing
transparency are essential to any comprehensive anticorruption strategy
and would complement more conventional public sector management tools
such as increasing civil service wages or strengthening internal
oversight and enforcement. Researchers at the World Bank confirmed this
finding in a recent study, which concluded that ``corruption [usually]
has been reduced not so much by overreaching visions of good government
as by the growing ability of people and groups outside the state to
defend themselves against official abuse and to check the unfair
advantages of others.'' This should take place at two levels:
Encourage participation in MDB operations. Although some
improvements have been made, MDBs should facilitate more proactive
participation in the operations they finance. Potential initiatives
include, inter alia: (a) conducting regular consultations during
preparation and implementation with affected peoples, local
governments, professional organizations, other civil society
organizations;\7\ (b) carrying out client surveys to determine
corruption in procurement, contracting, and service delivery within a
project; (c) requiring increased transparency on project costs and
expenditures; and (d) instituting strong whistleblower protections and
incentives for speaking out against corruption. At the country level,
MDBs should expedite initial efforts to promote participatory budgeting
and monitoring of public expenditures. Increasing transparency and
public participation in the Government's budgeting process at the
country level would be a significant step towards reducing corruption
at a broader level.
Oversight by independent ``watch-dog'' civil society organizations
and media. Beyond stronger participation in MDB operations, it is
critical that independent ``watch-dog'' civil society organizations and
media emerge and play a more proactive role in monitoring corruption
and the role of Government and international institutions. Since the
independence of these organizations is key to their effectiveness,
direct support from MDBs or Government is not the answer. Ideally, more
independent sources of funding (e.g. private foundations) can be
secured to support these organizations and the indispensable watch-dog
role they can and do play.
D. Enhancing Transparency and Disclosure in MDB Operations
Openness is essential to guard against corruption. Exposing
clandestine government operations to the disinfecting light of public
scrutiny is one of the most powerful tools available for uncovering and
deterring corruption. This entails ensuring that government decision
making and policy making are transparent, and that civil society,
media, and Parliaments have timely, complete, and convenient access to
the information they need to meaningfully scrutinize official
activities. MDBs should therefore view improving transparency and
access to information as critical to controlling fraud and corruption
in every project or program they support. As public institutions, the
MDBs need to do a much better job of providing access to information
regarding all aspects of their operations.
Congress has begun to demand greater transparency and
accountability standards at the MDBs in Section 580 and 581 of the
Consolidated Appropriations Act FY2004 (P.L. 108-199). However, the
United States can still do more to enhance transparency and fight
corruption in MDB operations. In the context of the ongoing and future
Information Disclosure Policy Reviews and MDB replenishment
negotiations, the US Executive Directors should promote the following:
(i) greater openness and information disclosure throughout
the project cycle--from project preparation through Board
approval to project completion and evaluation. This should
include greatly expanded public access to such critical
information as economic and technical feasibility studies, aide
memoires, appraisal documents, loan covenants in the public
interest, and project monitoring reports.
(ii) disclosure of draft policies and strategies, including
draft country strategies, in order to allow for public comment
or consultation prior to policy or strategy approval.
(iii) disclosure of full reports of independent audits of the
MDB's operational effectiveness and internal control
mechanisms.
(iv) disclosure of a list of debarred firms ineligible for
funding at each MDB.
(v) stronger whistleblower protection for employees seeking
to report corruption, fraud, violations of law or other serious
problems.\8\
(vi) disclosure of all written statements from the US
Executive Directors to the Board of Directors at the MDBs
(establish best practice by leading through example).
Furthermore, the Disclosure Policies at the MDBs are governed by a
``presumption in favor of disclosure.'' However, none of the Banks has
effectively put in practice this principle. Instead, the MDBs generally
operate under a ``presumption against disclosure'' unless specific
direction is given to disclose. This represents a negative bias within
the institutions which fosters confidentiality, reduces the
effectiveness of participation, and masks corruption. In order to
enhance transparency at the MDBs, the United States Congress can begin
to investigate current disclosure practices and identify gaps in MDB
standards. BIC recently completed a comparative analysis which examines
the transparency standards of the World Bank and major regional
development Banks across almost 250 indicators of transparency.\9\
E. Aligning Institutional Incentives to Strengthen Anti-Corruption
Initiatives
Most MDBs currently lack clear institutional direction and a
culture of accountability with respect to anticorruption. Overall,
mixed signals exist on whether fighting corruption (in its many forms)
is an institutional priority. This is evident in the incentive
structure within the institutions themselves. Management incentives
still reflect a ``pressure to lend'' and a ``culture of approval''
where promotions and rewards are based more on the amount of loans
approved than on development impact, implementation quality, and
compliance with key safeguard and fiduciary policies. This incentive
bias is reflected in the resources dedicated to project preparation
versus supervision. Most independent evaluations at the MDBs have
concluded that the quality of project supervision remains weak along
many dimensions (not only corruption) and that the lack of adequate
administrative resources is one important explanation. Moreover, the
institutional imperative to lend often leads to engagement in countries
and sectors with poor governance and to a preference for large projects
which present greater opportunities for high-level corruption. Finally,
appropriate recourse does not exist for MDB negligence or complicity
related to corruption. As a result, MDBs are not sufficiently
accountable for their actions. Without a more appropriate system of
recourse and accountability in those instances that the MDBs are indeed
negligent, it is difficult to understand how political commitment
within the MDBs will emerge.
F. Further Steps Toward Redress
Greater focus on compliance with applicable laws: Congress has
taken important initial steps in the new Section 1504 of the IFI's Act,
enacted this January, by requiring reports on the extent to which each
MDB has included in each public sector loan (and in several other kinds
of documents), the resources and conditionality necessary to ensure
that applicable laws are obeyed. Congress may want to ask the Treasury
Department how it intends to recommend that the MDBs address this
``rule of law'' provision.
The question of immunity: There are many sound reasons why
international institutions are provided varying degrees of legal
immunity. However one must recognize that a certain moral hazard
problem emerges in regards to corruption in MDB-financed operations.
Immune from lawsuits and legal challenges, the MDBs know that they will
be paid-back regardless of how much money is diverted or stolen. This
situation provides weak incentive to properly exercise full fiduciary
duty to ensure that the money goes to its proper purposes. The Articles
of Agreement of the World Bank indicate every intention to comply with
final judicial rulings, even as to the attachment of assets, and
certainly to rulings that do not threaten its ability to carry out its
development purposes. The UN Convention Against Corruption recommends
recognizing the criminal liability of institutions as well as of
natural persons and waiving immunity of such institutions in cases of
corruption. Thus the Congress may want to review the International
Organizations Immunities Act to explore trimming back immunity that it
or the courts may have granted that is in excess of that required.
Compliance with US Law. The United States has a number of important
legal requirements pertaining to its membership in the MDB system:
Title 13 of the International Financial Institutions Act
establishes critical review and reporting requirements on
natural resource impacts and overall development effectiveness
by US agencies when considering proposals of MDBs. Several of
these requirements have not yet been fully implemented and
deserve Congressional attention;
Section 1504 of the International Financial Institutions
Act, (as noted briefly above) establishes important
accountability, transparency, audit, law enforcement and policy
enforcement goals to be sought by the U.S. Government by June
of 2005 in the MDBs, with reports due to Congress from Treasury
by September 2004 and March 2005. Congressional oversight of
progress with these goals and reports is important;
SEC regulations that provide for the SEC to require MDBs
(that float bonds on the US market) to report information to
the public concerning risks and other factors relevant to their
overall financial health (in the Sarbanes-Oxley Act, Congress
increased the reporting required of corporations but did not
address the MDB requirements). Therefore, Congress may want to
ask the SEC whether it intends to use its existing authority to
bring the reporting requirements for the MDBs up to date so
that the MDBs are not perceived as undercutting corporations
and other entities who compete with the MDBs on the bond market
but must report in seemingly greater detail to the potential
bond-buying public;
Furthermore, it is worth exploring whether the Treasury
Department could ensure that U.S. companies involved in MDB
projects are in compliance with relevant U.S. anti-corruption
laws, such as the Foreign Corrupt Practices Act (FCPA).
Researchers have identified a number of cases, from Nigeria to
Bolivia, where MDBs seemed to ignore evidence and allegations
of corruption in violation of the FCPA. This law not only
forbids bribing government officials overseas, but also
requires US corporations to keep their books in such a way as
to help the Justice Department determine whether such bribes
have been paid.
V. CONCLUDING REMARKS
I would like to thank you, Mr. Chairman, for the opportunity to
share our views with you today on corruption and the Multilateral
Development Banks. I hope that the testimonies provide the Committee
with constructive and concrete ideas of mitigating corruption in MDB
financed projects and programs and also help identify other development
challenges facing the MDBs. The role of appropriate and effective
international development aid is critical in overcoming poverty and
deserves the dedicated attention of the entire development community.
[Attachment 1]
Samut Prakarn Wastewater Management Project in Thailand
A FAILURE TO FOLLOW POLICIES
The Asian Development Bank (ADB) funded Samut Prakarn Wastewater
Management Project in Thailand is a clear example of how corruption can
transform a potentially important initiative into a major development
debacle. Based on a feasibility study funded by the ADB, a ``two
facility'' site was selected for the project in 1995. The ADB Board
approved the project which proposed a ``turnkey contract'' for each
facility. When land acquisition became a problem, the Thai Government
changed the project design and allowed bids for a single treatment
plant. Only one contractor submitted a final bid for a single treatment
plan not on the original site approved by the ADB but near the village
of Kiong Dan, 20 kilometers away from the approved location. The ADB
accepted all changes as a routine matter. Construction on Samut Prakarn
was stopped in 2002 when Thai investigators determined that corruption
by government officials, private investors, and land owners led to the
inflation of the land price by as much as 1000%. The ADB did not
intervene even though project changes had led to an 87% increase in
costs prior to loan signing. The Samut Prakarn case illustrates that:
affected communities are often the last to know about
projects that impact their lives.
the ADB had no meaningful impact in limiting or exposing the
corruption at any stage of the project cycle, despite its
``Zero Tolerance'' Anti-corruption Policy.
the ADB believed a ``turnkey'' contract exempted the
institution from its oversight responsibilities such as
questioning substantial design changes that contravened ADB
policies and the loan covenants.
the ADB accepted the site change despite the fact that no
environmental, social or alternatives assessment was ever
conducted and the Procurement Policy was violated.
the ADB did not object when a single bidder was awarded the
contract despite international competitive bidding procedures.
When the ADB finally responded to corruption allegations raised by
the Kiong Dan community, its Special Review Mission found no evidence
of any irregularities. When the community asked the ADS Board and Anti-
corruption Unit (ACU) to investigate the matter, the Board never
pursued the matter and delegated it to the ACU which never conducted an
appropriate investigation. This is in stark contrast to the Thai
Government project investigation that has confirmed corruption and
started to prosecute those involved.
[Attachment 2]
World Bank Extractive Industry Review
RECOMMENDATIONS ON CORE GOVERNANCE
The criteria of governance adequacy should be developed
transparently and with the involvement of all stakeholders and should
include minimum core and sectoral governance criteria. For the core
macro-governance, they should include:
government capacity and willingness to publish and manage
revenues transparently and to maintain macroeconomic stability;
government willingness to allow independent audits of its
receipts from the extractive sector;
the existence of effective frameworks for revenue sharing
among local, regional, and national authorities;
the quality of the rule of law;
the absence of armed conflict or of a high risk of such
conflict
the government's respect for labor standards and human
rights; as indicated by its adherence to international human
rights treaties it has ratified; and
the government's recognition of and willingness to protect
the internationally guaranteed rights of indigenous peoples.
The above is taken directly from Striking a Better Balance, the
Final Report of the Extractive Industries Review, December 2003.
[Attachment 3]
Chad-Cameroon Oil Pipeline
THE CHALLENGES OF GOVERNANCE AND REVENUE MANAGEMENT IN REDUCING
CORRUPTION
The World Bank-financed Chad-Cameroon oil pipeline is frequently
cited as a model extractive industry development because of the revenue
management, oversight and monitoring measures designed for the project.
However, in reality, these extra-ordinary mechanisms have been layered
on top of an unsound foundation. The (as of yet undemonstrated) ability
to mitigate risks of corruption and negative impacts related to oil
development ultimately depends on the broader governance context and
political will in the country. To date, the indications are not good:
the first oil bonus money was used to purchase arms; expenditure on
priority sectors has lagged behind targets; the President is attempting
to modify the constitution to allow him to stay in office indefinitely
and has appointed his brother-in-law to the oil revenue oversight
mechanism, to name a few examples.
Despite persistent problems with the management of public revenues,
misuse of HIPC funds and other earmarked resources in Chad, MDB funds
were approved for the Chad-Cameroon pipeline project, paving the way
for a potential doubling of the government's national revenues. The
World Bank's own documents indicate that governance problems pose the
most fundamental risks to development prospects in Chad, generally, and
the success of the oil project in particular, including the risk of
``political turbulence and deteriorations in the rule of law more
broadly.'' They note that ``[a]s oil revenues begin to accrue and the
stakes rise, power may be contested by violent means. And road
blocking, violent crime, and the theft of public resources may
increase.'' (CAS, December 2003, pp 31-32). If these risks materialize,
the costs will be borne by the population living in Chad--i.e. the
purported ``beneficiaries'' of the project. Thus without determining
whether countries meet minimum governance criteria (based on an open
assessment of core and sector governance indicators) prior to
supporting projects in sensitive sectors, MDBs risk facilitating
corruption--providing money not to benefit the poor but an elite few.
FOOTNOTES
\1\ It is useful to note, however, that in US law, an agreement or
attempt to commit any offense, or violation of federal law, or to
defraud the US or any agency of the US includes, under 18 U.S.C. 371 of
the criminal code, any ``. . . conspiracy for the purpose of impairing,
obstructing, or defeating the lawful functions of any department . . .
'' which is broader than abuse for personal gain. (See, Haas v. Henkel,
216 U.S. 462.)
\2\ See ``Zero Tolerance?--Assessing the Asian Development Bank's
Efforts to Limit Corruption in its Lending Operations,'' Bank
Information Center, 2004. www.bicusa.org
\3\ These recommendations are intended to build upon the
recommendations made by the General Accounting Office in its series of
reports on the MDBs, including reports of April 2000 on measures for
controlling corruption in World Bank lending, and the reports of
December 2001 and June 2003 on external audits of the regional banks
and World Bank respectively.
\4\ Corruption within the procurement processes of MDB lending
operations has received perhaps the most significant amount of
attention at the institutions, with the establishment of fraud and
corruption units, and guidelines for procurement and consulting
services. I have consciously not focused this testimony on this issue
given its detailed treatment in other recent literature including by
the US Government.
\5\ See Ian Gary and Terry Karl, Bottom of the Barrel: Africa's Oil
Boom and the Poor, Catholic Relief Services, June 2003.
www.catholicrelief.org/africanoil.cfm
\6\ See for example, Eduardo Lora and Ugo Panizza, Structural
Reforms in Latin America, Inter-American Development Bank, Washington,
D.C., March 11, 2002. These analysts suggest that the level of
corruption inherent in the privatization processes in some countries
has actually undermined popular support for democratic governance.
\7\ The GAO found significant weaknesses in public consultation on
environmental assessments of World Bank in its September 1998 review.
The World Bank's Inspection Panel and the IFC's Compliance Advisory
Ombudsman have continued to find violations of the policies requiring
proper consultation on proposals and alternatives to them.
\8\ See forthcoming assessments of whistleblower protection at the
four largest MDBs now being completed by the law firm and advocacy
group, the Government Accountability Project (GAP).
\9\ This study was prepared by the Bank Information Center and an
early draft of the data and summary (April 2004) is available upon
request.
The Chairman. Well, thank you very much, sir, for that
testimony.
Ms. Boswell.
STATEMENT OF NANCY ZUCKER BOSWELL, MANAGING DIRECTOR,
TRANSPARENCY INTERNATIONAL USA
Ms. Boswell. Thank you, Mr. Chairman, and thank you for
taking the time to look at this important issue, and for
inviting Transparency International to participate.
I am the managing director of the U.S. chapter of
Transparency International, as well as a member of its
international board of directors.
I am here today on behalf of Peter Eigen, the founder and
Chairman of our organization, and it may interest the committee
to know that Peter spent his entire career at the World Bank.
In the early 1990s, when he expressed his deep concern about
the impact of corruption on the bank's efforts to alleviate
poverty, the bank leadership refused to take the issue on. So
it was that in 1993 he left the bank to found Transparency
International as a nongovernmental, nonpartisan organization
committed to raising awareness about this issue and to securing
systemic reform.
Ten years later, TI now has national chapters in over 90
countries and the World Bank has a president who is, as has
been noted, committed to fighting corruption. We believe this
reflects a growing understanding that the bank's mission to
alleviate poverty depends on success in this issue and, indeed,
the achievement of the millennium development goals also
depends on reducing corruption.
The World Bank Institute research now clearly demonstrates
the devastating impact. We note a recent estimate that more
than $1 trillion are paid annually in bribes, both in rich and
developing countries. Clearly it means that corruption
increases the cost of doing business and that the private
sector contributes enormously to the problem. But this figure
does not include embezzlement of public funds, theft of public
assets, high costs and poor quality purchases, or most
important, the social and economic impact on the poorest where
corruption is most prevalent.
This is an intolerable situation that requires urgent
attention, and we would like to offer two specific
recommendations drawn on the experience of our chapters around
the world. They apply equally to the World Bank as to the
regional banks.
First, every opportunity should be taken so that lending
decisions are based on governments taking specific steps to
increase their transparency and accountability to their
citizens, and second, that the banks take steps to reduce
private sector bribery. As you note, Mr. Chairman, a bank
policy that rewards such actions will reinforce a similar
approach under the Millennium Challenge Account.
By transparency, we mean publication of information that
affects citizens and how public funds are used. It includes
publication of laws, regulations, judicial decisions, assets of
public officials, budgets, procurement, campaign finance, and
voting records, and legislation to ensure that when that
information is not routinely published, citizens can get access
to it.
These may seem like routine issues but they are not in most
countries and they contribute to the problem that we are
confronting. Without such transparency in government operations
there can be no accountability and citizens can neither monitor
nor have an impact on decisions that affect their daily lives.
Moreover, business cannot know with certainty what the rules
are, leaving opportunities for manipulation and distortion, and
thus we find that foreign investment does not flow to those
countries where corruption is a problem.
The bank has several mechanisms through which to promote
transparency. You have been discussing some of them: country
assistance strategies, budget support lending, investment
lending, and procurement, in addition to the moral suasion of
the leadership.
In country assistance strategies, governance is already a
factor in determining the amount and content of financial
assistance, but the benchmarks are not explicit. We believe
they need to include transparency measures that I have just
listed. We note that many of the borrowers have already made
such commitments in adopting anti-corruption conventions and
trade agreements. Many are participating in important followup
mechanisms on the anti-corruption conventions, which the U.S.
Government is very generously funding. Those mechanisms
identify deficiencies in compliance and issue recommendations
for remedial action.
Encouragement and help from the multilateral banks to
governments to carry out these commitments should be a
priority. The bank can use its significant influence by raising
these issues in discussions with governments and encouraging
their inclusion in activities and in the benchmarks.
In all of this, the bank needs to provide the technical
support to both the governments and to bank staff to reach
these benchmarks. Our understanding is that bank staff with
expertise is much in need. For example, the bank has such
expertise for environmental issues. It is not currently in the
bank for anti-corruption and transparency programs.
As to project evaluation that Senator Hagel raised, after a
project is completed, OED should assess not only operational
effectiveness but also the level of transparency and anti-
corruption.
Another opportunity is one you raised in connection with
budget support lending. The bank is shifting significant
amounts of lending through this mechanism, and the example of
community engagement that you and Ms. Brookins discussed
earlier--those amounts are dwarfed by the amount of money that
flows through general budget support. It is essential that such
flows be conditioned on essential transparency reforms that I
mentioned earlier, and the bank needs to ensure that these
conditions are actually met.
The bank also needs to address the fact that adjustment
lending cannot be traced in the same way that investment
lending can, and so it needs to build into these agreements the
covenants and mechanisms necessary to permit effective followup
monitoring.
Turning to the area of bank lending and procurement, there
are still opportunities for the bank to use its substantial
leverage to further strengthen procurement processes when it
comes to transparency. In our written testimony, we have
provided a very detailed list of reforms. Let me just mention a
few that could help remedy the deficiencies.
First of all, significant project documents must be made
public so that citizens can be fully informed about the
amounts, scope of work, and companies and contractors involved.
The decision to publish such documents should not be deferred
to governments as the current practice too frequently is that
governments do not disclose this information. Publication in a
timely manner on the bank's Web site would enable citizens and
local officials to exercise meaningful oversight for projects.
Second, reducing corruption requires tight controls, and
staff time for supervision in the field, we understand, has
been reduced and too often there is not the opportunity to do
more than ask controlling questions of local project staff.
More staff must be allocated for this oversight function.
Third, a growing share of total bank-financed procurement
is not according to open international competitive bidding
rules, and when this is the case, we believe bank staff
decisions to permit other processes should be justified and
published so as to allow later review.
I want to also emphasize the critically important work of
the Department of Institutional Integrity and the Sanctions
Committee that was discussed earlier. We do believe that the
published black list does create a strong deterrence for future
misconduct. It also identifies systemic problems and these need
to be mainstreamed through bank programs.
Let me turn to the other central issue that we believe
needs attention and that is a bank requirement that all bidders
on bank financed projects must have anti-bribery compliance
programs. If anti-corruption and anti-bribery conventions are
to be effective, the private sector simply must abide by new
rules. The OECD convention, which this committee did so much to
bring into force, depends on whether the 34 other signatories,
companies enact anti-bribery compliance programs.
A World Bank requirement would do a great deal to move
toward that outcome. We are pleased to note that the bank seems
willing to review its prior decision not to adopt such a
requirement and we hope that this hearing today and the new
circumstances will permit it to move forward on this very easy,
preventive, risk management tool.
Finally, I would concur with my colleague from BIC that
improvements are needed in the bank's institutional
transparency. There are still instances where key documents are
kept confidential or released only after commitments have been
made. As a public institution, lending public funds for a
public purpose, the bank has a duty to ensure that the public
is informed in a timely manner.
In conclusion, let me say that bank has made impressive
progress, but it is time to accelerate the pace and the
resources necessary for specific action to enhance transparency
and reduce bribery. As you note, Mr. Chairman, and as was
raised by the prior testimony, it must also ensure that bank
staff are confident that their efforts to reduce corruption
will be as highly valued as their more traditional functions
and that they will be supported by sufficient supervisory
staff.
We know there are still obstacles to overcome. Members of
the bank are at once its borrowers, and at times some of them
are at the heart of the problem. Some have little patience with
calls for greater transparency and may have a vested interest
in the status quo. Even some contributors have special
interests.
Therefore, sustained pressure by the U.S. Government will
be necessary to strengthen the proponents of reform within the
bank. The leadership that you have demonstrated today at this
committee is vital in the global fight against corruption with
regard to the bank, and more generally across the board. It
will be critical in the future as other priorities compete for
attention and resources. So we thank you for this hearing today
and we look forward to your questions.
[The prepared statement of Ms. Boswell follows:]
Prepared Statement of Nancy Zucker Boswell
I would like to thank the Chairman and the Committee for inviting
Transparency International to address this hearing on ``Combating
Corruption in Multilateral Development Banks.'' I am the Managing
Director of the U.S. Chapter of Transparency International and a member
of TI's international board of directors. I appear today on behalf of
Peter Eigen, founder and Chairman of Transparency International, who
spent his career at the World Bank.
In the early 1990's, Peter expressed his growing concern to the
Bank hierarchy about the devastating impact of corruption on efforts to
promote economic and social development. He urged the Bank to address
the problem. The Bank leadership refused, finding the issue too
``political'' and not an economic issue for the bank to address.
In 1993, convinced of the importance of the issue, Peter left the
Bank to create Transparency International, a politically non-partisan,
non-governmental organization, committed to raising awareness about the
impact of corruption and to securing systemic reforms.
Today, TI has national chapters in over 90 countries and the World
Bank has a president who is committed to fighting corruption! Since his
1996 speech to the World Bank/IMF meetings on the ``cancer of
corruption,'' James Wolfensohn has demonstrated great courage and
leadership in reversing the Bank's prior policy position and in seeking
to institute measures to eliminate fraud and corruption from within the
Bank and in the countries where it operates. He has given this issue
far greater priority, recognizing that the Bank's mission to alleviate
poverty depends on it.
TI commends Mr. Wolfensohn and his colleagues for the steps taken
to date. We recognize that this is a long-term undertaking and many
challenges remain. For purposes of our testimony today, we would like
to offer only a few specific recommendations to help achieve the
reduction in corruption we are all seeking. While they are in the
context of the World Bank, these recommendations apply equally to all
the multilateral banks.
First, the Bank should use every opportunity to see that
governments provide the broad range of transparency measures that
permits citizens to hold their governments accountable. Second, the
Bank should ensure that the private sector plays its role, by requiring
bidders on Bank-financed projects to adopt anti-bribery policies.
Before I elaborate on these recommendations, let me say a few words
about TI's approach to fighting corruption and how it affects my
testimony.
I. TI'S SYSTEMIC APPROACH TO FIGHTING CORRUPTION
TI's approach to combating corruption is holistic, recognizing that
it requires a range of systemic and institutional steps. These include
preventive measures as well as criminal laws and prosecutions.
TI works with government and with the private sector, encouraging
each to play its part in reducing the incidence of bribery and
corruption. TI chapters are independent and locally-based, setting
their agendas to reflect local circumstances. Nonetheless, they value
the anti-corruption conventions concluded by the OECD, OAS, Council of
Europe and the UN. These conventions provide a roadmap for reform in
both the public and private sectors, represent the political commitment
of the government and provide a platform for citizens to hold their
governments accountable.
TI focuses on systemic reform and not on individual cases of
corruption. Accordingly, my comments today do not discuss the specific
projects about which the Committee has raised questions. Rather, they
address steps the Bank has and should take to minimize the likelihood
of those questions arising in the future.
My testimony includes some recommendations TI has already submitted
to the Bank in a meeting initiated by Mr. Wolfensohn in March 2003.
Some action has been taken. I should also note that this testimony does
not pretend to fully reflect all the steps the Bank has taken or an
exhaustive assessment of those that should be taken. Finally, our
recommendations should be considered to apply to all the multilateral
banks.
II. THE COMPELLING CASE FOR THE BANK FIGHTING CORRUPTION
The Bank has made great strides in addressing the issue of
corruption, starting with its acceptance of the view that corruption
undermines the Bank's efforts to alleviate poverty. The World Bank
Institute (WBI) has done formidable research, demonstrating the
devastating impact of corruption on economic development and putting to
rest old arguments that some types of corruption can be beneficial.
The WBI recently estimated that more than $1 trillion dollars is
paid each year in bribes--in both rich and developing countries. This
figure dwarfs earlier estimates, but as stunning as this figure is, it
does not include the cost of embezzlement of public funds or theft of
public assets or higher costs and poorer quality purchases or, most
important, the economic impact on the poorest in those countries where
it is most prevalent.
WBI Director of Governance, Daniel Kauffman, notes that ``the total
amount of corrupt transactions is only part of the overall costs of
corruption, which constitutes a major obstacle to reducing poverty,
inequality and infant mortality in emerging economies.'' The result can
be social breakdown and alienation, with the potential for instability
and sometimes violence.
Corruption also discourages sorely needed foreign investment. Lack
of transparency undermines predictability and creates opportunities for
extortion. In short, it increases the cost of business.
Having made a compelling case regarding the costs of corruption and
the need to address it, the Bank is moving forward. The following
recommendations indicate ways to strengthen its efforts.
III. BANK MECHANISMS TO SECURE TRANSPARENCY
TI recommends that the Bank condition country assistance
strategies, structural adjustment, project lending and procurement on
making progress on specific transparency reforms. Bank policy rewarding
a demonstrated commitment to transparency and reducing corruption
reinforces a similar approach under the Millennium Challenge Account.
Among the required transparency measures are legal and regulatory
transparency, access to information legislation, asset disclosure by
public officials, budget and procurement transparency and transparency
of campaign finance and voting records. Recent anti-corruption
conventions and trade agreements reflect a consensus that these
transparency measures are an essential and integral part of an
anticorruption program.
Promoting government transparency will strengthen accountability
and create a sound investment climate that will support economic
development. This will permit private sector development, leading to
job creation, higher incomes and tax revenues essential for public
expenditures.
Without transparency in all aspects of government operations, there
can be no accountability. Citizens can neither monitor nor have an
impact on government decisions or expenditures that affect their daily
lives. Business cannot know with certainty what the rules are, leaving
opportunities for manipulation and distortions in decision-making. Lack
of transparency discourages long-term foreign investment.
A. Country Assistance Strategies:
Country assistance strategies (CAS) should underscore and promote
more explicit and effective programs to increase transparency. The Bank
has taken an important first step, making ``governance'' a factor that
must be considered in determining the amount of financial assistance as
well as the specific content of lending and non-lending programs. CAS
objectives have included transparency, accountability and integrity of
government, but the benchmarks have not been adequately specific to
accomplish this objective.
TI recommends that the benchmarks for securing financial assistance
include publication of laws, regulations, budgets, procurement rules,
officials' assets and other key aspects of government operations.
Programs to improve public resource management and a more effective
regulatory framework will be enhanced by incorporating transparency
requirements. Programs focusing on other sectors will also be more
effective if transparency requirements are an integral part.
The Bank should provide the necessary technical support to enable
governments to reach these benchmarks. To this end, the Bank should
develop adequate in-house expertise to assist in the design and
execution of transparency and other anti-corruption components of
country projects. Although the Bank has determined that governance is
an important factor to be addressed, it has not provided the resources
and level of expertise needed by bank staff as it has, for example, on
environmental issues. Without the necessary expertise and already
heavily burdened with other priorities, Bank staff are unlikely to be
able to provide the detailed attention required. The considerable WBI
expertise, developed in some instances in concert with TI and its
national chapters, should be more routinely ``mainstreamed'' into the
Bank's country programs. For a start, a practical handbook with
detailed recommendations would be useful for Bank staff.
Finally, after a project is completed, it should be assessed not
only for its operational effectiveness but also on the level of
transparency and absence of corruption.
B. Structural Adjustment Lending
Given the Bank's increasing shift to providing significant amounts
of lending through budget support mechanisms, the Bank should condition
such lending on implementation of the essential transparency reforms
outlined above, including procurement reform. This is a constructive
and straightforward use of Bank leverage to increase transparency for
both local citizens as well as the international community.
Recognizing that conditions imposed are frequently not performed or
performed in form, but not in substance, the Bank should ensure that
transparency and anti-corruption conditions are actually carried out.
Another issue requiring Bank attention reflects the nature of
adjustment lending. With investment lending, the Bank can trace whether
funds have been used as specified. With adjustment lending, the funds
are, essentially, transferred to a national treasury, where they are
commingled with other assets and become impossible to trace. The Bank
should build into structural adjustment agreements the covenants and
mechanisms necessary to permit effective follow-up monitoring.
C. International Initiatives
Many of the Bank's borrowers have already made transparency and
other anti-corruption commitments in adopting anti-corruption
conventions and trade agreements. For example, the Inter-American
Convention Against Corruption and the new UN Convention on Corruption
call for asset disclosure, procurement transparency and greater access
to information. The WTO Government Procurement Agreement has detailed
procurement transparency requirements. Recent trade agreements, such as
the CAFTA, also have detailed procurement transparency requirements,
and call for publication of laws and regulations and for providing an
opportunity for prior comment.
Encouraging and helping governments carry out these commitments
should be a Bank priority. The Bank can use its significant influence
by raising the convention commitments in discussions with governments
and encouraging their inclusion in relevant activities in country
programs. We note, for example, that most government procurement is not
financed by the Bank and, therefore, is not subject to Bank guidelines.
Bank programs to reform procurement systems should ensure that domestic
systems are in compliance with agreed transparency norms.
For those governments participating in convention follow-up
mechanisms, the Bank should help them remedy the deficiencies
identified by these mechanisms. It should provide the resources and
skills many countries urgently need to give their legal and judicial
institutions, regulatory and administrative agencies the capacity to
fight corruption.
The 2003 G-8 Leaders Action Plan and the Nuevo Leon Declaration in
this hemisphere call on the Bank to provide such support for these
initiatives.
D. Bank Lending and Procurement
TI welcomes the important steps the Bank has taken to reduce
corruption in bank lending and procurement, from specific anti-
corruption and anti-fraud provisions in its Procurement Guidelines and
Guidelines for the Selection of Consultants to blacklisting offenders.
There are still opportunities for the Bank to use its substantial
leverage to further strengthen these processes, particularly with
regard to transparency.
We note that there has been some progress toward ``harmonization''
of procurement documents among the World Bank and regional development
banks. However, greater consistency is still needed for procurement
guidelines and use of standard documents. A common approach, especially
with increasing co-financing, is in the interest of the borrowers and
the suppliers. Further progress is also needed with regard to
consistent definitions, investigations and sanctions procedures and to
sharing and respecting each other's blacklists.
1. Strengthening Transparency Requirements
As TI has noted in its prior submissions to the Bank, it must take
every opportunity to ensure a transparent procurement process from
inception through execution. The following Bank requirements can help
achieve this.
Borrowers should publish project features and justification
in advance and provide an opportunity, such as a public
hearing, for public comment well before final decisions are
made.
All significant project documents must be made public. The
Bank should publish or obligate governments to publish all
contracts and sub-contracts entered into on projects financed,
even in part, by the bank. Information, including the amounts,
scope of work, and companies or contractors involved, should be
made public. There should be a presumption that such documents
are public unless there is a demonstrated need for
confidentiality. The decision to publish should not be deferred
to governments as all too frequently they do not disclose this
information, and there are no domestic legal mechanisms for
citizens to require disclosure. Publication in a timely manner
on the Bank's website will enable citizens and local officials
to exercise meaningful oversight throughout the process.
Borrowers should publish contract awards and the basis on
which competing bids were evaluated. This would help reduce
manipulation.
There should be a grace period between the ``publication of
the award'' and signing the contract to permit legitimate
complaints to be taken into account while there is still time
for consideration.
Clarification sought by bidders must not be permitted to
change the substance of the bid and should be notified to other
bidders. Such ``hidden changes'' are not uncommon and should be
reviewed carefully as part of the Bank's supervision.
Borrower discretion should be minimized as it permits
corruption. While some discretion may be necessary, the
exercise of even a minor degree should be recorded, justified
and disclosed.
Finally, in those cases where contractors and other stakeholders
may need Bank assistance in dealing with Borrowers, the Bank should
provide a central office where complaints or protests can be lodged. It
should see that complaints are investigated and, in appropriate
circumstances, intercede.
2. Audit and Supervision
Keeping procurement corruption-free requires tight controls as well
as stringent rules. Staff time for supervision in the field has been
reduced and staff too often does not have the opportunity to do more
than ask ``controlling questions'' of local project staff. Adequate
staff must be allocated for supervision.
3. Other Practices
Non-ICB Bidding: A growing share of total Bank-financed procurement
does not follow open international competitive bidding (ICB) rules.
Bank staff decisions to permit other processes should be justified and
the decision recorded, so as to allow later review.
Change Orders: Improper change orders have become a common form of
corruption during project implementation. Change orders should not be
used to change the contract. The Bank should require borrowers to
introduce a domestic review by senior staff (or tender committees or
boards) when cumulative change exceeds a 15% threshold. This would
avoid collusion between the site engineer and contractors to approve
relatively small change orders which, in the aggregate, lead to major
cost increases.
Selection of Consultants: The bank should help ensure that
consultants do not undermine the integrity of the project. Consultants
should certify in their contract application that they have no conflict
of interest. The Bank should take steps to assure that consultants have
the appropriate expertise, particularly when rare or highly technical
expertise is needed .
4. Investigations and Sanctions
The work of the Department of Institutional Integrity and the
Sanctions Committee is critically important to creating a strong
deterrence for future misconduct and for identifying systemic problems
brought to light by particular cases. These objectives would be
furthered by publication of the number of cases under investigation,
the types of allegations and the results of investigations.
Lessons learned should be systematically addressed, including in
country assistance and project lending. The Bank should assist with
technical capacity and training for prosecutors and judges for
countries eager to pursue wrongdoing. Prior cases demonstrate that some
of the poorest governments cannot easily bear the burden and may not
have the requisite skills to gather evidence abroad and prepare cases
against companies around the world.
TI believes that the sanctions reforms recently sent to the Bank
board have the important potential to de-politicize the process, such
as by expanding Sanctions Committee membership to outside experts.
Other issues requiring further consideration are the application of the
Sanctions process to IFC lending and the weight to accord court
convictions with regard to Bank blacklisting.
The blacklist has been a constructive and powerful instrument for
promoting private sector reform. The Bank should consider moving beyond
the information posted on the website regarding the INT and Sanctions
Committees work and procedures to a broader awareness-raising program.
The private sector has expressed interest in learning more and could
contribute valuable insights. One such important issue is voluntary
disclosure, which can assist the Bank in determining where systemic
problems are most acute.
IV. ANTI-BRIBERY BIDDER REQUIREMENTS
Let me turn to the other central recommendation that will help in
the Bank's efforts to reduce the risk of bribery in Bank-financed
projects: a requirement that all bidders have anti-bribery compliance
programs. According to the TI Bribe Payers Index (BPI), bribery is
still a common practice. The BPI finds that large multinationals are
still engaging in grand scale payments and that domestic concerns are
even more likely than foreign enterprises to engage in bribery.
This situation should begin to change with recent anti-corruption
conventions prohibiting bribery and providing tools, such as mutual
legal assistance, to pursue cases. The OECD Convention on Bribery of
Foreign Public Officials is particularly important because it extends
transnational bribery prohibitions, similar to those in the Foreign
Corrupt Practices Act, to most of the world's major exporters. Its
entry-into-force in 1999 was encouraged by the prompt action of this
Committee to secure US ratification.
Since then, all 35 OECD signatories have enacted new laws
criminalizing foreign bribery, and an OECD monitoring process is
promoting their enforcement. Some major companies are adopting
compliance programs.
A World Bank requirement that all bidders on bank-finance projects
must adopt anti-bribery compliance programs would stimulate broader
adoption of such programs, promoting compliance with these new laws.
This would be a powerful preventive measure, reducing the likelihood of
bribery on bank-financed projects. It would also help ensure that
exporters from non-OECD member countries abide by similar practices.
There are plenty of models for companies to consider in developing
their own programs, including the TI Business Principles for Countering
Bribery. Under the Business Principles, companies commit to prohibit
bribery in all forms and to adopt an implementation program. They
commit to maintain accurate books and records which properly document
all financial transactions and prohibit off-the-book accounts. These
provisions are consistent with the FCPA and with the OECD Convention
requirements.
In light of Sarbanes-Oxley, it is also notable that the Business
Principles require the enterprise to maintain internal control systems,
in particular accounting and record keeping practices, and submit them
to regular audits to provide assurance that they are effective in
countering bribery.
The TI Business Principles were developed by a multi-stakeholder
task force including multinationals from different industry sectors.
They were adopted this year by leading companies in the engineering and
construction sector. Members of a task force, led by the Fluor
Corporation working with TI, have since joined in calling on the World
Bank to enact such a requirement. They see it as an effective means to
level the playing field and to combat extortion.
TI's work with other industry sectors, including energy,
extractives, pharmaceuticals and defense, would be facilitated by a
World Bank requirement. TI national chapters have also conducted
country workshops to promote broader adherence of the Business
Principles. These workshops reach an audience of local companies and
subsidiaries of MNEs. Cooperation with the Bank in such outreach
activities could help reduce corruption in the supply-chain on Bank-
financed projects.
Concern has been raised that imposing a bidder requirement might
exclude small and medium size enterprises from bidding. However, no
bidder, regardless of size, is excluded from legal prohibitions against
bribery. The Bank should encourage compliance by all bidders, and even
the smallest can develop appropriate policies using the available
models without imposing a significant burden. The Bank could start by
implementing the requirement on contracts above a certain threshold.
We are pleased to note that the Bank has agreed to permit
governments to use a TI tool, the Integrity Pact, under which the
borrower will only accept bids from those who have anti-bribery codes
and who certify they will not bribe. The government agrees to conduct a
transparent process, often with expert oversight. This new tool has
contributed to lower costs and less corruption in several countries. It
has demonstrated that integrity is possible even in an environment or
an industry that has historically been corrupt. TI hopes that the Bank
will do more to encourage its broader use.
TI also looks forward to working more closely with the IFC and
Global Corporate Governance Forum on giving greater prominence to the
issues of bribery, corruption and internal controls in their corporate
governance training and materials. TI believes this will be important
to expanding the number of enterprises adhering to best practices. This
will not only help create a better investment climate but will also
improve the performance of IFC investments.
V. INSTITUTIONAL TRANSPARENCY
Throughout this testimony, TI has highlighted examples of
improvements in the Bank's own institutional transparency as well as
areas where further improvement is still needed. There are still
instances where key documents have been kept confidential or have been
released only after commitments have been made, rather than when they
were under discussion. As a public institution lending public funds for
public purposes, the Bank has a duty to ensure there is public
participation in the design and implementation of Bank policies and
activities. Transparency should be practiced not only by the Bank's
members but by the Bank itself. This requires timely and accessible
dissemination of information by the Bank and its members.
CONCLUSION
In TI's judgment, the Bank has made impressive progress under the
leadership of Jim Wolfensohn. However, it must take additional,
specific steps to mainstream the fight against corruption throughout
its operations and activities. It must also ensure that Bank staff
receive as much encouragement for their efforts in this arena as for
more traditional functions.
TI intends to continue its campaign to promote action on the
recommendations outlined in this testimony. We know that there are
still obstacles to overcome. The shareholders of the Bank are at once
its borrowers and, at times, at the heart of the problem. Some have
little patience with calls for greater transparency or may have vested
interests in the status quo.
Therefore, sustained pressure by the US Government will be
necessary to strengthen proponents of reform within the Bank. We
welcome the Committee's ongoing interest in this issue and we hope the
foregoing makes a constructive contribution to the Committee's work.
The leadership of the US Government and of this Committee has been
vital to the global fight against corruption. It will be critical in
the future as other priorities compete for attention and resources. We
hope we may count on your continuing interest and support and we
welcome your questions.
Thank you.
The Chairman. Well, thank you very much, Ms. Boswell, for a
remarkable statement, as well as the more voluminous testimony
which backs this, and the reforms that you have mentioned. We
appreciate it.
Dr. Levinson.
STATEMENT OF PROFESSOR JEROME I. LEVINSON, DISTINGUISHED LAWYER
IN RESIDENCE, WASHINGTON COLLEGE OF LAW, AMERICAN UNIVERSITY
Dr. Levinson. Thank you, Mr. Chairman. In a previous
incarnation, I sat on the other side, so this is a
transformation for me, if you will.
I will be brief in my oral comments.
I think paradoxically the larger the project and the more
international bidding, the easier it is to control the
prospects of corruption because on the large projects, you
generally have international competitive bidding. You have the
two envelope system. The first envelope, prequalification on
technical grounds without reference to price, only after the
first set has been passed of qualified bidders, do you get to
the second, the price issue. The envelopes have to be opened in
public session, and if it is properly administered, it should
be a completely transparent process with the prospect of
corruption minimal in my opinion.
This is not to say that there will not be controversy. In
every case which I saw as general counsel to the Inter-American
Development Bank, where you have a large project, you are going
to have the losers complain that they lost because of corrupt
payments rather than the fact that their price was higher or
that their goods were inferior. That is why you have
procurement committees within the institutions to review these
matters.
By and large, I think that where you have competitive
international bidding on projects, it is very exceptional to
find significant corruption in that part of the project,
subject to that competitive bidding.
The problem of corruption on large projects comes
particularly with suppliers credits where particularly the
Europeans build into the price of the product illegal payments,
and as you well know, in many countries in Europe those
payments have been deductible as ordinary business expenses.
The OECD convention urges countries to discontinue this
process, but it is dependent upon individual countries adopting
the necessary measures. As you also know, a number of countries
have been slow to do that. So we should not exaggerate what the
multilateral financial institutions can and cannot do.
My own view is that where they are financing on a large
project, a significant input and their input is desirable from
the point of view of the private participants, they have every
right to demand that the bidding processes apply not only to
that part of the project being specifically financed by the
MFI, the multilateral financial institutions, but to the entire
project because they cannot insulate themselves from corruption
and claim, well, that was not on the part that we were
financing. It contaminates the whole project and destroys their
credibility. So I think that is very reasonable, and it is not
always the case, but I think they ought to extend that
practice.
The other thing I think which is quite effective is this
business, which has been in the last decade adopted, of the
Sanctions Committee where firms which do engage and are shown
to have engaged in such corrupt practices can be barred from
particularly World Bank projects, and now the IDB has a similar
program under consideration. I understand that they expect that
it will be shortly enacted.
What is interesting, I think impressive, is the degree of
specificity and institutional maturity in terms of due process
for the companies that are accused. The easy case is the
Lesotho water dam project, water dam authority, where the head
of the authority was convicted in the Lesotho courts and the
contractors were convicted. But not every country is going to
use its judicial process in such a really effective and
transparent way. So that imposes a requirement upon the
institutions to conduct their own independent investigation and
that requires internal processes which assure due process to
the companies. I think as I have looked at those processes they
are quite impressive in assuring due process. The companies
that are, in fact, sanctioned have very little basis to
complain. I think that this is a very effective innovation.
I do not understand this idea that Professor Winters has
put forward of hundreds of millions of dollars in criminal
payments being siphoned off from the direct lending of these
institutions. As I say, on the large projects where there is
international competitive bidding, I think there are such
built-in checks and balances that I am skeptical about that.
In the project approval process, in the Inter-American
Development Bank, you have a project team on every project that
is going to be financed. It consists of a lawyer. It consists
usually of an economist, a financial analyst, an institutional
specialist or water specialist, depending on what the project
being financed is. Before a project is authorized, it has to go
for preliminary approval to a committee headed by the president
of the bank. Only when it passes that approval committee is the
project team organized. Any individual in the bank has a very
hard time bringing about approval of a project by him or
herself because it is surrounded by so many checks and
balances. Then the project has to go to the loan committee for
approval. It then has to be approved by the board of executive
directors. At these different levels of scrutiny, you have so
many people involved, so many institutional checks and
balances, that the approval process itself, it seems to me, is
relatively integrated from accusations of corruption.
I think the more difficult issue which has been alluded to
by the previous speaker is the structural adjustment lending
where the money goes to the central bank. It is then
conditioned upon reforms where the reforms are disconnected
from the use of the money. The central bank can use the money.
It can keep it in its reserves. It can use it for remittances.
It can use it for general consumption imports, not necessarily
for the reforms, say, in the banking sector or in the electric
power sector where you are asking for institutional reforms the
money is not necessarily directed to that particular sector
which is different from a project where the money is used for
specific purposes.
How then do you trace the money? It has gone into the
central bank funds. Money is fungible. The money from the World
Bank or the IDB does not have a little ticker on top which says
this is an IDB or World Bank dollar. It goes through the
system. So you cannot generally trace that with a great degree
of security. Everybody recognizes that is a problem. They try
and deal with it by post-audit financing, but even that is at
least questionable.
When I first became general counsel of the Inter-American
Development Bank, the Mexicans invited me to Mexico, as they
always do with high officials of these institutions. And they
are wonderful hosts and my host was a high official in the
finance ministry. At the lunch which began at 2 and ended at 5
and we were into the second bottle of wine, things got warmer.
And I asked him, why are you doing this?
The IDB at that time in the early 1980s could only provide
$250 million to the big countries, what they call the A
countries in the IDB, Argentina, Brazil, Mexico, and Venezuela.
This is a pittance. Mexico was going to the financial markets
to raise a $2 billion jumbo loan. I said, so why are you
bothering with me? I mean, it is wonderful. I am having a
wonderful time. The lunch is elegant and everything else.
And he said to me you underestimate the quality of the
multilateral financial institutional lending. You are going to
give us $250 million. That is going to go into an agricultural
credit project. Because of our size, we put up $500 million. So
that is $750 million for this program. You also require that
the entire program, not just your funds, be audited by an
independent auditor. That was always a fight with the Mexicans
who wanted to have a government auditor and we always insisted
that it be an auditor independent of the government. He said, I
know with reasonable certainly what happened to that money, not
only the $250 million but the $500 million that we put up as a
counterpart. He said, in all candor, I cannot say that to you
with respect to this $2 billion jumbo loan that we are going to
the market for.
So I think that there are reasonable checks and balances.
This is not to say they are perfect, especially when you are
giving money. For example, rather than financing specific
schools, you are giving it to the ministry of education which
then is expending the money. It is very difficult. I think it
would be foolish to say that there is not some kind of kickback
or so on in the expenditure of that money of the ministry,
which gets mixed up with the bank money. You can have all the
post-audits you want, at the local level, there is going to be
some level of corruption.
Let me just conclude with one other factor because it has
been alluded to in terms of the general climate of corruption
in a country. There are extreme cases, for example, Kenya,
where the IMF actually insisted that a UK national be put in
charge of the central bank because the corruption was so
pervasive. It was almost a return to colonialism, but the
Kenyans accepted it because the corruption was so notorious.
Reference has been made to Indonesia. There is no question
that Indonesia under Suharto was an egregious case. And there
is a remarkable June 16, 1998 article in the Wall Street
Journal which says exactly what Professor Winters says, that
the World Bank officials in Indonesia knew that some of their
money was being siphoned off.
I once had a conversation with Lou Preston, who was then
president of the World Bank, who tragically died of cancer, and
he was telling me how he was really looking forward to going to
Indonesia because the staff was telling him what a star
performer Indonesia was. I said to him, has the staff also
suggested to you that on every major deal in Indonesia, a
member of the Suharto family has to be cut in, that the absence
of free trade unions and a free press and an independent
judiciary, that there are no checks and balances in this place?
What is the plan for post-Suharto political transition? Have
they discussed that with you? And he said, no. He said, I guess
I will have to inquire about that when I get back.
There was an excessively technocratic economic approach
which was blind to these other factors. I think to a great
extent we have gone much further now in recognizing that
development is an integrated whole and you cannot isolate the
political.
Just let me say in conclusion that the best antidote to
corruption in a society are the institutions of political
democracy: a competitive political party system, a free press,
independent trade unions, and independent judiciary. And the
case that illustrates that most graphically is Argentina
because Argentina in the decade of the 1990s was acclaimed as
one of the star performers. It was implementing a neo-liberal
economic agenda of the World Bank and the IMF and the U.S.
Treasury at the time.
But the corruption was endemic in the Menem government.
There are other reasons why the Menem government failed, the
failure of the economic program, divisions within the majority
party, but every informed observer would tell you that
corruption was a major consequence of the fall of the Menem
government and his inability to get his term extended and his
inability to mount a comeback.
The system worked. It flushed out the corrupt political
leadership and corruption became a defining issue in the
Argentine political context. Now, is that not what we should
want, that the system, not the external agents, the World Bank,
the IMF, et cetera, and Transparency International and the U.S.
Government flush it out, but that the system itself of the
country? And the best antidote is the institutions of political
democracy.
Thank you.
[The prepared statement of Dr. Levinson follows:]
Prepared Statement of Professor Jerome I. Levinson
Thank you for giving me this opportunity to address this important
issue. As Chief Counsel to the Subcommittee on Multinational
Corporations of this Committee (1972-1977, General Counsel of the
Inter-American Development Bank (1977-1989), and, more recently, as a
Democratic appointee to the International Financial Institution
Advisory Commission of the Congress, popularly known as the Meltzer
Commission, I have had some experience in dealing with the multiple
facets of corruption in international financial transactions and the
issues faced by the MFIs.
As I see it, there are three aspects to the problem. First, in
projects and programs directly financed by the institutions, how do the
institutions assure that the decisions with respect to the awarding of
contracts are made on the basis of transparency and the merits of the
proposals, free of any taint of corruption? Second, where the
institutions have conditioned their financing upon certain reforms
being enacted and implemented by the government but the MFI financing
is not directly connected to the reforms, how does the MFI ensure that
the funds disbursed are properly used? What responsibility do the
institutions have to ensure that the reforms that they have publicly
endorsed are implemented in a transparent manner free of corrupt
practices? Finally, what responsibility, if any, do the MFIs have for
assessing the level of corrupt practices in a particular country and
calling attention to such practices as an obstacle to development?
A. DIRECT FINANCING
How do the institutions ensure that their own officials are not
bought off by contractors or recipient governments in decisions such as
the approval of projects and the award of contracts? I believe that
this is a minimal risk. The internal project approval process is
surrounded by checks and balances that virtually guarantee that such
wrongdoing cannot take place. First, a project team is formed to
evaluate the economic, financial and technical feasibility of a
proposed project. In the IDB, with which I am most familiar, that team
will have as a minimum, a lawyer, and, depending upon the nature of the
project being financed, such additional technical staff as is
necessary.
Before the formation of a project team, the proposal in preliminary
form must be approved by an upper management committee, which is
chaired by the President of the Bank, and includes senior operational
members of the IDB staff the most senior members of the staff of the
IDB. The final analysis by the Project Committee of the feasibility of
the project in all of it facets must be submitted for, at the staff
level, final approval to a Loan Committee, chaired by the Executive
Vice-President of the IDB. Each project must be approved Final by the
Board of Executive Directors. A similar process, although different in
some details, is followed in the World Bank.
At each stage of the process of analysis and approval there are so
many individuals involved and checks and balances built into the
system, that no one individual can control the decision. Hence, I think
that the risk of individuals within the institutions making corrupt
decisions which determine the project approval is minimal. However, in
particular where there is purchase of goods and services, there are
almost invariably disputes over the award of contracts. Where the
purchase of such goods and services is being financed with MFI
resources, except in extraordinary and specified circumstances, all
contracts are awarded by a process of competitive bidding. That process
administered by the borrower following agreed MFI procurement
guidelines. In larger contracts where international competitive bidding
is used, a two-envelope system is used. At the first stage, the bidders
must submit technical qualifications in which price does not figure.
Only after the first stage of technical pre-qualification has been
approved, does the second envelope of price come into play. All bids
must be opened in a public session. The process and the final award
must receive the non-objection of MFI officials.
Ideally, the process if properly administered, should be open and
transparent and thus insulated from the possibility of corruption in
the award of the contracts. Inevitably, though, there will be
challenges to the process and the final result. The losing bidders will
complain that they lost by virtue of a flawed process, corruption in
the award, or any number of other reasons. Very often, they will seek
the intervention of their governments which will direct their Executive
Directors in the institution to seek redress for their complaints.
The venue in the IDB for hearing appeals is the Procurement
Committee, which is chaired by the Manager for the Regional Operations
Department of the particular country where procurement is taking place
and other senior managers of the Bank. The Procurement Committee makes
its own investigation of the validity of the complaints and reports in
writing its conclusion to the Executive Vice-President of the IDB, who
can endorse or overturn the report. The World Bank internal appeal
process traditionally has been more informal. (Procurement issues are
not within the purview of the World Bank(s Inspection Panels). On that
part of a project directly financed by an MFI, I think that the award
of contracts is fairly transparent and insulated from corruption.
The problems arise, I believe, on that part of a huge construction
project where the financing is independent of the MFIs. There may be an
issue with the borrower country and entity in charge of the project
about whether the MFI procurement guidelines ought to apply to the
entire project, including that part not being financed and supervised
by the MFI. This is particularly sensitive where supplier credits are a
part of the financing. What role, if any does the MFI have in approval
of the process and final award of such credits? Can it really insulate
itself from possible abuses where its financing is not directly
involved? I think not.
American companies may be at a particular disadvantage. They are
subject to the Foreign Corrupt Practices Act, which makes it a felony
for the company through its officials or agents to make corrupt
payments to foreign government officials in connection with procurement
decisions by that government. Many European governments have
traditionally treated such corrupt payments as ordinary business
expenses, deductible for tax purposes. The OECD Convention on Bribery
urges member governments to end such tax treatment, but it is dependent
upon the action of individual governments, many of which have been slow
to act. American companies are consequently particularly dependent upon
the MFIs to effectively assure the integrity of the project.
A recent project in Lesotho, Africa illustrates the issue. The
Director of the Lesotho Highland Water Authority was convicted in the
courts of that country of corruption in the award of contracts in
connection with the project. Part of the project was financed by the
World Bank. There is no allegation of corruption in the award of
contracts on that part of the project financed by the World Bank. The
Lesotho authorities then convicted as well two international
contractors who had paid the bribes. The World Bank, potentially, has
an effective, if draconian, remedy. It could place the international
contractors on a proscribed list barring them from bidding on any
future World Bank financed projects anywhere in the world. Usually, the
project is financed or administered through a subsidiary of the parent
company organized for the individual project; once the project is
completed, the subsidiary is dissolved. In order to be effective the
sanction must pass through the subsidiary to the parent company,
usually an internationally recognized company.
A more difficult case is the huge multipurpose dam project,
Yacyreta, a tripartite project among Argentina/Brazil/Paraguay, which
has been financed in part by both the World Bank and the IDB. I should
note that at the time of the original loans from the World Bank and
IDB, I was the General Counsel of the IDB. From its inception, the
project was complicated if for no other reason than three countries
were involved but the most controversial issue involved the relocation
of thousands of Paraguayan families, for which the government of
Paraguay had neither the financial resources, nor the administrative
competence or the political willingness to effectively follow-through
on the relocation plan which was an integral part of the project.
The international institutions can provide the financial resources
but not the administrative competence or political will. The
Paraguayans were masters at playing off the two larger neighboring
countries to maximize the financial benefits for a small clique
surrounding the then Paraguayan strong-man Stroessner. The form this
financial extortion took was ensuring that Paraguayan companies
controlled by Stroessner's cronies were included in the larger country
construction consortia. Yet, it was also difficult to oppose the
inclusion of such companies which were justified in the interest of
technical capacity-building in Paraguay.
In fairness, I should note that at the time (1979-80), Argentina
and Brazil were determined to proceed with the project and were willing
to pay whatever the price demanded by the Paraguayans. Both countries
were oil-import dependent and had been highly traumatized by the oil
price revolution of 1973/74. Deep water oil discoveries in Brazil and
Argentine on-land oil discoveries had not yet been proved. Hydro power
was an attractive alternative for both of the larger countries. The
MFIs, it was thought at the time, could ensure the integrity of the
bidding process for very large international contracts and an adequate
relocation program. On the first part, the integrity of the bidding
process, I think they were relatively successful. On the second part,
the relocation issue, they were less successful. And, as a recent
report by the World Bank Inspection Panel notes, the relocation issue
continues to plague the project.
The Lesotho case may be the easy one. One has a local court
proceeding and finding of criminal conduct by the local project manager
and consulting companies. If the World Bank placed the offending
companies on the proscribed list, it is difficult to see how the
regional development banks could sanction awarding contracts to the
same companies on projects financed by them. The potential sanction is
thus truly draconian. The World Bank and the Asian Development Bank
have sanctions proceedings in place which provide for investigation,
and a hearing for any company proposed to be subject to the sanctions.
The IDB has a similar process now under consideration.
How many other countries are as zealous as that of Lesotho in
pursuing the matter within their own judicial systems? And if they
don't do so, what is the responsibility of the MFIs? It is unlikely
that they can pursue such an investigation where the government shows
no disposition on its own to investigate allegations of corruption on
that part of a project not financed by an MFI and which is not subject
to the procurement guidelines of the MFI. If we are serious about
addressing the cancer of corruption in projects even partially financed
with public international funding, I think that it is reasonable to
insist upon the entire project being subject to procurement guidelines
that assure transparency in the award of international contracts and
thus minimize the risk of corrupt payments in connection with such
contracts.
More recently, attention has focused on getting the national export
credit financing agencies of the creditor countries to address the
issue of padding the supplier credits with corrupt payments in the
award of the contracts. Given the intense competition in this segment
of the international economy, I am not optimistic that any time soon
this issue will be effectively addressed.
B. STRUCTURAL REFORM CONDITIONALITY
In the late 1980s and during the decade of the 90s, increasingly,
the MFIs conditioned a substantial part of their lending upon borrowing
countries undertaking major structural reforms such as privatization of
state owned enterprises. The major vehicle of financing for these
reforms were structural adjustment or sector adjustment loans. What
distinguishes these loans from more conventional project financing is
that the use of funds is not necessarily related to the structural
reforms upon which the loans are conditioned. Typically, a loan is
authorized conditioned upon the country, for example, privatizing the
banking sector or the state owned electricity companies. Loan funds go
to the Central Bank and need not be expended for purposes related to
the privatization which is the condition for the loan. The funds can be
used for purposes that are not specifically prohibited: paying
creditors, held in the currency reserves of the country, or for general
imports. A first ``tranche'' of the funds is usually disbursed to the
Central Bank upon signing of the loan contract. After six months, a
review is conducted to determine whether the country has implemented
the agreed reforms. If performance by the borrower in implementing the
agreed reforms is satisfactory, the remainder of the loan is disbursed
to the borrower.
The MFIs must also ensure that disbursed funds for non-specific
purposes are not used for corrupt purposes. This is usually
accomplished by a post-audit of the use of the disbursed funds.
Realistically, however, this is the weakest link in the system. Money
is fungible. It is extremely difficult, if not impossible to trace the
MFI disbursed funds. You basically are relying on the probity of the
Central bank officials.
As the importance of the structural adjustment lending has over the
years grown in importance and magnitude for the MFIs another equally
important issue arises: what responsibility do the MFIs have to assure
that the reform process they are endorsing, particularly where
privatization of state-owned assets is involved, is transparent and
free from corruption? By endorsing the privatization reforms, the MFIs,
particularly the World Bank, place the imprimatur of international
approval upon the process.
Yet, in many instances, that process is so flawed and marred by
corruption that it discredits the agreed reform. No country has been
more acclaimed for its structural reforms than Mexico. This is the way
that Andres Oppenheimer, the chief Latin American correspondent for the
Miami Herald, in his book, ``Bordering on Chaos'', described
privatization in that country: ``In his bid to increase capital
inflows, Salinas had put state banks on the block at three times their
book value and often more . . . But in exchange for high prices,
Salinas offered their buyers sweet regulatory deals and long term
promises of fabulous riches through NAFTA, which would soon allow some
of the new private owners to sell their monopolies to multinational
corporations at record profits . . . Through a policy of `directed'
deregulation or selective liberalization, Salinas paved the way for the
formation of more than a dozen monopolies that would control industries
such as copper mining and telecommunications.''
After the Mexican devaluation of December 1994, the World Bank and
the IDB poured billions of dollars into the Mexican banking industry to
``bail out'' the banks from their profligate lending, designed to
recuperate the exaggerated prices they had paid for the state owned
banking assets that were privatized. Mexico is not an isolated case.
The same pattern has been noted in Russia and Argentina, both
countries, which were at the time acclaimed for their reforms,
particularly the privatization of state owned assets. Subsequently, the
process, the lack of transparency, the massive corruption that
accompanied the process, became in both countries major political
issues.
I think it is unreasonable to expect that the World Bank, and or
the regional development bank, can by themselves ensure the integrity
of the process. The political and financial interests, and the stake of
the government in the policy are too great. The process will be driven
by domestic considerations and the domestic balance of power. What I
think is reasonable however is to expect that where the corruption that
has accompanied the process is as notorious as it was in Mexico,
Argentina and Russia, the international financial community, through
the MFIs, not give its stamp of approval, as was done in all three
cases, to such a flawed process by extravagant praise of the
``reforms.''
What then is the remedy? Political democracy. Argentina is the
country which best illustrates the point. The government of President
Carlos Saul Menem by the end of the decade of the 90s was thoroughly
discredited. Menem failed in his initiatives to amend the constitution
to permit him to succeed himself as President and then to mount a
political comeback. The reasons are complex, rooted in part in the
failure of the government's economic plan and the rivalries within his
own political party. But all informed observers agree that the
perception and the reality of massive corruption in the government, and
particularly the privatization of state owned enterprises, played a
major role in the demise of Menem's political career.
A competitive political party system, an aggressive free press, and
a previously discredited judiciary all played crucial roles in ensuring
that the corruption issue was a central part of the Argentine political
decision-making. The system worked the way we should hope it would. And
that is why I remain skeptical of the role of outside entities in
addressing corruption in any particular society. The best and most
effective remedy is the existence of the institutions of political
democracy--a competitive political party system, a free press, free
trade unions, an independent judicial system.
Too often, that objective has been sacrificed to an excessively
technocratic economic outlook within the MFIs. The most egregious
example is that of Indonesia under the government of Suharto. Indonesia
was acclaimed by the World Bank as a ``star'' of the system because of
its economic performance and alleged reduction in absolute poverty. And
there were gains, both in economic management and in the reduction of
those living in abject poverty. But in a remarkably detailed report the
Wall Street Journal (Brauchili, 6/14/98), observed that ``World Bank
officials knew corruption in bank-funded projects was common'' and
``went along with government estimates that showed epic improvements in
living standards, despite indications the numbers were inflated.'' The
Journal notes that the World Bank lent Indonesia more than $25 billion
over three decades and quotes James Wolfensohn, the President of the
World Bank, explaining that ``We were caught up in the enthusiasm of
Indonesia.'' Hopefully, we are now beyond the excessively economic
technocratic thinking that led World Bank officials to overlook and
justify the seamier side of development in the Suharto era.
The Chairman. Well, thank you very much, Professor
Levinson. I appreciate the historical background which each of
you bring to the discussion.
Frequently in the body politic, the whole situation of term
limits is mentioned, and the thought is that it would be
useful, for people in our calling in the Senate or the House,
or what have you, after a certain amount of time, to yield and
let others take our place. There may be some virtue in
refreshment of the system in that respect.
One advantage of the current system, however, is
institutional memory. A few people are here for a long time.
Professor Levinson, you have been around for a long time, and
your memory is helpful in this. Professor Winters talked about
15 years of research in this. Ms. Boswell has talked about the
evolution of the interest in this subject in the World Bank,
and in particular the lack of interest which really may have
led to the foundation of the group that you represent today.
I remember, as a junior Senator, in 1977, serving on the
Banking Committee. Senator Proxmire was then the chairman, and
we were discussing the issue of the deductibility of bribes.
This was a serious issue then. This was 27 years ago. American
businesses were coming to us and saying, what about this? We
are trying to do more exporting. We are trying to do deals, and
our competitors literally have tax systems that either overtly
or covertly lead to severe disadvantage for us. The American
Government even then tried to institute various policies that
would discourage this. As you pointed out, the OECD situation
is one which we are still attempting to perfect, to move the
ball ahead.
The dilemma we are talking about today is that of the many
nations that assert their sovereignty. These nations sometimes
go so far as to contend that, corrupt or not, the problem is
theirs, and they do not brook tolerance by us folks with all of
our moralism and fastidiousness. They seek to run their own
affairs in an entirely understandable spirit of independence.
On the other hand, serious issues arise, in terms of equity
for poor people around the world, quite apart from the general
morality of politics. I can recall the Indonesian experience
and President Suharto, on my first visit to that country, which
came fairly shortly after observation of the Philippine
elections involving Ferdinand Marcos and Corazon Aquino. The
degree of corruption in the Marcos regime was fairly obvious,
but this runs up against another problem and that is the sense
of real politics at the time, whether Marcos was our friend,
our ally in the cold war, leaving aside whatever might be
happening with regard to international loans or anybody else's
money. There is still some of that. You have problems of
governments that somehow or other, regardless of which war or
which period we are in, there is a good bit of overlooking of
all this. This runs up against another problem; that is the
politics of the time. Was Marcos our friend, our ally in the
cold war, regardless of the administration of international
loans? We are still faced with that sort of problem today.
This committee has the temerity to have a hearing of this
sort. We hope to do this periodically, as opposed to having one
go at it, and hoping you all do well. We are attempting to
illuminate what sort of progress we are making. I sense that
the American people--and I think this is true of the citizens
of many countries--have little tolerance for political
corruption, and the misuse of money. You must have found, in
your reforming efforts, constituents who really believe
somebody ought to be doing this kind of work, and doing so
comprehensively.
Now, having said that, doing it is tough going, as you have
illustrated, although some of you have been optimistic about
how we proceed in these things.
There are a good number of people who do not like the
international lending institutions. They have felt that
America's support for these was a dubious prospect. They listen
to hearings such as this one, in which it is suggested that
millions, maybe billions historically, have been
misappropriated and misspent. This leads to further
justification, in their own mind's eye.
Fortunately all of you have approached that angle. This is
clearly true of our first witnesses. These institutions are
critically important. Anyone approaching this from a
humanitarian standpoint is not looking at the corruption
investigation as a way of winding it all up, and saying we
ought to quit this sort of thing, and just get out of the
business. It is very important, I think, for us to emphasize
the reason we are in this business. We are having the hearing
because we believe that strengthened confidence in all of this
is imperative. The world is more transparent generally. The
press has become better in following these stories. So have
political parties in some affected nations. So I appreciate the
spirit with which you have approached this.
I asked the first panel about these large loans to
government. I think, Professor Levinson, that you were right on
the mark in trying to give us an illustration of this. Let us
say to the ministry of agriculture or the ministry of
education, maybe you could take a look and see if there are
some educational results, such as schools coming up, and so
forth. Is there accountability? We had testimony earlier on
that some would say, well, by golly, some schools got built and
all things considered, thank goodness. Even if only 70 percent
of the money got there, something happened.
Governments themselves say, we are sovereign. We really
resist people coming in and taking a look at our situations.
Now, you could say, if you were a bank, OK, you do not get any
money. That is that. But some of these people who are in these
positions may not be that interested in the poor. We may be
more interested in their poor people than they are, as a matter
of fact. That is our humanitarian dilemma. How in the world,
given systemic failure of this variety, do you get the money to
the poor people?
Where are we getting more leverage with the governments?
How can we do better in the Congress, and in the
administration? Yes, Professor Levinson.
Dr. Levinson. I was a Democratic appointee to the Meltzer
Commission on International Financial Institutions. There were
constant allusions to the fact that schools were built without
teachers, et cetera. Frankly, what I saw and through the years
have seen, is that there has been a tremendous evolution.
Nobody is just interested in building schools anymore. You have
to show as part of that project you are going to have teachers,
that the teachers are going to be trained, that there is going
to be a post-construction evaluation process. Sometimes it is
done jointly with the government and the institution. The IDB
has an evaluations office which does post facto evaluations of
programs and projects and then tries to build in what they
found into future lending.
I think that we have to make a distinction between projects
where the institution can demand that the procedures are
transparent and visible and competitive. It is another thing
when you provide money--take your example of money to an
education ministry. Sometimes the education ministries are very
weak politically and administratively. So the question is, how
do you assure that the money that is going to go through the
ministry is going to, in fact, build the schools without--I
think 30 percent would be an extraordinarily high percentage
being siphoned off, frankly. I think it would be outrageous and
I think if it was discovered, the institution would have to
stop the program and stop future lending to that institution
and maybe to the government because I do not think that is
acceptable and I do not think it is acceptable in the
institutions.
So I think that you have to approach it from two points of
view. One, you are trying to build capacity in the education
ministry because when you eventually leave, you want to leave
that ministry better capable of carrying on on its own than
when you started with them. You are not only providing money
for construction, you are providing money for institutional
betterment with respect to processes and you are demanding that
as a part of your financing. Once you stop lending to that
institution, you lose whatever leverage you may have had.
But in my experience, the institutions now look at the
totality of what they are financing. They do not just look at
building schools. They want to know the schools are going to be
staffed. They are then looking at what is the output in terms
of literacy. They then conduct joint evaluations to see what
went wrong, what went right. They demand, in some cases that I
used to know of, that the bidding process be subject to
approval, which elicited enormous resistance because that is
the way in which you took care of your friends.
As you point out, there is a tension between the
sovereignty of the institution and of the country and the
demand of the international financier, that if we are putting
up the money, we want to be sure the money is going for the
purpose that we claim. I think you have to see it as a whole.
The Chairman. Dr. Winters.
Dr. Winters. Yes. With regard to sovereignty issue, no
country in the world has a right to multilateral development
funds, and there is a fundamental difference between public
sector lending and commercial lending. A commercial lender will
look at loan conditions on the front side. It will assess
ability to repay and whatever you do with money is up to you.
It is very different with the case of a multilateral
development bank. Because the money is in part coming from
taxpayers, your responsibility as a representative of those
taxpayers is to safeguard that money. And you are quite right
that there is a lot of anger associated with it being stolen.
I think we also need to understand that the corruption
issue is not an on/off switch. It is a dimmer switch issue.
Those of us who live in the city of Chicago know this very
well, a famously corrupt city, and we struggle very hard to
make sure that our public money is watched.
I think the reason I differ somewhat with some of the
comments that others have made here, especially about the
relationship between governance at the broader societal level
and specifically how these resources by public sector lenders
are handled is because I am actually much more modest in my
objectives. I believe a modest, but solid foundation needs to
be laid for the resources that flow through this particular
channel, and while accepting that we are probably talking about
a multi-decade process of getting the governance institutions
in place, controlling excessively powerful people and getting
them to submit to rule of law in their own countries, this is a
very long-term process. And I do not think that the operations
of the MDBs should wait multiple decades in order to safeguard,
as a best practices element within a broader context of theft,
to basically have a hands-off policy on these particular
resources.
I differ also slightly with the idea of the fungibility
problem. When we do make payments directly into the Treasury
for broad support, it is not unreasonable to ask that those
funds be earmarked for specific projects and that followup be
done to make sure that funds are spent for the ways that they
were intended to be spent. It is possible actually to track and
trace money, and if the government wants to steal the rest of
the money from its treasury, if officials want to do that,
fine, they can, but make sure that money that is allocated for
specific purposes gets used for it.
Finally, on the question of what I am calling criminal debt
and the scale of it. I stand behind the figures of $100 billion
for the World Bank and $200 billion for all the MDBs, and it is
because the problem is not in the bidding process on the front
side. The problem is in how the funds are actually used on the
back side, and that is an auditing and supervisory issue. I can
give you a concrete example.
The bidding may be for a $300 million toll road to be
built. Roads have been built for thousands of years. The
technology of building roads has not changed much. One can put
in a $200 million road with substandard sand, cement,
materials, rocks, and when you are all done, it is going to
look like a nice road. It cost $200 million instead of $300
million and $100 million was lost in the process. There is
nothing about the front side bidding process that would ever
detect this or catch it, and the problem is within 3 years that
substandard road now needs a second World Bank reconstruction
loan because it has deteriorated rapidly. And this kind of
thing goes on over and over and over.
I conclude by saying we cannot ask the World Bank and we
cannot expect the multilateral development banks to self-report
and to self-monitor entirely. We need an independent
multilateral agency that has the right to go into every country
and on a spot basis audit projects as a condition for accepting
multilateral loans. If you do not want MDB money, go to the
commercial market.
The Chairman. Mr. Bapna.
Mr. Bapna. I would like to touch upon two of the issues
that have been raised recently. The first one has to do with
this concern about infringing national sovereignty, which I
think is a very important question to ask and something to be
very clear about.
I think that what these institutions have and can do
appropriately is to set clear, open, and transparent
international standards that are consistent with their own
missions on how they lend their funds. This is how I think one
tries to ensure that one does not get into the World Bank
forcing or coercing national governments on issues that are
oftentimes considered sovereignty or within kind of a domestic
context.
This is similar to the environmental and social standards
that the institutions have put in place where there is
oftentimes a higher standard or a difference of opinion on, for
example, how to resettle individuals that are affected by a
particular investment project. The World Bank has a
resettlement policy that is at least superior than other
countries in terms of dealing with this, and I think similarly
for corruption, the idea of setting some open transparent
standards that reflect the international communities approach
to dealing with this issue can help address this issue.
The second point has to do with respect to adjustment
lending. Adjustment lending is an increasing percentage of the
total portfolio of these institutions. Since 1998, it is
approximately 35 percent of World Bank total lending, and in
one year I think it actually was 53 percent. So this is an
important type of operation for conveying development aid.
Often, though not always, these resources are attached to a
particular policy framework that sets out specific policy goals
and triggers that need to be achieved in order for subsequent
tranches of the operation to be released.
The rationale for adjustment lending is in part the
recognition that investment projects can only go so far in
addressing some of the underlying development challenges facing
countries today, that one needs to put in place an appropriate
policy and institutional framework. Moreover, questions of
country ownership, questions of sustainability also have led
organizations to recognize the importance of budgetary support.
What perhaps I find more controversial are the actually
policy conditionalities that the institutions are putting in
place. The type of operation itself I am a little less
concerned about because perhaps from a slightly different point
of view, I do believe resources are fungible. I do believe that
the institutions can do some on their own through internal
controls to address corruption, but if one really wants to look
at addressing corruption in a more systemic way--and granted,
this is a bit more of an ambitious goal--I think one needs to
deal with corruption throughout the country and that really
calls upon the international donor community to focus on
supporting good governance.
The Chairman. Ms. Boswell, do you have a contribution to
this round?
Ms. Boswell. Well, I would only ask the fundamental
question why so much money is being shifted toward this budget
support area if it is so controversial and so difficult. I
think it is something that should be looked at. I think the
amounts, as I understand it, are over what they were supposed
to be at the bank. I do not have more specific figures, but I
think it ought to be something we look into.
I wanted to go back to some of the comments you made
earlier about the temerity of the committee in looking at this.
From the perspective of the various chapter representatives I
talked to in preparing for today, they welcome this inquiry.
They welcome visits by congressional delegations to their
country because it sheds light and it gives them information
that they otherwise might not have. So it is an open invitation
to continue.
I would like to comment that governments have already made
commitments to take a lot of these steps that we are talking
about today. They are signatories to anti-corruption
conventions. If the bank takes up those commitments and makes
sure that they are actually acted upon, then I think the issue
of sovereignty may be less of an obstacle.
Finally, I think business attitudes are shifting as well.
You go back to 1977, when the FCPA was enacted. Certainly for
the last 25 years it has been terribly difficult to get laws on
the books outside the United States. We now have 35 signatories
where those laws are on the books. It is now a crime to pay a
bribe to a foreign official to get a deal. Those payments are
no longer deductible. However, we do not have any cases to
point to. We simply have to make progress on that. The
monitoring process at the OECD is terribly important to make
sure that cases are brought.
The bidder requirement that the banks could impose can go a
long way toward helping those companies that really want to do
the right thing. And we have companies not just in the United
States now but in Europe. We have been working in construction
and energy and other problematic sectors. There are companies
that would like to operate with integrity, but they need a
level playing field, and I think a bidder requirement could
help do that.
The Chairman. Let me ask a question. This is in an entirely
different field, but there may be some transference of
situations. At the time the Soviet Union collapsed, Russian
officials came to some of us and said, we have got a mutual
problem; namely, our nuclear weapons and our chemical weapons
and what have you, might be at risk of misappropriation,
proliferation, people stealing them or cashing in and so forth.
So we think this ought to be of interest to you. It is of
interest to us in terms of our own security. Nuclear accidents
might occur in Russia, quite apart from missiles being shot
inappropriately.
We came up with the Nunn-Lugar Act, a cooperative threat
reduction program. But this was not to be budget support. The
Russians said we have no money. We can sign the Chemical
Weapons Convention, and we did, but there is no way we can
destroy the 40,000 metric tons of chemicals we have because we
have no money. Our budget is very small.
The Nunn-Lugar money came in the form essentially of paying
American contractors, when it comes down to it, 85 percent of
it, to go to Russia and to work with Russians there, at very
modest sums, to get the job done.
Now, this is an extreme case. Obviously, it is
counterintuitive. A great power enlists another power to disarm
itself.
The fungibility question always came up, in this case, in a
defense context. If you give money to the budget of Russia, how
do you know what the money might be spent for? Granted, 85
percent or 90 percent goes to American contractors. How about
the other 10 percent? Is it being spent developing new missile
or submarines or what have you? The indications are that it has
not been, but this is still a valid question. It is important
to address the fungibility problem, if you are dealing
government to government.
Some of the issues we are talking about today do not
involve nuclear weapons or chemical destruction, but many
countries are involved in some very vital activities.
I think you make a very good point. Why do the banks go
into so much budget support? Why do we not have criteria for
looking for roads or schools or various development situations,
in which you define what this is all about, as opposed to what
seems to be almost a propping up of somebody's failed economic
system, or one that is on the tenterhooks of disaster?
Yes, Professor Levinson.
Dr. Levinson. The structural adjustment and sector
adjustment lending, you are quite right, were designed to deal
with emergency financial situations. You will recall after the
Mexican devaluation in 1994 when Secretary Rubin and the IMF
put together that major bailout, which really was not of Mexico
but was of the creditors that had loaned the short-term----
The Chairman. Money for the worldwide financial system.
Dr. Levinson. Right. So what did they do? If you will
recall, Rubin came to the Congress. The leadership said, yes,
this is important, but the majority of both parties in the
Congress said, hey, wait a minute. We are not going to
appropriate $20 billion to pay off the creditors who bought
these short-term bonds from Mexico.
So what did they do? They turned to these multilateral
financial institutions, probably the only source of immediate
liquidity at the time, and they invented this whole structural
adjustment/sector adjustment lending. So that became part of
the program.
Now, Professor Winters says, well, that money should be
used for specific purposes. That would defeat the whole purpose
for which they invaded the funds of these institutions which
was to provide liquidity to enable the country to use the funds
for any purpose. That was linked to reform, to an overall
austerity reform program, as it is in every case.
But the fact of the matter is your question is perfectly
valid as to whether or not it is desirable to continue this
form of lending. I think if you look at it in perspective, you
will find that the great majority of it was a response to the
debt crisis of the 1980s, post 1985, and the successive
financial crises of the 1990s. The question now is so many of
the countries have gotten, if you will, addicted to this free
use of money, that they do not want to go back to financing
infrastructure and specific programs and projects where the
money is used for identifiable purposes.
There is a tension that is going on right now. At the last
IDB annual meeting, this was a central issue. Some of the
larger countries said, just give us the money, which is what
you did during the decade of the 1990s. Well, you know,
politically that is not viable.
When I made a trip to Brazil, I would say show me the debt.
I want to see the debt. They would say, OK, we will pick you up
in the morning in a carryall. And they would take me out to see
a steel mill or transmission lines or a road. This is what we
borrowed for. This is what we used it for.
I asked the same question in Argentina, and they thought I
was out of my mind because the money all went for current
consumption. There was nothing to show for it. It just went
into the central bank and then went out the back door of the
central bank.
I think Ms. Boswell raises a very legitimate question. Does
it make sense any longer to go on with this type of lending?
And if these institutions are to be politically viable over the
long term, I suspect that it does not make any sense.
The Chairman. Ms. Boswell.
Ms. Boswell. I would just like to take advantage of your
posing this question to raise something that may be a little
bit delicate, but you mention situations with the nuclear
weapons and the urgency justifying the support at the time. We
have a situation in Iraq with great urgency. We have raised the
question of whether or not time is being taken to build the
kinds of institutions and leaders that after handover, will
have the mind set of accountability and transparency and
responsibility for the resources that will flow through them.
So I just put that on the screen as an issue that I do not
think we really have an answer to yet.
The Chairman. Well, we do not. I would say in an ideal
world we might have a better one, but in the real world in
which we are operating presently, it would appear that
sovereignty is going to be transferred to people that are non-
elected, although they will fashion some elections, some
legitimacy. In this kind of an atmosphere, the kinds of
standards that we are talking about today just do not exist.
People who have become the Iraqi statespersons understand that
you cannot be totally irresponsible. They may fashion some
institutions, but clearly, I think, it is going to be an
incremental, day-by-day experience for them. The negotiating
skills of Ambassador Negroponte on behalf of the thousand
Americans and 15 agencies that will be working to help in those
situations will be tested. It is a very good question, and it
probably is not the last time that it may be raised.
We had the hearing on Afghanistan yesterday, for example.
Now, there a finance minister and others have fashioned very
responsible activities in which they are asking the world
community for aid, and the world community has responded with a
certain amount of pledges. The money has not come yet. There is
a certain slowness of payment and the cash-flow and what have
you. But at least the institutional aspects look a lot more
solid in terms of a transition state which still is trying to
have its elections, still having road-building, just so people
can get around to register the voters.
These are valid questions. We have been talking about a
world of the 1980s and this is would be bad enough for even the
1990s, let alone our current decade. We face a whole new train
of situations involving transitional states and failed states.
Did you want to talk, Mr. Bapna?
Mr. Bapna. Sure. Just to perhaps touch upon this issue in a
little bit more detail on adjustment lending and corruption. As
has been acknowledged it is becoming an increasing percentage
of the portfolios of these institutions, but I think it is
important to recognize adjustment lending is almost a term that
is a catchall for many different types of lending. There is
emergency lending at the country level. There is macroeconomic
adjustment lending at the country level. There is sector
adjustment lending. There is programmatic lending. All these
different types of lendings are being kind of classified under
this catchall of adjustment operations or budgetary support.
The Chairman. Good point.
Mr. Bapna. It is important to recognize the nuances between
these different types of lending.
For some of the lending, the rationale for adjustment
lending is premised upon a recognize that focusing solely on
physical investments in investment lending did not produce the
impact and the sustainability of development objectives that
people had initially hoped for. This is based on a fair amount
of literature back in the 1980s and 1990s on these experiences
that recognized that policy institutional reforms are critical
to underpin the sustainability of the particular objectives
that are being set forth.
Therefore, I have a slightly more nuanced perhaps
interpretation of budgetary support. I think at times when the
wrong policy framework is imposed, it can have disastrous
consequences. However, if in certain cases the policy
institutional framework which has cost to it, which is why
adjustment operations are provided to help provide ministries
with the cause to make such an adjustment, is complemented with
useful investment projects, that that is the most effective way
to ensure positive development impact and to ensure local
ownership and sustainability of that impact. So I would like to
make that point clearly.
Thank you.
The Chairman. A very good point.
Dr. Winters.
Dr. Winters. I think your question on the adjustment
lending gets to a more fundamental question which is what first
were these institutions designed to be, what have they become,
and what ought they be. One of the reasons we entitled our book
``Reinventing the World Bank'' rather than ``reforming'' the
World Bank is because we feel we are looking at a blue screen
and it is time to reboot. A second Bretton-Woods would be a
very good idea.
The computer analogy is one that is used intentionally. The
World Bank and the other multilateral development banks have
responded to criticisms over the decades and they have
responded also to political pressures by adding to what they
do. They have expanded out into all kinds of things which are
not necessarily their core competence. The World Bank should
not be the leader on environmental change in the world. The
World Bank is not a knowledge bank. A good deal of its research
is not cutting edge and so on and so on. The World Bank should
not be promoting participation around the world. This is not
what the World Bank in our view is good at.
What the World Bank should be doing is lending for purposes
of direct development projects, things that they can watch
funds. So I am actually against adjustment lending. I think the
vast majority of adjustment lending has not produced very good
results.
So one of the things we have to grapple with ultimately,
quite apart from the technical aspects of how to watch money
and what specific recommendations should be put forward, is the
much broader question which is can we rethink and can we
reinvent these institutions. I certainly hope, given the needs
that have been expressed here today and the question of
reducing poverty and so on, that that can be undertaken.
The Chairman. This is a different objective but an
important one. As you say, perhaps we need to take a look at
the sorts of institutions we have and, what is required, given
the problems in the world.
I suspect something will come along again like the Mexican
crisis, which I remember very well. I remember Secretary Rubin
coming over here, and Alan Greenspan, hand in hand, as part of
a small group of people meeting over in Senator Dole's office.
It appeared as though the world was collapsing. We were getting
communications from Asia and elsewhere of funds being
transferred wildly. It was a crisis situation that in fact was
met with the very obscure reserve fund of our government,
leaving aside the banks, from nowhere. Some funds were found
from readjustment from World War II, as I recall.
Pragmatically, statesmen do this sort of thing in order to sort
of save the world.
At the time of the long-term capital management situation,
when things were unraveling as people tried to get their
positions right, a meltdown appeared to be occurring in various
ways. There were a lot of tense people. In that particular
case, there was not a great deal of multinational lending from
these institutions, as I recall, but on the other hand, there
were suggestions there might be.
I am not certain what we will anticipate next. Last year
there was a concern with China. Is there a bubble being created
here? Is there something that is so big, given the enormity of
the impact on all the surrounding nations, quite apart from our
own debt structure, with the Chinese buying all the bonds from
us and supporting our currency in these ways? A crisis has not
happened, and we are not experiencing borrowing problems.
A hearing of this variety is important. First of all, we
have encouraged transparency, a better sense of governance, a
better sense of confidence. You have served as very
constructive critics of the situation. When these crises do
occur, there might be confidence on the part of the American
people and their elected representatives in the institutions,
as well as faith in the ability to form new ones, to have some
sense of what sort of charters are really required given the
financial requirements of an interdependent world.
We promised the hearing would come to an end at noon. The
rollcall vote mercifully had been postponed until 12:10. I can
do my duty and go vote. I appreciate your spending time both on
the statements, which are helpful for our record, and also on
your very forthcoming responses.
The hearing is adjourned.
[Whereupon, at 12:03 p.m., the committee adjourned, to
reconvene subject to the call of the Chair.]
----------
Additional Submissions for the Record
The World Bank,
Washington, DC, 20433,
U.S.A., April 28, 2004.
The Honorable Richard G. Lugar,
United States Senate,
Chairman, Committee on Foreign Relations,
306 Hart Senate Office Building,
Washington, DC 20510-1401.
Dear Chairman Lugar:
I am writing in response to the request from you, as Chairman of
the U.S. Senate Foreign Relations Committee, to testify and provide the
Committee with a status report on efforts to address corruption related
to World Bank projects. I regret to advise you that I will not be able
to testify, as further explained below. Nonetheless we are very
enthusiastic about your enquiry and will use every other possible means
to provide you and your colleagues with information to allow your
enquiries to be complete and fully informed.
The World Bank, as an international organization, is accountable to
all of its 184 member countries, through its internal governance
structure in which all members participate. Consequently, the Bank and
its officials provide information about the Bank's activities to each
of its shareholding member governments, using channels agreed upon with
the representatives of that government. The Bank recognizes the
importance of parliamentary and Congressional processes in its member
countries, and indeed, provides support to help strengthen these
processes as part of its development work. As you are aware, the Bank
regularly provides briefings to U.S. Congressional staff on topics of
mutual interest.
Bank officials cannot provide information, however, through
testimony before the legislatures of the Bank's shareholders. This
long-standing policy respects the requirements under the Bank's charter
to preserve the international character of the Bank, to avoid
involvement in domestic political affairs, and to ensure that local
legal processes are not inappropriately applied to the Bank.
Consistent with these policy and legal requirements, I am not able
to accept the request to testify before the Committee. Yet, combating
corruption is a topic of keen importance to the Bank and to me, so I
have asked Suzanne Rich Folsom, Counselor to the President, to be in
touch with Keith W. Luse and your staff shortly to arrange for our Bank
experts to provide a full briefing and exchange of information on this
topic.
Sincerely yours,
James D. Wolfensohn,
President.
______
Inter-American Development Bank,
1300 New York Ave., N.W.,
Washington, DC 20577, May 4, 2004.
The Honorable Richard G. Lugar,
Chairman, Committee on Foreign Relations,
United States Senate,
Washington, DC 20510.
Dear Mr. Chairman,
Thank you for your letter of April 22, 2004, in which you invite me
to testify at the hearing on ``Combating Corruption in the Multilateral
Development Banks'', to be held on Thursday, May 13, 2004.
I want to commend you for this initiative and assure you of our
fullest cooperation. You may be aware, however, that due to the
policies governing international organizations such as the Inter-
American Development Bank, Bank officials are unable to provide
testimony to the parliaments of any of the member countries of the
institution.
Nevertheless, I hope that we will have the opportunity to inform
about our longstanding commitment to help fight corruption in the Latin
American and Caribbean region and of efforts to greatly improve our
institution's own internal and external controls. To this effect,
senior staff of the Bank dealing with these matters would be available,
preferably before the scheduled hearing, to provide all necessary
information. I also will be only too willing to meet with you at a
later date to discuss this and other issues of interest to you and the
Committee.
Yours sincerely,
Enrique V. Iglesias
President.
IDB EXPANDS INFORMATION DISCLOSURE, TRANSPARENCY
BANK AT FOREFRONT OF PROVIDING GREATER ACCESS TO DOCUMENTS, POLICY
PROCESS
The Inter-American Development Bank's new Information Disclosure
Policy, which entered into effect on Jan. 1, 2004, places the
institution at the forefront of action by multilateral institutions to
provide greater and more timely access to documents and information.
For the first time the policy includes not only operations-related
information, but also financial statistics and legal documents.
Approved by the Board of Executive Directors in late 2003, the new
policy is the first for a multilateral institution to include access to
minutes of the deliberations of the Board.
In the realm of projects, the extent of information published under
the new policy has been expanded considerably. Information on
operations is first provided when a project has newly entered the
Bank's pipeline. As the proposed operation becomes more complex and
detailed, a project concept document is posted on the IDB Web Site,
which is later complemented by the full-text publication of the loan
proposal, the document used by the Board in its deliberations as to
whether or not to approve a financing package sent forward to it by the
management of the Bank.
In another new development for 2004, the public now has access to
information on the status of disbursements for all projects. The
Statement of Approved Loans, updated monthly on the Web Site, contains
a rundown of all loans approved in more than 44 years of Bank
operations, including information on repayments. Coordinated by the
Bank's Office of External Relations, the IDB Web Site also provides
access to two other operations-related products: the Country
Strategies, which lay out in broad terms the rationale for the Bank's
collaboration with borrowing member countries in Latin America and the
Caribbean and Country Program Evaluations, prepared by the IDB's Office
of Evaluation and Oversight, which reviews both Bank and country
performance in comparison with the programs as originally mapped out.
Individual Bank-financed operations with significant environmental and
social implications are required to publicly document those impacts--
and the Bank and borrowers' proposed remedial actions--in a timely
manner. All documents considered by the Board are available in both
English and Spanish. Documents in Portuguese are available for
operations for Brazil, and French language documents are available for
those in Haiti.
ZERO TOLERANCE FOR CORRUPTION
The IDB's adoption of a progressive new information disclosure
policy fits alongside a number of other significant steps taken by the
institution to raise questions of governance--both In Bank operations
and among member countries. Dating back to the Bank's Annual Meeting in
Milan, Italy, in March 2003, IDB President Enrique V. Iglesias
emphasized the need to maintain a policy of ``zero tolerance'' for
fraud and corruption. To that end, late in 2003, the Bank assembled a
number of its most important investigative functions under the umbrella
of a new Office of Institutional Integrity. The secretariat of the
Bank's Oversight Committee on Fraud and Corruption resides in the new
office, as do investigators charged with looking into alleged
violations of the Bank's Code of Ethics and matters related to conduct
in the workplace.
Within the past year, the Bank has implemented a new staff rule on
protection for whistleblowers. A policy providing for the debarment of
firms accused of improper actions related to Bank-financed procurement
is in the final stages of clearance by the Bank's management. In the
area of procurement more generally, the Bank hired two leading firms to
conduct top-to-bottom reviews of the Bank's procurement policies and
procedures--both for purchases made in connection with projects in
borrowing member countries (operational procurement) and for the
acquisition of goods, services and works directly by the Bank
(corporate procurement).
In addition, a Corporate Governance Committee was established and
submitted recommendations, for implementation by the Board of Executive
Directors and management, on enhancing auditing, internal controls,
institutional reporting and rules consistent with the procedures of the
Sarbanes-Oxley Act of 2002 adopted in the United States and similar
international initiatives.
These recommendations include the realignment and enhancement of
the Audit Committee's responsibilities, enhanced disclosure mechanisms
and procedures, tighter rules against conflict of interest and measures
to ensure greater independence and effectiveness of the Bank's external
auditor.
______
African Development Bank Group,
13 Avenue du Ghana,
Angle Av. Hedi Nouira et Pierre de Coubertin,
BP.323--1002Tunis Belvedere,
Tunisia, May 11, 2004.
The Honorable Richard G. Lugar,
United States Senate,
Committee on Foreign Relations,
Washington, DC, 20510-6225.
United States of America
Dear Senator Lugar,
I am pleased to acknowledge receipt of your letter dated 22 April
2004, wherein, in your capacity as Chairman of the United States Senate
Foreign Relations Committee, you have invited me to testify on 13 May
2004, and provide information to your Committee on the efforts of the
African Development Bank to address corruption in the Bank's projects.
Regrettably, I will be unable to testify. However, I would like to
express appreciation for your letter of invitation. The Bank would, of
course, through other possible means be able to provide you information
on the subject of the Committee's interest. We have been informed that
the Committee hearing on 13 May 2004, is expected to discuss in
particular, with respect to Africa, the Lesotho Highlands Water project
in Southern Africa. If this information is correct, you will please
note that the African Development Bank did not participate in financing
that project.
The African Development Bank is an International Institution
governed by the Agreement Establishing the Bank (the Bank Agreement)
and is accountable, through its internal governance structure, to its
member countries. The Bank, therefore, provides information about its
activities to each of its member countries through the Board of
Governors and the Board of Directors of the Bank, on which Boards all
member countries are represented. The Bank also maintains a public
information center, through which, and consistent with the Bank's
policy of transparency and information disclosure, information about
the Bank's activities are made available. Officials of the Bank do not
testify before the national legislatures of its member countries.
Nevertheless, the Bank fully recognizes and supports parliamentary
inquiries by its member countries as evidence of good governance within
the member countries. The inability of Bank officials to testify before
the legislatures of its shareholders stems from the Bank Agreement
that, among other things, requires officials of the Bank to preserve
the international character of the Bank, avoid involvement in domestic
political affairs of member countries and ensure that the Bank is not
subjected to the national legal processes of its member countries or
have these processes inappropriately applied to the Bank.
Consistent with these policies, and legal requirements, I am unable
to respond favorably to the invitation of your Committee. I would,
however, like to assure you and members of your esteemed Committee that
the Bank is keenly interested in weeding out corruption from Bank
projects and has worked towards that end. Please have your staff
contact the General Counsel of the Bank, Mr. Adesegun Akin-Olugbade,
who could furnish available information for the benefit of your
Committee.
Omar Kabbaj,
President.
______
Prepared Statement of Ambassador Cynthia S. Perry
ANTI-CORRUPTION EFFORTS OF THE MULTILATERAL DEVELOPMENT BANKS (MDBS)
AFRICAN DEVELOPMENT BANK GROUP (AFDB)
Mr. Chairman, Members of the Committee, I welcome your invitation
to discuss the efforts of the African Development Bank Group (AfDB or
``the Bank'') to address corruption.
Fueled by poor governance, corruption in much of Africa remains
widespread and pervasive. Far-reaching change will be necessary to
reduce it dramatically. The African Development Bank is keenly aware of
the challenges involved, and has placed itself at the forefront of
efforts to promote good governance and combat corruption on the
continent.
The Bank's anti-corruption efforts aim to mitigate the risk of
corruption in its operations and increase the level and quality of
assistance to its borrowing member countries in support of good
governance. By virtue of its African character and the priority it has
placed on promoting good governance, I believe the African Development
Bank is well placed to continue to enhance its leadership role in the
area of governance and in the fight against corruption.
The Office of the U.S. Executive Director at the AfDB has advocated
strongly for greater transparency and improved governance at all levels
of the AfDB's operations, and will continue to do so. While the Bank
has made significant progress in terms of institutional accountability,
transparency, and operational control, further efforts are needed. My
remarks today will focus on the AfDB's efforts to combat corruption and
strengthen governance on three fronts: at the institutional level, the
project level, and the country level. The Bank is also actively
promoting good governance through a number of partnerships with
regional and international organizations.
Institutional Efforts
The AfDB's 1999 Policy on Good Governance emphasizes combating
corruption as one of the pillars of the Bank's mandate to promote good
governance in member countries. The Bank's Strategic Plan for 2003-2007
also underscores the linkages between good governance, including
combating corruption, and the Bank's poverty reduction mandate. To
strengthen these linkages, the Bank has put in place effective internal
controls and procedures intended to deter, detect and punish corrupt
practices.
Most notably, in the past year, the Bank developed a Code of
Conduct for Bank staff, Guidelines for Preventing and Combating
Corruption, and an Information Disclosure Policy. The AfDB maintains
strict recruitment procedures and is strengthening internal capacity to
combat corruption and promote good governance through staff training
programs.
The Code of Conduct for staff is a statement of basic ethical
principles to guide Bank staff in fulfillment of their duties. Failure
to abide by the Code of Conduct results in sanctions, as specified in
the Bank Staff Rules. During the past year, the Bank has disciplined,
in some instances terminated, the services of staff after determining
their involvement in corrupt or unethical practices related to Bank
operations.
Building on the Bank's good governance policy, the Guidelines for
Preventing and Combating Corruption outline where and how corruption
and fraud may occur in the Bank's operations, modalities for its
prevention, and procedures on how Bank staff should respond to
incidents of corruption and fraud in Bank operations.
One of the key features of the Guidelines is the Bank's zero
tolerance position with regard to fraud and corruption. In line with
the Code of Conduct for staff, the zero tolerance position means that
staff proven to have engaged in corrupt or fraudulent practice in
fulfillment of their duties will be disciplined in accordance with Bank
Staff Rules.
With regard to transparency, the Board of Directors recently
approved a new Information Disclosure Policy, which will significantly
enhance the transparency of the Bank's operations by making a wide
range of Bank documents publicly available. The Office of the U.S.
Executive Director has been the strongest advocate in the Board for
greater transparency, and will continue to lead this effort in order to
achieve the goals specified in Section 581 of the FY2004 Consolidated
Appropriations Act that are germane to the AfDB.
In the area of recruitment, the Bank's procedures explicitly forbid
nepotism or favoritism on the basis of nationality or group
identification. Staff members who fail to comply with these rules are
subject to reprimand, dismissal, or legal sanction.
The Bank continues to take steps to build its institutional and
human capacity. Internal staff training has been organized to promote
the Bank's good governance policy and to familiarize operations staff
with new diagnostic assessments such as the Country Governance Profile.
Enforcement of the Bank's zero tolerance position will require
strengthening the Bank's institutional capacity to deter, investigate
and sanction corrupt activities. The Bank intends to increase the
number of staff experts assigned to anti-corruption activities, and
enhance the technical skills of Bank staff through specialized training
in areas such as forensic auditing, detection of money laundering and
financial investigation techniques. In the Board of Directors and in
dialogue with AfDB management, I will continue to stress the need for
strengthening the capacity of staff working on governance and anti-
corruption activities in the Bank.
Project-Level Efforts
The African Development Bank has instituted a range of controls to
mitigate the risk of corruption in its projects. These controls include
auditing, supervision, the use of special accounts for higher risk
lending, due diligence on private sector borrowers and co-financers,
strict procurement procedures and a soon to be established inspection
mechanism. The AfDB requires annual audits of its projects and enforces
contractual audit provisions in its loan and grant agreements. My
office is active in the review by the Board's Audit and Finance
Committee of internal audit reports dealing with the results of audits
of the implementation of Bank projects.
The Bank's Internal Audit department safeguards the Bank's assets,
certifies compliance with its policies, and ensures auditing standards
are met. The Internal Audit department also assesses the strength of
internal controls and institutional arrangements in borrowing member
countries and assists national audit institutions with outsourcing
audit functions until adequate national audit capacity can be
developed. The AfDB's Operations and Internal Audit departments
evaluate the quality of independent audits of Bank projects, and fully
enforce the Bank's audit policy, which may include suspension of
disbursements to some projects. While no disbursements have been
suspended in the last three years due to fraud or corruption, at least
two projects are currently being investigated for fraud and corruption.
Preliminary assessments have revealed some improvements in the
submission of annual audit reports of Bank funded projects, but the
Bank needs to remain vigilant in its oversight to ensure project audit
reports are completed consistently across projects in a timely manner.
Supervision missions focus on good financial management of projects
as a way to eliminate opportunities for corruption. When compliance
with financial management standards is not adhered to, the Bank
proposes corrective measures and may impose sanctions. The Bank's
ability to conduct supervision missions was significantly impaired by
the temporary relocation of the Bank's operations to Tunis in 2003. The
Bank is now fully operational at the temporary relocation site and
supervision missions have resumed.
The AfDB's procurement regulations have been modified to be more
explicit in their treatment of corruption. As a result, the Bank will
now cancel at least part if not the entire loan or grant if the
procurement process was tainted by acts of fraud or corruption. Firms
proven to engage in corrupt or fraudulent practices can be declared
ineligible from participating in future Bank funded activities
indefinitely or for a period determined by the Bank. Over the past few
years, about thirty tenders have been canceled, companies sanctioned,
and together with their affiliates, barred from participating in Bank
projects. The Bank maintains a list of sanctioned or blacklisted firms
and shares the information with other MDBs.
The Bank's Procurement Review Committee of senior managers
appointed by the President receives and investigates complaints from
bidders who are not satisfied that their bid was handled in accordance
with Bank Rules of Procedure for Procurement of Goods and Works. The
committee is an independent body whose decisions, which can include
cancellation of a procurement process, are final and binding.
The experiences of other MDBs show that efforts to prevent, detect,
investigate and sanction fraud and corruption in MDB operations is most
effective and credible where a high-level single oversight body is
designated as a focal point for managing all matters relating to
corruption and fraudulent practices. As such, the Bank plans to
establish a high-level Oversight Committee on Corruption & Fraud. The
Bank is also working to develop a formal whistleblower protection
program designed to protect the identity of those disclosing
information or allegations concerning fraud or corruption.
To address issues of corporate governance, particularly in private
sector projects, the Bank is finalizing a Strategy and Plan of Action
on Corporate Governance. The Bank conducts due diligence assessments on
potential borrowers to ensure full compliance with corporate governance
principles for Bank-supported projects. The Bank also provides direct
assistance to private sector investors to endorse and implement
corporate governance principles as a pre-condition for Bank financing.
Within the overall framework of promoting good governance, the Bank
has proposed the creation of an Inspection Function, a combined
compliance and problem-solving mechanism. The proposal was posted on
the Bank's website for several months to invite comments from
interested stakeholders. Bank management will submit a final proposal
to the Board of Directors in June 2004. My office has been at the
forefront of the effort to establish an inspection mechanism at the
AfDB, which will reinforce the Bank's accountability for the impact of
its project operations.
Country-Level Efforts
The African Development Bank provides financial and technical
assistance to regional member countries in their fight against
corruption. Requests for assistance are determined on a case-by-case
basis and subject to a clear and credible demonstration of commitment
to principles of good governance and combating corruption.
Since 2001, the AfDB has approved $925 million in loans and grants
for governance-related activities for 25 member countries. Following
the 10th replenishment of the African Development Fund (ADF), the
number of Bank-financed governance projects is expected to increase
significantly.
Good governance is a key factor in determining the ceilings on
allocations of ADF resources for eligible ADF borrowing countries
during a given replenishment cycle. The Country Performance and
Institutional Assessment (CPIA) and Country Risk Assessments are based
on formulas that place a 40% weight upon the quality of governance in
ADF-eligible borrowers.
The policy-based loan for governance (PBLG) is a key instrument
that the Bank will use to support institutional reforms to consolidate
macroeconomic stability and a favorable environment for sustained
growth in its borrowing member countries. PBLGs will be used to support
governance-related reforms in areas such as judicial and legal
frameworks, trade policy, public finance, fiscal and monetary policy,
public sector management, financial sector policy, and competition
policy. The Office of the U.S. Executive Director provided substantial
input into the PBLG Guidelines that were recently approved by the
AfDB's Board of Directors. Going forward, my office will monitor the
Bank's use of this instrument very closely.
The AfDB collaborates closely with the World Bank in conducting
various diagnostic assessments of public financial management systems
and recommends actions for implementation. To date, this collaboration
has produced eleven Country Financial Accountability Assessments
(CFAAs) in Burkina Faso, Chad, Gambia, Malawi, Mali, Madagascar,
Mauritania, Senegal, Tanzania, Uganda and Zanzibar. Since 2002, the
AfDB has also collaborated with the World Bank to carry out six Country
Procurement Assessment Reviews (CPARs) in Benin, Senegal, Cote
d'Ivoire, Angola, Togo, and Guinea.
The Bank also conducts its own Financial Management Review of its
projects. The Financial Management Review is an AfDB innovation
designed to improve the financial management and audit functions of
specific projects. The Bank has successfully carried out Financial
Management Reviews in five countries (Cameroon, Madagascar, Malawi,
Uganda, and Zambia), covering four key sectors (agriculture, transport,
public utilities, and the social sector).
Another important and innovative diagnostic tool employed by the
Bank since 2002 is the Country Governance Profile. Country Governance
Profiles are used to identify key governance issues in borrowing member
countries, including corruption, and to develop a common understanding
of the strengths and weaknesses of country governance arrangements.
These profiles allow the Bank to better assess risks to Bank funds and
to develop governance reform and capacity building programs with its
borrowing member countries. The Country Governance Profile is the key
instrument for mainstreaming governance priorities into Bank
operations. The new cycle of Country Strategy Papers for 2005-2007 will
address governance issues based on the governance profiles. Currently
five Country Governance Profiles have been completed (in Nigeria,
Ghana, Mauritania, Malawi, and Zambia) and an additional 10 Country
Governance Profiles are scheduled for completion in 2004.
Borrower institutional capacity is critical for effectively
combating corruption and compliance with the anti-corruption safeguards
in the loan agreements with the Bank. For countries ranked low in the
CPIA governance factors and where the risk for corruption is deemed
high, the Bank will undertake more rigorous assessments through Country
Governance Profiles, CFAAs, and CPARs, and propose corrective measures.
Government officials will benefit from selective and specialized
governance- and corruption-related training organized through the Joint
Africa Institute housed at the AfDB. Such training will be country
specific and based on areas of weakness identified through assessments.
Partnerships
The AfDB is actively engaged in partnership with a number of
institutions to combat corruption on the continent. The Bank is an
active member of the MDB Harmonization Working Group on Financial
Management, Procurement, and Environment. The Bank is also
collaborating on good governance promotion activities with the Economic
Commission for Africa, and has conducted a series of workshops on
developing national strategies and action plans for combating
corruption in collaboration with Transparency International, the World
Bank Institute, and the Global Coalition for Africa.
The Bank was the lead institution involved in developing the
standards and benchmarks for banking, financial regulations, and
corporate governance for the New Partnership for Africa's Development
(NEPAD) initiative and is providing technical assistance to the African
Peer Review Mechanism component of the NEPAD. The AfDB was also a key
partner of the African Union in finalizing the Africa Convention on
Combating Corruption.
Responding to the call to tighten anti-money laundering controls
after the September 11, 2001, the Bank is actively supporting existing
institutions such as the Financial Action Task Force (FATF), Africa
regional FATF-style bodies and specialized sub-regional anti-money
laundering taskforces. In addition, an internal Bank working group is
exploring how the AfDB can help member countries develop appropriate
legal and regulatory systems and regimes to address the problem.
Conclusion
Despite these significant and ongoing efforts to combat corruption
and improve governance at the institutional, project, and country
levels, the African Development Bank itself recognizes that additional
efforts are required, particularly with regard to implementation and
enforcement of existing policies and procedures, and strengthening the
Bank's internal capacity. As the Bank works to build the appropriate
skills mix to carry out its good governance promotion initiatives, I
will continue to press the Bank to periodically review its
organizational arrangement, procedures, and policies to ensure an
appropriate enabling environment and strategy for combating corruption.
The Office of the U.S. Executive Director will continue to
challenge and support the Bank to further strengthen its anti-
corruption efforts, enhance the transparency of its operations, and
realize its objective of becoming the lead institution on good
governance in Africa.
Thank you.
______
Prepared Statement of Patricia Adams
I appreciate the opportunity to submit this written statement to
the Senate Committee on Foreign Relations regarding its investigation
of corruption in multilateral development bank (MDB) projects. As an
economist and the executive director of Probe International, a Canadian
non-profit research group, I have researched the environmental,
financial, and social effects of MDB projects over the past 20 years.
In 1991, I published a book, ``Odious Debts: Loose Lending, Corruption,
and the Third World's Environmental Legacy,'' which exposes how
corruption led to unrepayable debts, environmental harm, and the demise
of democracy throughout the Third World. I submit a copy for your
reference.
I have followed the case of corruption in the Lesotho Highlands
Water Project, and especially the trial of Acres International--the
first corporation to be convicted--since before the indictments were
issued in 1999. I have read many of the court documents and my
organization makes these widely available to the public and press
around the world by posting them on our Web site .
I first wish to correct the record regarding testimony you received
on May 13, 2004 from Professor Jerome I. Levinson of the Washington
College of Law at the American University. He is incorrect in stating
that corruption did not occur in the award of a World Bank Lesotho
Highlands Water Project contract.
In his statement to the Committee on Foreign Relations, Professor
Levinson states:
A recent project in Lesotho, Africa illustrates the issue. The
Director of the Lesotho Highland Water Authority was convicted
in the courts of that country of corruption in the award of
contracts in connection with the project. Part of the project
was financed by the World Bank. There is no allegation of
corruption in the award of contracts on that part of the
project financed by the World Bank. (Emphasis added)
The Lesotho High Court transcripts, which are available at and
the World Bank's own ``Notice of Debarment Proceedings,'' dated March
21, 2001, which is available at , show Professor
Levinson to be mistaken. These documents show that Acres International
was convicted in the Lesotho High Court (later upheld by the Appeal
Court) for bribery payments to the former head of the Lesotho Highlands
Development Authority in order to secure Contract 65, a World Bank
contract signed in 1991 with a base value of CAD$16,986,413.
This conviction regarding the award of a Bank contract is important
because, according to the World Bank's self-defined guidelines, only
those who have committed fraud or corruption in the procurement or
execution of Bank-financed contracts will be subject to the Bank's
debarment proceedings. Indeed, the World Bank acknowledged that Acres'
crime did involve a World Bank contract when it reopened its debarment
proceedings against Acres International in March, 2004.
Under World Bank anti-corruption guidelines, a contractor that
commits fraud or corruption in the procurement or execution of Bank-
financed contracts will be barred from receiving future World Bank
contracts. World Bank contracts are the bread and butter of many
multinationals. As the world's largest development agency, and the
standard setter for the world's other agencies, a World Bank
blacklisting could be the death knell for a corrupt company. No more
effective deterrent exists to corruption in international development
projects than a World Bank debarment.
I understand this principle drives the sanctions against bribery
under the U.S. Foreign Corrupt Practices Act which includes, among
other sanctions, fines, imprisonment, and being ``barred from doing
business with the Federal government.'' Indeed, according to the U.S.
Department of Justice's Web site, ``Indictment alone can lead to
suspension of the right to do business with the government.'' The
Foreign Corrupt Practices Act, which has been in place since 1977,
``was intended to have and has had an enormous impact on the way
American firms do business,'' says the Justice Department. This is
consistent with my own anecdotal experience: Relative to firms in other
countries, American companies are acutely alert to the serious
consequences of a conviction for corruption. This may explain why, of
the 19 individuals and firms from nearly a dozen countries that were
indicted in the Lesotho Highlands Water Project corruption scandal
(many of them Organisation for Economic Co-operation and Development
members), none of them was from the United States.
Jeremy Pope from Transparency International described the
importance of tough consequences for corrupt acts when he said, ``If
executives see they can be prosecuted, humiliated and jailed, their
firms barred from work and their names damaged, they will conclude
bribery is not worth it.'' \1\
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\1\ ``The end of swag?'' by Rich Thomas and Stefan Theil, Newsweek,
July 1/2002.
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If the World Bank does not debar those companies convicted of
corrupt acts in the Lesotho Highlands Water Project trials,
corporations will get the message that a bribery conviction is an
affordable irritant, and that they can counter bad press with promises
to adopt new internal corporate anti-corruption management systems. In
the absence of meaningful deterrents, bribery will continue to pay and
firms will have an incentive to look for more devilishly inscrutable
ways to hide their crime.
Also, if the World Bank does not debar those companies convicted of
corrupt acts, Third World governments will learn that the OECD
convention against bribery \2\ is meaningless, and that those who
repeatedly lecture them on the need to adopt good governance and the
rule of law--OECD member governments and the World Bank alike--are
hypocrites.
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\2\ OECD Convention on Combating Bribery of Foreign Public
Officials in International Business Transactions available at
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The Lesotho bribery trials, involving over a dozen of the world's
most prominent engineering firms, is the most important case of
corruption in the history of international development. For the first
time, multinational firms have been brought to trial by a Third World
government. Two of the firms have been convicted and one has been fined
after pleading guilty to bribery in connection with their contracts on
the $8 billion Lesotho Highlands Water Project dam-building scheme. In
the international development business, this case is being closely
watched by engineering companies around the world, as well as by
companies in other sectors, as a bellwether that will indicate the
World Bank's tolerance of corruption.
Lesotho and other Third World countries that are confronting
corruption deserve western government support and respect for
courageously tackling this cancer. And they deserve to have western
governments follow up their extraordinary, precedent setting trials
with action, not business as usual. As Lesotho's Attorney General Fine
Maema said, ``The attitude has always been that Africans are corrupt.
But it takes two to tango, and we want rich world corporations and
countries to acknowledge their role.'' \3\ It is time for western
governments and all the international funding institutions, such as the
MDBs, to stop awarding contracts to individuals and corporations that
engage in corrupt acts.
---------------------------------------------------------------------------
\3\ ``The end of swag?'' by Rich Thomas and Stefan Theil, Newsweek,
July 1/2002.
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THE U.S. CONGRESS'S INVESTIGATIONS INTO THIS MATTER ARE ESPECIALLY
IMPORTANT
To my knowledge, apart from the U.S. Congress, no northern
governments or legislatures have worked to make the World Bank crack
down on corruption. Indeed in Canada, in contrast to the U.S.
Congress's attempt to root out corruption and expose it to the light of
day, the Canadian government has been lobbying the World Bank not to
debar Acres. A Canadian official in our Executive Director's office at
the World Bank, for example, has told me that the Canadian government
would resist Acres' debarment because ``there is corruption with courts
in the Third World.'' \4\ Other Canadian government agencies have also
disparaged, without any evidence, the judicial process in Lesotho. A
spokesman from Export Development Canada, Canada's counterpart to the
Export-Import Bank of the United States, stated: ``Had the case been
heard in an Ottawa courtroom, there might have been a different
outcome.'' \5\ Indeed, EDC and other Canadian agencies recently
announced that they will continue to favour Acres with taxpayer-funded
programs. \6\
---------------------------------------------------------------------------
\4\ June, 2003 meeting with Francois Page, Senior Advisor to
Canadian Executive Director. Subsequently reported in the press,
including in ``Acres' partners in crime,'' Financial Post, August 23,
2003.
\5\ ``Groups fear Canadian funding for Romanian mine,'' by Stephen
Leahy, Inter Press Service News Agency, November 16/2003.
\6\ For example, Patti Robson in the Media Relations Office of the
Canadian International Development Agency stated in a February 6, 2004
email to me that, ``We have reviewed the issue carefully and we have
discussed it with a number of key stakeholders including international
institutions and donor countries. Acres has agreed to pay the fine, and
we are satisfied that Acres has implemented an Integrity Management
System designed to protect itself and its clients from future risks.
This was one of the determining factors in our decision. We will
continue to fulfil existing contractual agreements with Acres and will
consider new proposals when submitted.''
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Also disturbing, Acres agent in Lesotho, the person who arranged
Acres bribery payments for which it was later convicted, was a Canadian
federal cabinet appointee. The person in question was Mr. Zalisiwonga
Bam, Canada's Honorary Consul to Lesotho.
Bribery is a ``corrupt and ugly offence, striking cancerously at
the roots of justice and integrity,'' quoted the Court of Appeal in
Lesotho in its judgment confirming the lower court's finding of guilt.
Acres' ``cynical exploitation'' of Africa's largest international
development project ``motivated as it was by greed, is the more
reprehensible.''
Countries that are working against the odds to rid their countries
of corruption, as is Lesotho, deserve honesty and integrity from those
of us in the West. Many of Probe International's supporters have
written compelling and principled letters to Mr. Wolfensohn, urging him
to resist pressure from the Canadian government. They ask him not to
``derail the course of justice'' and to follow through on Bank policy
to debar Acres and any other company that is convicted of bribing a
Third World official.
The developed countries have long lectured Third World nations to
clean up their corruption. In Lesotho, we have a little country that
has found the courage and fortitude to do just that. Now it is the
western countries and western institutions like the World Bank, long on
lip-service to corruption but short on action, that must muster their
courage. We appreciate the efforts of the U.S. Congress to make that
case to the World Bank.
Thank you.
______
Prepared Statement of Bruce M. Rich
I. INTRODUCTION
Environmental Defense is a national environmental organization with
over 300,000 members and supporters nationwide. The International
Program of Environmental Defense has been involved in research and
advocacy concerning the environmental and social impacts of
Multilateral Development Bank (MDB) lending for twenty years, and has
made numerous submissions to Congressional authorization and
appropriations committees regarding these institutions. Our concern
regarding the quality of MDB lending led us a number of years ago to
examine the issue of institutional incentives and controls in these
institutions, particularly in the World Bank.
This submission examines the institutional issues concerning
massive corruption in World Bank lending over the past thirteen years,
as documented in internal World Bank memoranda and reports. Based on
this record, we question the adequacy of current World Bank management
efforts to address major management and institutional problems that are
conducive to corruption.
We would first like to comment on why organizations such as
Environmental Defense, which are primarily focused on promoting
environmentally sustainable lending policies at the international
financial institutions, are so concerned about corruption. The
``culture of loan approval'' and ``pressure to lend'' that has been
documented in the World Bank and other MDBs for more than a decade has
often meant that policies designed to mitigate adverse environmental
and social impacts of MDB lending are not implemented. Our research has
led us to World Bank internal documents that state clearly that the
culture of loan approval has also undermined the implementation of
basic financial auditing and reporting requirements. These findings
themselves are rather astounding for any public international financial
institution, let alone one like the World Bank, which proclaims itself
to be a leader. Nevertheless, the excerpts and conclusions from
internal World Bank documents speak for themselves.
We believe that the same measures that would address the
institutional problems relating to corruption in the MDBs would also go
a long way towards improving overall project quality with respect to
environmental and social impacts. For this reason we wish to submit
additional information for the record to supplement the information
presented in the testimony of the witnesses on May 13th, particularly
the statements of Mr. Manish Bapna of the Bank Information Center (to
which we contributed) and the statement of Dr. Jeffrey Winters.
Our major concern is that the statement of the U.S. Executive
Director Carole Brookins and the announced anti-corruption measures of
the World Bank do not credibly address the most serious, endemic
problem embedded in MDB lending operations; namely, the systematic,
across-the-board diversion of MDB lending by whole governments or
government ministries in the Bank's borrowing countries.
As was noted in Mr. Bapna's statement, World Bank anti-corruption
actions have focused on specific procurement, bribery and kickback
abuses, as well as selected general governance programs, rather than on
the much larger and more serious public sector, country-wide level of
corruption of Bank loans. This latter problem is at the root, however,
of by far the largest portion of corruption in MDB lending.
II. EXTENT OF CORRUPTION IN WORLD BANK OPERATIONS: LESSONS AND
IMPLICATIONS OF THE INDONESIA CASE
The World Bank has claimed that there is ``no supporting evidence''
and ``no credible evidence and/or foundation'' for Senator Lugar's
statement (based on the testimony, inter alia, of Dr. Winters) that
between 5% and 25% of the $525 billion the World Bank has lent since
1946 has been diverted and misused, the equivalent of between $26
billion to $130 billion.
Yet the Bank itself cannot provide any credible estimate of how
much--or even a range of how much--is currently being stolen and
diverted from Bank lending operations.
In the case of one major Bank borrower, Indonesia, Bank staff did
prepare precisely such an estimate, with a detailed breakdown of how
the money was being stolen from World Bank lending, including estimates
of the extent of graft for each government ministry.
In the Indonesia case, American political economist Jeffrey Winters
alleged in a July 1997 Jakarta press conference that shoddy accounting
practices by the World Bank had allowed corrupt Indonesian officials to
steal as much as 30% of Bank loans over a thirty-year period--a mind-
boggling total approaching $10 billion.\1\ At about the same time,
Environmental Defense obtained a copy of an internal study of
corruption in World Bank lending programs to Indonesia commissioned by
the Bank's Jakarta Office. For well over a year, the findings and
recommendations of the study--which confirmed many of Winters'
charges--were not acted on by World Bank senior management, and World
Bank President Wolfensohn learned of the existence of the report only
in July 1998, a year after its completion.\2\ This was nearly two years
after Wolfensohn's 1996 declaration of ``no tolerance'' for corruption
and the announcement that the Bank was ``taking steps'' ``to ensure
that [its] own activities continue to meet the highest standards of
probity.'' \3\
---------------------------------------------------------------------------
\1\ Jeffrey A. Winters, ``Down With the World Bank,'' Far Eastern
Economic Review, 13 February, 1997, p. 29; Keith Loveard, ``The Dark
Side of Prosperity: A World Bank critic alleges waste and graft,'' Asia
Week, 15 August 1997.
\2\ Personal communication, member of World Bank management (must
remain anonymous), September 17, 1998.
\3\ ``Let's not mince words we need to deal with cancer of
corruption . . . Let me emphasize that the Bank Group will not tolerate
corruption in the programs we support, and we are taking steps to
ensure that our own activities continue to meet the highest standards
of probity.'' World Bank President James Wolfensohn, 1996. See: http://
web.worldbank.org/WBSITE/EXTERNAL/NEWS/0,,contentMDK:20190202-
menuPK:34457-pagePK:34370-piPK:34424-theSitePK:4607,00.html
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The internal Bank report, known as the ``Dice Memorandum'' \4\
(after the Bank staffer who authored it) directly contradicted the
assertions of the Bank's Vice President for East Asia, Jean Michel
Severino, who, in response to Winters' charges, stated that ``this
[systematic corruption in World Bank lending to Indonesia] is
demonstrably untrue. We know exactly where our money is going.'' \5\
---------------------------------------------------------------------------
\4\ Glenn R. Simpson, ``World Bank Memo Depicts Diverted Funds,
Corruption in Jakarta; Report Contrasts with '97 Denials,'' The Wall
Street Journal, August 19, 1998, A14.
\5\ World Bank New Release No. 98/1426/EAP, ``Indonesia and the
World Bank,'' July 28, 1997.
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The Dice Memorandum is a critical document, for it provides an
alarming blueprint--drafted by Bank in-country staff deeply familiar
with the situation--of a problem which is likely endemic in other major
MDB borrowers such as Russia, Bangladesh, Mexico, and most of sub-
Saharan Africa. It notes the following:
1. ``Documentation of procurement, implementation,
disbursement and audits for Bank-financed projects are
generally complete and conform to all Bank requirements; we
have moved to resolve each and every irregularity for which we
have documents (as well as many cases of preventive action and
informal corrections of problems).''
2. ``Bank staff members have not been implicated in any form
of misconduct; the Bank is widely regarded as one of the few
`uncorruptable' institutions in the Indonesian development
process. . . .''
What follows indicates that even when ``documentation of
procurement, implementation, disbursements and audits are generally
complete and conform to all Bank requirements,'' these requirements do
not address massive problems of corruption and diversion of Bank loans.
Dice goes on to note that ``In aggregate we estimate that at least
20-30% of GOI [Government of Indonesia] development budget funds are
diverted through informal payments to GOI staff and politicians, and
there is no basis to claim a smaller `leakage' for Bank projects as our
controls have little practical effect on the methods generally used.''
(emphasis added)
Dice notes ``one of the difficulties in attempting an analysis of
the nature and magnitude of such diversions is the wide range of
variations in operational methods among GOI organizations.''
Nonetheless, the memorandum goes on to give detailed estimates of
percentage diversions of specific Bank funds, such as: ``Pre-Project
expenses (5-10% of project budget);'' ``Land Acquisition and
Resettlement Costs--numerous reports of diversion of 50-80% of funds. .
. .;'' (emphasis in original); ``Contract Procurement and Award Process
(extremely variable, 5-35%;'' etc. Most remarkable is a list of
estimated corruption and diversion of funds for each Indonesian
Government Ministry, ranging from ``relatively low (less than 15%)'' at
the Ministry of Health, for example, to a ``high (more than 25%)'' at
the Ministries of Home Affairs, Transmigration, Cooperatives and SMEs,
and Forestry. Below, in italics, is the chart of estimated corruption
directly taken from the Memorandum:
Dice notes ``one of the difficulties in attempting an analysis of
the nature and magnitude of such diversions is the wide range of
variations in operational methods among GOI organizations.''
Nonetheless, the memorandum goes on to give detailed estimates of
percentage diversions of specific Bank funds, such as: ``Pre-Project
expenses (5-10% of project budget);'' ``Land Acquisition and
Resettlement Costs--numerous reports of diversion of 50-80% of funds. .
. .;'' (emphasis in original); ``Contract Procurement and Award Process
(extremely variable, 5-35%;'' etc. Most remarkable is a list of
estimated corruption and diversion of funds for each Indonesian
Government Ministry, ranging from ``relatively low (less than 15%)'' at
the Ministry of Health, for example, to a ``high (more than 25%)'' at
the Ministries of Home Affairs, Transmigration, Cooperatives and SMEs,
and Forestry. Below, in italics, is the chart of estimated corruption
directly taken from the Memorandum:
``Classification of GOI Implementing Units by Estimated Magnitude of
Development Budget Diversion
Estimated Diversions Agency/Ministry
----------------------------------------
Relatively Low (less than 15%)
* Relatively small percentages of very large numbers
* Major problems with firms owned/related to senior GOI officials
PLN
PGN
Telecoms
Jasa Marga
Min. of Health ?
Min. of Mines and Energy
----------------------------------------
Moderate (15-25%)
Min. of Public Works
Min. of Education
Min. of Agriculture
Min. of Housing/Perumnas
Min. of Environment
Min. of Communications ?
Min. of Religous Affairs ?
Min. of Tourism, Post & Tel. ?
----------------------------------------
High (more than 25%)
Min. of Home Affairs, including all provincial and
local gov'ts.
Min. of Transmigration
Min. of Cooperatives & SMEs
Min. of Forestry''
In the fifteen months subsequent to the Dice Memorandum, the Bank
committed and disbursed over $1.3 billion more to Indonesia without any
effective measures to contain the ``leakage'' detailed in the memo. In
October 1998, with plans to commit and disburse an additional $2
billion over the next nine months, a second Bank mission, headed by
Jane Loos, recorded the following:
Our mission confirms earlier reports on corruption in
Indonesia: that it is pervasive, institutionalized, and a
significant deterrent to overall growth of the economy and
effectiveness of the Bank's assistance. . . . We cannot rely on
probity of audits both from BPKP (Government internal audit
agency) and local associates of international audit firms. . .
. Despite apparent compliance with World Bank guidelines and
documentation requirements for procurement, disbursement,
supervision and audits, there is significant leakage from Bank
funds. . . . Bank procedures/standards are not being applied
uniformly . . . The [World Bank] auditing requirements have
been allowed to deteriorate into a superficial exercise; even
an agency with overdue audits was not excluded from receiving
new loans.\6\
---------------------------------------------------------------------------
\6\ Jane Loos, Regional Manager, EAPCO, World Bank Office
Memorandum to Mr. Jean-Michel Severino, Vice President, EAP, ``Options
to Reduce Negative Impact from Corruption on Bank-Financed
Activities,'' October 19, 1998.
The full consequences of the inability to root out the ``culture of
approval'' were spelled out in an unusually candid reevaluation of the
entire thirty-year record of the Bank in Indonesia conducted by the
Bank's Operations Evaluation Department (OED) and circulated internally
(and leaked to the press) in February 1999.\7\ The OED ``Indonesia
Country Assistance Note'' of February 4, 1999 presents a major revision
of the Bank's evaluation of development effectiveness in Indonesia over
the past three decades.\8\ For years the Bank had touted Indonesia as
one of its great success stories, ``widely perceived within the Bank to
be a miracle and a symbol of the Bank's success.'' However, the OED
report concludes that reluctance to offend a major borrower, a refusal
to address corruption, and a dysfunctional internal Bank culture that
punishes staff for identifying problems that could slow down lending,
all contributed to the propagation of what the original draft of the
OED report called the ``myth of the Indonesian miracle.'' (The final
report omitted this phrase in response to the objection of the
Indonesian Government.) \9\ The OED report rates the Bank and the
Indonesian government as only ``marginally satisfactory'' for the past
three decades, contradicting numerous previous evaluations of Bank
involvement in Indonesia as a leading example, at least relatively, of
development effectiveness.\10\
---------------------------------------------------------------------------
\7\ Association France-Presse, ``World Bank Rates Its Indonesia
Performance as `Marginal,' '' February 10, 1999 (wire service story);
David E. Sanger, ``World Bank Beats Breast for Failures in Indonesia,''
New York Times, February 11, 1999.
\8\ World Bank Operations Evaluation Department, Indonesia Country
Assistance Note, February 4, 1998.
\9\ Association France-Presse, February 10, 1999.
\10\ OED, Indonesia Country Assistance Note, February 4, 1999, 25.
---------------------------------------------------------------------------
One of the more revealing analyses in the report describes how the
culture of approval and perverse Bank career incentives led to
disastrous consequences in lending for the financial sector. As the
Indonesian meltdown was brewing, supervision reports indicated the
Bank's single biggest financial sector project, the Financial Sector
Development Project, was riddled with problems. Then,
A thorough supervision effort in August 1996 not only found the
project outcome to be unsatisfactory on all counts, but
concluded that Indonesia's State Banking Sector was in
disarray, riddled with insolvency. . . . the Bank downplayed
the evidence presented in the supervision report and rejected
the proposed cancellation of the loan for several months
(cancellation was postponed until a new Banking Reform
Assistance project was approved in November, 1997), arguing
that such action would do serious damage to the Bank-Government
relationship. This process also triggered perceptions of
unjustified penalties to career prospects of some Bank staff
who had brought the issues to light. The staff proposals for
in-depth [financial] sector work were shelved. . . . The Bank's
readiness to address the subsequent financial crisis in
Indonesia was seriously impaired.\11\
---------------------------------------------------------------------------
\11\ Ibid., 20.
The World Bank 1999 OED Country Assistance Note also recounts how
the 1997 reorganization of the Bank under Wolfensohn--through which
Bank management claims that anti-corruption measures became a
priority--further undermined the ability of the Bank to respond to the
---------------------------------------------------------------------------
Indonesian crisis in 1997-98:
An unfortunate combination of staff turnover, some of it the
result of policy disagreements, and the 1997 reorganization
complicated the ability of the Bank to respond to the crisis. .
. . The far-reaching 1997 reorganization detracted attention
from economic development issues.\12\
---------------------------------------------------------------------------
\12\ Ibid., 9.
The major recommendations of the February, 1999 OED Indonesia study
echo the conclusions of countless past reports, particularly the 1992
Morse Commission and Wapenhans reports. It argues that if country
monitoring is to be effective, there must be ``major changes in the
---------------------------------------------------------------------------
Bank's internal culture.'' Once again,
warning signals were either ignored or played down by senior
managers in their effort to maintain the country relationship.
Some staff feared the potential negative impact on their
opportunities that might result from challenging mainstream
Regional thinking.\13\
---------------------------------------------------------------------------
\13\ Ibid., 26.
One of the biggest obstacles to improved development effectiveness,
and a major factor in the culture of loan approval flagged in the
Wapenhans report, is the chronic ``clientitis'' of the Bank--the desire
to keep lending to maintain the ``country relationship,'' often to the
direct detriment of the poor the Bank purports to be trying to help.
The 1999 OED Indonesia report makes clear that in many cases a choice
has to be made: ``Bank strategy should look at the importance of the
issues to the country's development, and not whether the country
relationship may be jeopardized.'' \14\
---------------------------------------------------------------------------
\14\ Ibid.
---------------------------------------------------------------------------
It is worth summarizing the Indonesia case since it relates to the
overall management and institutional culture of the Bank, and has major
implications for all of the Bank's country lending programs. In the
late 1990s in Indonesia, we had a ``smoking gun;'' namely, a number of
internal World Bank memoranda and reports that document \15\ the past,
ongoing, and continuing diversion of an estimated 20-30% of Bank
lending by one of its major borrowers. After the first alarm was
sounded by the Dice Memorandum in 1997, nothing was done and another
$1.3 billion was disbursed. The 1998 Loos Memorandum repeated the same
findings regarding the systematic diversion of funds in even more
alarming terms. Then the 1999 OED country note linked the pressures to
keep disbursing funds to Indonesia and the associated corruption to a
long-documented, Bank-wide institutional problem: the culture of loan
approval that pressures staff to keep lending despite abuses.
---------------------------------------------------------------------------
\15\ ``Document'' is perhaps not the accurate term, since the
memoranda and reports make educated speculations on the degree of
corruption, since the Bank has no precise, reliable documentation of
how much is actually being stolen--if it did, that would be a big step
towards addressing the problem.
---------------------------------------------------------------------------
Since 1999, the Bank claims that it has mounted an anti-corruption
program in Indonesia, and has reduced lending levels to approximately
$400 million annually. But the problems documented in Indonesia are
endemic within many of the Bank's major borrowers that rank low on the
Transparency International Corruption Perception Index. For example, in
most of sub-Saharan Africa many estimate that the diversion of
international loans by corrupt government practices occurs on an even
more serious scale than in Indonesia. It is hardly idle speculation to
ask whether in Russia, Bangladesh, and in much of Latin America the
systematic diversion of World Bank loans is also on the scale
documented in the Dice Memorandum.
For example, in the summer of 1997, Business Week alleged that ``at
least $100 million'' from a $500 million Russian Coal Sector loan was
either misspent or could not be accounted for. Noting that the Bank was
preparing a new $500 million loan for the Russian coal sector, Business
Week observed that ``World Bank officials seem surprisingly unperturbed
by the misspending. They contend offering loans to spur change is
better than micromanaging expenditures.'' \16\ A little over a year
later, the Financial Times estimated the amount stolen in the coal
sector loan to be much higher, as much as $250 million.\17\
---------------------------------------------------------------------------
\16\ Carol Matlack, ``What Happened to the Coal Miners' Dollars? At
least $100 million from a World Bank loan is lost,'' Business Week, 8
September 1997, 52, 54.
\17\ John Lloyd, ``A Country Where the Awful has Already
Happened,'' Financial Times, Weekend October 24-October 25 1998, XXVI.
We have no evidence from the Bank's public statements of any
systematic inquiries or estimates of diversion of World Bank lending in
other major borrowers taking place, nor of the elaboration of measures
to address the systematic problem of country diversion and corruption
of whole lending programs.
III. THE CULTURE OF CORRUPTION: ISSUES OF FINANCIAL REPORTING AND
AUDITING
Apart from the Indonesia case, in the 1990s there was also alarming
documentation of the long-standing failure of internal World Bank
financial auditing and reporting, as well as the systematic non-
enforcement of financial reporting and management loan conditions. This
failure was again linked to the culture of loan approval. While we do
not have recent documentation, the findings are so alarming--yet
seemingly neglected--that one can only wonder how much has changed.
One of the most astounding aspects of the 1992 Wapenhans Report was
the finding that the Bank's auditing and accounting system was in
shambles. Indeed, Wapenhans reported that nearly 78% of the financial
conditions in World Bank loans were not adhered to, a figure he
characterized as ``startlingly low.'' \18\
---------------------------------------------------------------------------
\18\ Wapenhans et al., ``Report of the Portfolio Management Task
Force,'' ii.
---------------------------------------------------------------------------
Then, in late 1993 a World Bank ``Financial Reporting and Auditing
Task Force'' reported that ``less than 40% of audited financial
information is received by its due date, making it inconsequential for
project management purposes.'' \19\ It found that the format of the
financial information that is received often does not allow for ``1)
comparison with information in the staff appraisal report and 2)
linkage of physical achievements with project expenditures and
reconciliation with Bank disbursement records.'' Moreover, ``financial
statements and reports rarely address specific requirements of the loan
agreements and rarely make reference to accounting principles and
auditing standards applied.'' Finally, the report found that the Bank
``rarely 1) reviews the borrower country's reviewing and auditing
standards and 2) reviews the auditors' independence and capabilities.
Financial statements received by the World Bank frequently are not
reviewed by Bank staff or are reviewed by staff without the necessary
skills to identify significant problems and initiate appropriate
action.'' \20\ One reads with amazement the major conclusion of the
report, coming as it does from the largest public international
financial institution: ``As a general principle the World Bank should
promote the concept that accounting is the foundation of financial
management.'' So as the Bank approached its 50th anniversary, and, at
the time, $170 billion in outstanding loans, it had learned the
following: ``Without efficient accounting and financial auditing
arrangements project management itself is not under control.'' \21\
---------------------------------------------------------------------------
\19\ World Bank, Central and Operational Accounting Division,
``Financial Reporting and Auditing Task Force'' (internal report World
Bank, Central and Operational Accounting Division, Financial Reporting
and Auditing), October 8, 1993, 1.
\20\ Ibid.
\21\ Ibid., 2.
---------------------------------------------------------------------------
One of the accountants (a former director of the World Bank
Auditing and Anti-Corruption Unit) who had worked on a the 1993
``Financial Reporting and Auditing Task Force'' publicly stated that
Bank auditors prepared an earlier financial reporting and auditing
report in the 1980s that documented the same systemic problems. The
original draft of the 1993 report referred to the fact that the
recommendations of the earlier report had been ignored. Bank management
had simply removed the reference to the earlier report's existence and
its findings--a convenient enough way of preventing accountability,
since the average tenure of an Executive Director on the World Bank's
Board is two to three years.\22\
---------------------------------------------------------------------------
\22\ Public Statement by James Wesberry, Former Director, Auditing
and Anti-Corruption Unit, World Bank, at Northwestern University
Conference, ``Reinventing the World Bank,'' May 14-16, 1999.
---------------------------------------------------------------------------
Like the Wapenhans Report, the ``Financial Reporting and Auditing
Task Force'' report disappeared in the bowels of the Bank bureaucracy
with no effective follow-up.\23\ (``It is perhaps noteworthy,''
Mr.Wapenhans wrote in 1994, ``that the Bank's management response to
the Wapenhans report does not yet address the recommendation concerning
accountability. The `cultural change' required is, however, unlikely to
occur unless the performance criteria change.'' \24\)
---------------------------------------------------------------------------
\23\ The follow-up was, in 1993, an 87 step ``action plan''
entitled ``Next Steps'' which Bank management proclaimed within a year
was ``92 percent either . . . completed or at an advanced stage of
completion.'' World Bank, ``Progress Report on Next Steps,'' Report No.
R94-154 (Washington, D.C.: World Bank, 26 July 1994), ii.
\24\ Willi A. Wapenhans, ``Efficiency and Effectiveness: is the
World Bank Group Prepared for the Task Ahead,'' in Bretton Woods
Commission, ``Bretton Woods: Looking to the Future'' (Washington, D.C.:
July, 1994), note 22, p. C-304.
---------------------------------------------------------------------------
The questions of financial auditing and reporting on the ultimate
end use of Bank loans are critical in examining the World Bank's
efforts to address corruption. The specific, comprehensive questions
and issues set forth in the 1993 ``Financial Reporting and Auditing
Task Force'' report are ones that should be systematically reviewed by
each MDB on a regular basis. However, we have do not have answers to
these questions from any of the MDBs. While the World Bank has divulged
the most information about its anti-corruption efforts, an examination
of its most recent public descriptions reveal that the issues of
systematic diversion of World Bank resources by its borrowers, of the
kind documented in the Dice Memorandum, as well as of the need for
effective, rigorous financial auditing and reporting systems for its
own loans, have not been adequately addressed.
IV. ``HOW THE WORLD BANK FIGHTS CORRUPTION''
An examination of the most recent public document outlining the
Bank's anti-corruption efforts leaves more questions open than it
answers. The document, the most recent brief of the Bank's External
Relations Department, which was also distributed internally to World
Bank staff in response to the May 13, 2004 hearing of the Senate
Foreign Relations Committee, is entitled ``How the World Bank Fights
Corruption'' (web link: http://web.worldbank.org/WBSITE/EXTERNAL/NEWS/
0,,contentMDK:20040922-menuPK:34480-pagePK:34370-
theSitePK:4607,00.html). It claims, among other things, that the Bank
is ``making anti-corruption efforts a key focus of the Bank's analysis
and lending decisions for a country'' and is ``striving to prevent
fraud in Bank-financed projects.'' However, many of the Bank anti-
corruption initiatives listed do not get to the heart of the problems
and questions outlined above from the Indonesia case and with financial
auditing and reporting. For example, the Bank highlights that ``in
recent years [it] has lent an average of $5 billion a year to help
countries build efficient and accountable public sector institutions''
and that ``more than 40% or the Bank's lending operations now include
public sector governance components.'' The ``How the World Bank Fights
Corruption'' summary goes on to note that ``the Bank runs a global 24-
hour a day anti-corruption hotline: 1-800-831-0463,'' that ``the Bank
has strengthened its financial disclosure rules for its senior managers
and Executive Directors of the Board,'' and that ``the Bank is an
active supporter of the United Nations Convention Against Corruption.''
But can the Bank give any estimate of how much money continues to
be diverted through corruption in its own lending operations? Has it
made any serious effort, apart from the example of the Dice and Loos
memoranda in Indonesia in the late 90s, to undertake such an effort for
individual countries or across the board?
To the extent we find a public answer to these questions, it is the
following: ``To deliver real results in fighting corruption, the Bank
relies on upon the Department of Institutional Integrity to investigate
claims of fraud and corruption--inside and outside the institution--and
a Sanctions Committee to adjudicate cases and assess penalties.''
The Department of Institutional Integrity has some 50 staff, and
``so far more than 180 companies and individuals have been debarred
from doing business with the Bank, and their names and sanctions posted
on the Bank's external web site.'' Moreover, ``between July 2003 and
March 2004, the Bank referred 18 cases of fraud or corruption to
national justice authorities.''
However, while these measures are a step forward, the Bank's
record, and the record of the Department of Institutional Integrity so
far is not especially encouraging. The 180 ``companies and
individuals'' debarred from future Bank business are all relatively
minor players, almost entirely smaller developing country companies and
some international consultants. In the case of procurement corruption
in the Lesotho Highlands Water Project, the Bank's corruption
investigation has been unsatisfactory despite the high level of
international publicity and attention that it has received. The Lesotho
courts have already convicted the following companies for paying bribes
to win contracts on the World Bank-financed multi-billion dollar
project: Acres International Ltd., Canada; Lahmeyer International GmbH;
Germany; Spie Batignolles (Schneider Electric SA), France. Acres and
Lahmeyer have already lost their cases in the Lesotho Appeals Court.
Concerning Acres, the World Bank commissioned a report from the
prominent Washington law firm Arnold & Porter which found sufficient
evidence to indicate that Acres had engaged in corrupt practice.
However, none of these major international companies has so far been
debarred from doing business with the Bank.
While the Lesotho investigations have been ongoing for more than
five years, the Bank says its investigative unit is still studying the
Acres case and will later transfer it to its Sanctions Committee.
V. CONCLUSION AND RECOMMENDATIONS
The initiatives of the Bank's anti-corruption unit are inadequate
to address the scale, extent, and profoundly rooted institutional
problems and internal culture of the World Bank described in the leaked
internal reports and memos discussed earlier.
The Bank's most basic fiduciary duty is to ensure its funds are not
misappropriated from their intended uses. If the Bank is serious about
knowing--and changing--how its money is really used, much more is
needed than Bank initiatives to date.
Therefore, we would suggest that the Committee pose the following
questions:
1. Has the Bank undertaken, is it or will it undertake,
country-wide surveys and reviews, along the lines of the Dice
and Loos Memoranda in Indonesia, to begin to estimate how much
``leakage'' may be occurring from its lending programs in other
major borrowers where problems of corruption and diversion of
foreign loans and funds are well-known?
2. If the Bank disputes the estimate of Senator Lugar, based
on the testimony of Dr. Winters and others, of as much as $100
billion or more having been diverted and stolen from World Bank
lending, can it provide another figure or estimate? Surely the
Bank would not deny that some amount of its funds are being
diverted and stolen. The Dice and Loos Memoranda leave us to
conclude that $8 to $10 billion was diverted from the World
Bank's lending to Indonesia alone. Does the Bank dispute these
estimates?
3. Given that no one disputes that some proportion of World
Bank and MDB loans are diverted through corrupt means, the
burden of proof should be on the Bank and other MDBs not only
to come up with their own estimates but to explain how they
plan to work with governments to recover the stolen amounts. If
there is no systematic effort to recover the stolen amounts,
then the people of borrower countries and the taxpayers of
donor countries ultimately bear the costs while the MDBs let
the thieves not only succeed but continue. The people of the
borrowing nations end up directly and indirectly subsidizing
the repayment the stolen portions of MDB loans; the taxpayers
of the donor nations directly (through soft-loan windows like
IDA), or indirectly (through the callable capital of hard loan
windows like the IBRD) support and/or guarantee MDB lending.
4. To what extent is World Bank management ready to implement
the recommendations set out in the testimony of Mr. Manish
Bapna, on behalf the Bank Information Center, Environmental
Defense, the Government Accountability Project, and Public
Services International? The recommendations would go a long way
towards addressing some of these issues.
The World Bank's current statements regarding its anti-corruption
measures also do not adequately answer all the questions and issues
raised in the 1993 ``Financial Reporting and Auditing Task Force''
report. We do not have access to later reports, but former Bank
accountants and Task Managers who have been involved in the more recent
Wolfensohn era anti-corruption initiatives allege that the problems
persist. There are basic questions relating to financial reporting and
auditing that should be posed to all the MDBs since it is likely that
whatever the problems with World Bank financial management and
auditing, the situation in some of the regional development banks, for
example the Inter-American Development Bank and the Asian Development
Bank, may be more serious.
1. At the World Bank, as well as at the other MDBs, how often
are detailed, Bank-wide financial auditing and reporting
surveys, that examine the reporting, auditing, and use of funds
linked to project disbursements, conducted?
2. What percentage of World Bank and other MDB financial
covenants are now being complied with?
3. What percentage of audited financial information for World
Bank and other MDB loans is received by due dates?
4. To what extent and degree (percentage estimates) does: a)
financial and audit information received by the World Bank and
other MDBs from borrowers allow for comparison with information
in Staff Appraisal Reports; b) information from MDB projects
transparently and clearly link discrete physical construction
and specific physical improvements with project expenditures
and MDB disbursement records?
5. To what extent and how often do the World Bank and the
other MDBs: a) review each borrower's auditing standards; b)
review borrowing country auditors' independence and
capabilities?
6. To what extent are financial statements and reports
received by the World Bank and other MDBs actually reviewed by
staff? In cases where staff reviews financial statements, how
often do they possess or lack appropriate accounting and
financial management skills to identify significant problems?
______
Karachaganak Field, Kazakhstan: The World Bank Contributes to Poor
Environmental Health and Supports Corrupt Local Officials
The World Bank's mission, as chiseled in the entryway of its
headquarters in Washington, DC, is to create a world without poverty.
Loans provided by the World Bank's private lending arm, the
International Finance Corporation (IFC), are bound by the same mission,
and should, ``promote sustainable private sector investment in
developing countries, helping to reduce poverty and improve people's
lives.''
In 2002, the IFC provided $150 million in loans to LUKoil, a member
of Karachaganak Petroleum Operating BV (KPO), the consortium working at
the Karachaganak oil and gas condensate field in western Kazakhstan.
Karachaganak is one of the largest petroleum fields in the Caspian
region, and is operated by British Gas, ENI/Agip, Chevron Texaco and
LUKoil. Karachaganak is estimated to hold over 1200 million tons of oil
and condensate and 1.3 billion cubic meters of gas. Not only is oil and
condensate extracted from the field, but also refined on-site. The
condensate is transported from the field through pipelines to Orenburg,
Russia; the oil is piped to Aktau, Kazakhstan where it joins the
Caspian Pipeline Consortium pipeline and is then carried thousands of
miles to Novorossisk, Russia to be shipped by tanker to the west.
The village of Berezovka, which is home to 1,286 residents, is
located 5 kilometers from the Karachaganak field. A former collective
farm, the village is now home to many of the construction workers
building the refinery and other parts of the facility at Karachaganak.
According to Kazakhstani law, which stipulates a five-kilometer
``sanitary protection zone,'' the villagers should be eligible for
relocation from the site near Karachaganak because of exposure to toxic
chemicals produced at the field. However, KPO has decreased the
sanitary protection zone to 3 kilometers, effectively barring the
Berezovka villagers from relocation, because of the consortium's claim
of ``superior technology'' at the field.
Although independent testing shows that Berezovka suffers from
dangerously high levels of lead, cadmium and vanadium, the IFC and KPO
have failed to provide local residents with environmental monitoring
data taken in the village. Villagers allege that the local police
threaten individuals who speak out against the Karachaganak project.
Svetlana Anosova, the leader of an initiative group in the village
working to achieve relocation, was threatened by local police when she
returned from Washington, DC last summer, where she met with World Bank
and IFC officials about the plight of her village. Rather than
receiving support from the Bank, Ms. Anosova was told by one executive
director, ``there are winners and there are losers in this world, and
you ladies are losers.'' Repeated requests for additional environmental
health information have been denied and the village doctor who gathered
data about increasing medical problems in the community was fired after
speaking with US environmental activists who traveled to the village in
the winter of 2002. When questioned by Berezovka activists about their
decision to lend $150 million to the project, IFC officials replied
that they had not considered the effect on the village when they did
their initial study of the environmental risks at Karachaganak.
An independent environmental health survey conducted by the
villagers, indicates that almost 50 percent of the village population
is chronically ill. The health study revealed that 688 members of the
adult population suffer from headaches and memory loss. Five hundred
and ninety-nine have muscular-skeletal problems, 423 suffer from
significant hair loss and are losing their teeth; 413 suffer from
vision loss; 401 have cardio-vascular difficulties; 375 have serious
gastroenterological problems; 308 have upper respiratory illness; and
260 suffer from skin ailments.
The villagers, led by Ms. Anosova, also conducted a survey of 100
high school students in the village and discovered that 95 of them
suffer from overall weakness, 83 regularly experience severe headaches,
77 suffer from memory loss and have frequent fainting spells, 67 have
skin ailments, 49 experience feelings of aggression and 34 suffer from
regular nose bleeds. Among 80 middle school children (ages 7 to 10)
whom Ms. Anosova surveyed, 45 have frequent headaches, 38 suffer from
frequent stomach aches and weakness, 29 have skin ailments, 24 suffer
from memory loss, and 21 suffer from regular chest pains.
According to US environmental health specialists Linda Price King
and Dr. Janette Sherman, many of the villagers' health problems are
consistent with exposure to toxic chemicals, including hydrogen
sulfide, carbon monoxide, carbonyl sulfide and other by-products of
petroleum extraction and processing. Villagers who have sought
treatment for their ailments report that when they leave the village,
many of their symptoms decrease dramatically or disappear altogether,
making diagnosis and treatment difficult. However, when they return to
the village, their symptoms immediately recur.
Denial of access to the environmental data the villagers request
from the World Bank, KPO and the Kazakhstani government is a violation
of the Aarhus Convention, to which Kazakhstan is a signatory, and of
the World Bank's own regulations requiring disclosure of
environmentally relevant documents to the public. Corruption among
local officials, including the village mayor, who is also on the
payroll of KPO, has been ignored by both KPO and the World Bank. The
World Bank should not provide public funds to governments and
corporations engaged in activities that do not comply with World Bank
standards and whose activities contribute to poverty and illness in
local communities. The Extractive Industries Review has demonstrated
time and again that World Bank financial support of oil, gas and mining
only contributes to poverty, environmental degradation and increased
corruption. Such is the case at the Karachaganak field.
For more information about the Karachaganak case, contact: Kate
Watters, Executive Director, Crude Accountability, P.O. Box 2345,
Alexandria, VA 22301. www.crudeaccountability.org