Corruption corrodes Development Banks

Martin Edwin Andersen
Investigative Report
October 1, 2002

The flurry of e-mail was urgent and angry, and the subject was kickbacks. On the receiving end was a consultant for the Inter-American Development Bank (IDB), one of the major financiers of infrastructure projects in Latin America. Her interlocutor was an IDB operations manager. The correspondence did not mention that under-the-table kickbacks are against IDB policy. In fact the manager wanted to underscore how much the consultant owed him personally, in dollars, now that she had finished her well-paid consultancy work on IDB projects.

The first e-mail, dated May 8, 2000, was curt: “Since you did not stop by my office as you said, I want to confirm what I told you by telephone — you still owe me $5,300, which I hope you will pay me immediately. If you don’t I will have to take very unpleasant steps. I expect your reply immediately.”

After the consultant responded, asking the manager how he came up with the $5,300 figure, he replied in a second e-mail the following day from his office at IDB headquarters in Washington: “I waited [for you] until the last moment during your stay in Washington last week, in order to clear up several matters personally. One of the things I had to talk to you about is the money that you owe — the 10 percent from the current contracts and the late payments from previous contracts. The consequences of not paying, or of more late payments, will be, I repeat, very disagreeable.”

These e-mailed threats and demands for illegal kickbacks were obtained by Insight from the consultant.

A four-month investigation of corruption at the IDB and other multilateral development banks has found that payments also were made by other long-term bank consultants to the manager, and that he was just one of several IDB staff who demanded and received them.

The investigation revealed that a culture of corrupt practices flourishes at the bank, which receives large sums from the U.S. Treasury Department. These practices include serious and ongoing irregularities in the purchase of goods and services, cronyism in the hiring of both staff and consultants, preselection of job candidates, sexual favoritism and harassment practiced at senior levels, as well as a “no-fail” culture of internal evaluations of IDB-funded projects. Several U.S. businessmen interviewed by Insight complained that IDB bidding processes frequently are rigged, though none would allow their names to be used for fear of being blacklisted for future IDB business.

The IDB is one of several U.S.-backed development banks that serve as the major sources of financial capital in the developing world. In recent years, the senior IDB officials, together with those of the World Bank, the European Bank for Reconstruction and Development (EBRD), the Asian Development Bank and the African Development Bank, explicitly have cited the corrosive effects of corruption on democracy and development. But the challenges of fighting such corruption are enormous because the illicit rewards for bending or breaking their rules are so large.

The World Bank, which after the federal government is one of the largest employers in Washington, manages a portfolio of approximately 1,500 projects valued at more than $121 billion. Most observers credit it with taking the lead in global anticorruption efforts. Since 1996, when bank President James Wolfensohn scored corruption as a major tax on the poor which inhibited sound development policies, the World Bank has initiated more than 600 anticorruption programs and projects in nearly 100 client countries.

In part, the Wolfensohn initiative appeared to anticipate the firestorm of criticism that met the revelation that in one country, Indonesia, an estimated 20 to 30 percent of all development funds — several billion dollars a year — had been diverted systematically by corrupt officials. Already the World Bank/IDB-financed Yacyreta Dam on the border between Argentina and Paraguay — dubbed a “monument to corruption” by no less an authority than Argentina’s then-president Carlos Menem — ended up costing $11.5 billion, four times the initial estimate. The Itaipu Dam, a joint project between Brazil and Paraguay funded by capital from the multilateral development banks and swaddled in numerous allegations of corruption, ended up costing $20 billion, five times the original projections.

According to its Anticorruption Strategy, adopted in 1997, the World Bank’s work has focused on four areas: helping countries seeking assistance in curbing corruption, “mainstreaming” anticorruption efforts into World Bank country analysis and lending decisions, contributing to international initiatives designed to fight corruption and engaging in practices that prevent fraud and corruption in the projects and programs it finances.

By April of this year, World Bank investigations had resulted in 76 companies and individuals being declared ineligible to participate, either temporarily or indefinitely, in future projects it finances. The World Bank also became the first multilateral development bank to publish on its external Website the names of those found to have committed fraud or other acts of corruption in connection with its efforts.

“Ninety percent of our investigations involve projects and companies; 10 percent involve staff,” World Bank spokesperson Caroline Anstey tells Insight. “Over the last four years we have referred cases involving seven World Bank staff to the relevant national authorities around the world. Staff found to have committed fraud and corruption are immediately dismissed.”

Bank officials claim their internal campaign is working, pointing to the trial in the United States of a former veteran World Bank official charged with corrupt practices in a Kenya roadwork project. A World Bank probe of his activities “revealed that [three] staff members were paid or agreed to receive kickbacks by two separate groups of Swedish companies in exchange for steering certain bank contracts to those firms. In other instances, the contracts were awarded for ineligible activities.” Several of the consultants were debarred from future World Bank projects.

Observers say that two controversial World Bank projects in Africa are providing a test of the institution’s claimed commitment to transparency and anticorruption. The Bujagali hydropower project on the Victoria Nile in Uganda, which initially received $225 million from the World Bank and the African Development Bank, is the largest foreign investment in eastern Africa. Developed in partnership with the financially troubled U.S.-based AES Corp., the project is seen as a test of the World Bank’s anticorruption policy when interests of large industrialized countries are at stake. The bank’s independent inspection panel found that Bujagali, which was to receive an additional $195 million political-risk guarantee in July, poses grave economic, environmental and social problems.

In addition, a study by the International Rivers Network, a watchdog advocacy group, showed how bank staff and management misled the institution’s governing board about the Bujagali boondoggle’s economic viability. Prospects for project completion also were clouded after AES informed the bank that it had uncovered evidence of past corruption by its prime contractor, Veidekke ASA of Oslo, which allegedly bribed a Uganda government official before joining AES. Critics point out that Transparency International already ranks Uganda on its corruption-perception index as the world’s third most corrupt country, and AES was awarded the Bujagali contract without any competitive bidding.

Indeed, although he was forced to step down as Uganda’s energy minister in 1999 after being accused of accepting bribes from AES, Richard Kaijuka landed a job as an alternate executive director — at the World Bank. He eventually was relieved of his duties and replaced.

Anstey, the World Bank spokesperson, points out that since June the project has been on hold, despite pressure from Ugandan authorities to “delink” the corruption investigation from considerations about the project’s long-term viability. “The project will continue to remain on hold until the bank is satisfied that the ongoing investigation has been resolved to its complete satisfaction,” she says.

Yet another scandal rages around alleged bribery in Lesotho, where the World Bank is financing Africa’s largest water project. There, 10 companies and two consortia are accused of paying over a decade nearly $2 million in bribes into the Swiss bank account of Masupha Sole, the head of the Lesotho Highland Development Authority, a beneficiary of World Bank support. Several of the companies involved previously worked in the corruption-ridden Yacyreta and Itaipu hydroelectric projects. The senior official who oversaw construction of the controversial Katse Dam, Sole was found guilty in October 1999 by a Lesotho court of receiving the bribes.

According to Anstey, the World Bank conducted an internal investigation and one individual and the three companies that he controlled were debarred from further work on projects supported by the World Bank. “We said at the time that if the prosecution in Lesotho — which is a criminal prosecution with subpoena power (which we don’t have) — came up with new evidence involving any other companies we looked at, we would be prepared to reopen our investigation.” The Sept. 15 conviction by a Lesotho high court of another company involved in the scandal (the Canadian engineering firm Acres), Anstey says, will cause a review of the trial transcript to see what other actions need to be taken.

Bank critics say more-vigorous action is needed, pointing out that earlier this year Acres and the British engineering consultancy, Sir Alexander Gibb & Partners, were exonerated by a World Bank internal investigation. Court officials in Lesotho say that Gibb will be tried in the next few weeks. “The bank claims it can only investigate those firms that took money directly from it,” says Korinna Horta, a corruption-watcher at Environmental Defense, a Washington-based public interest group.

“Immediately after the corruption scandal was revealed,” Horta says, activist groups pressed the bank to investigate all companies on the project accused of corruption. Instead, she reports, it chose to interpret its procurement guidelines very narrowly, neatly avoiding having to apply them to some of the biggest dam-building companies in the world — companies with which they do substantial business. The facts of this case are scandalous [and] lead one to conclude that the World Bank is not serious about rooting out corruption on its projects.”

In June, an Argentinian federal judge raided the country’s law-enforcement ministry, seeking files that purported to show alleged administrative irregularities in consultants’ billing for IDB-financed projects during the Menem government. According to Insight sources, not only were the bank funds used as a source of patronage, with enormous sums being paid out to political cronies who did no work, but a contractor on another IDB-financed project reported that he was told by local officials that he would have to pay them half his company’s fee — more than $350,000 — if he expected to be paid. He still is waiting for his money. Credible corruption allegations also extend to IDB power projects in Colombia; water and sewerage works in Ecuador; pension-reform programs in Nicaragua; and sanitation programs in El Salvador.

William Taylor, the IDB’s auditor-general, says that many corruption claims are difficult to investigate because the bank does not have subpoena power and because of strong IDB staff association rules that protect employee rights. Several IDB employees and consultants contacted by this magazine, however, echo complaints heard at other multilateral banks — that they are afraid to step forward out of fear of reprisal. “There is little accountability at the IDB,” said one bank watcher in the U.S. Senate. The multilateral banks, the congressional source says, respond to U.S. concerns every three years when Congress appropriates the U.S. contribution to their institutions — “otherwise they more or less tell us to kiss off.”

This source says, “Maybe it is time that Congress consider doing to the multilateral banks what Sen. [Jesse] Helms (R-N.C.) did with the U.N. — withhold support until real reforms are set in place.”

In testimony before the Senate Foreign Relations Committee in September, Allan H. Meltzer, a visiting scholar at the American Enterprise Institute, called on Congress to demand “independent performance evaluation” at the multilateral banks. Meltzer is the former chairman of the congressionally mandated International Financial Advisory Commission, better known as the “Meltzer Commission,” an 11-member panel on the role and effectiveness of seven international institutions, including the World Bank, the IDB and the African Development Bank. It was the Meltzer Commission that recommended that future U.S. policy promote substantial change at the multilateral banks.

In his testimony before Congress, Meltzer called the World Bank’s poverty-alleviation efforts “ineffective,” noting that “between 1987 and 1998, the number of people living on less than a dollar a day [the bank’s measure of extreme poverty] remained the same. The proportion of the population declined modestly, from 28 percent to 24 percent. This is not much of an accomplishment for an expenditure of about 200 billion current dollars.”

Meltzer asked, “What lessons do we teach if we provide money to corrupt governments and do not ask whether the projects they proposed were completed, functioned and contributed to a better quality of life? When traveling to countries that received [World Bank] assistance, I have heard many stories of money wasted, money taken, projects never completed, schools without books, consultants paid handsomely but [with] no apparent outcome. The Congress should want more and should demand more.”

Martin Edwin Andersen is a reporter for Insight. He has worked in Latin America as a consultant for both the Inter-American Development Bank and the World Bank.

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