October 29, 2004

“It makes no sense for one MDB to do business with a company that another MDB has debarred because of corruption.”

STATEMENT OF BRUCE M. RICH
SENIOR ATTORNEY
ENVIRONMENTAL DEFENSE

TO THE SENATE FOREIGN RELATIONS COMMITTEE
CONCERNING RECOMMENDATIONS TO THE MULTILATERAL DEVELOPMENT BANKS TO REDUCE CORRUPTION IN THEIR OPERATIONS

FOR THE MDB ROUNDTABLE DISCUSSION
OCTOBER 29, 2004

Mr. Chairman and Members of the Committee, thank you for the
opportunity to contribute to this important process, which we hope will
result in legislative and other measures to address corruption in MDB
lending. As a follow-up to the three hearings held by the Committee on
corruption in the MDBs on May 13, July 21, and September 28, 2004,
Chairman Lugar has asked us to provide three recommendations to enhance
transparency and accountability in the MDBs in order to reduce
corruption in their operations.

Many good recommendations were put forth in the statements of various
witnesses in the three hearings held by the Committee over the past
several months, as well as before the roundtable discussion on October
29, 2004. The hearings and the roundtable discussion elicited some
common, overarching themes which many of the specific recommendations
of the witnesses tried to address. Among the two most prevalent
concerns are 1) The need for countervailing measures to address the
‘pressure to lend’ and ‘loan approval culture’ which is still prevalent
in the MDBs and

2) The need for coherence, harmonization and coordination of efforts
among the MDBs and other publicly supported financial institutions in
addressing corruption. [1] We have chosen and prioritized our
recommendations with these cross-cutting concerns in mind.

Based on our own analysis and that of the other witnesses, I will try
to summarize three major priorities that the Committee can act on
relatively soon to address corruption through enhanced accountability
and transparency of the MDBs.

A. Increased Enforcement and Deterrence

Many witnesses emphasized the need for more effective and increased
enforcement of existing anti-corruption policies in the MDBs. The ADB
is a prime example. For example its 1998 Anti-Corruption Policy and
2000 Anti-Corruption Operational Procedures require assessing
corruption risk in country and project documents, yet a systematic
examination of ADB Country Strategy Papers, project appraisal and audit
reports conducted earlier this year by the Bank Information Center. [2]
Exposed the total non-implementation of the policy and procedures.

For deterrence one of the most effective measures would be Public
Cross-Debarment of any company or individual found guilty of corruption
in a project financed with public money in developing countries.
Cross-debarment should be applied by all of the MDBs, as well as by
donor bilateral aid and export-credit agencies. It makes no sense for
one MDB to do business with a company that another MDB has debarred
because of corruption—indeed one could have the grotesque situation of
a company obtaining business from a MDB in the same sector in the same
country where a sister MDB had found evidence of corrupt practices.
Similarly, given that the MDBs, bilateral aid agencies and export
credit agencies are all supported by taxpayer funds and guarantees in
the donor countries, it makes little sense for a company to be debarred
from doing business with the MDBs for corruption, but then to receive
taxpayer-backed loans or guarantees—sometimes in the same country and
sector—from a donor country’s bilateral aid or export credit agency.

Cross-debarment is something the U.S. can initiate on its own. When a
company is debarred by an MDB, or found guilty of corruption in
contracting with U.S. AID, OPIC or the EX-IM Bank, it should be
debarred for a reasonable amount of time from business with all U.S.
taxpayer-supported projects and investments abroad. Finally, a strong
argument can be made that when a company is found guilty of corruption
in a country – even if an MDB or bilateral agency is not involved – the
company should nevertheless be subject to cross-debarment at these
publicly funded institutions for a period of time.

It should be emphasized that systematic, public cross-debarment, as
described above, would be a logical, necessary element of the Monterrey
Consensus harmonization process described in footnote 1, completing the
process of coherence, harmonization and coordination of policies and
practices among bilateral and multilateral development agencies.

An equally strong and important measure to promote increased
enforcement and deterrence is the recommendation of Steve Berkman to
require MDBs to provide annual estimates of the amount of money that is
illicitly diverted, as well as to report on the efforts made to recover
stolen funds. As Mr. Berkman pointed out, most major retailers have
estimates of what percentage of sales is lost through employee theft
and shoplifting, and how much this loss is reduced through increased
security measures. The World Bank produces statistics and estimates of
every conceivable economic indicator except arguably the most important
one for the development effectiveness of its own operations: leakage of
its own loans and credits through corruption. We note that the Bank’s
Indonesia Country staff prepared such an estimate—with breakdowns by
government ministry—of how much money was being diverted in its
Indonesia country lending in 1997 and 1998 (the “Dice” and “Loos”
memoranda).

The second aspect of this reporting requirement is equally important,
namely that MDB management should also require its borrowers to
undertake legal proceedings to recover stolen funds. MDBs should report
annually on the efforts made by each borrower and by the Bank as a
whole. The MDBs have talked a lot about helping to build capacity in
borrowers for financial management and addressing corruption, but
ignore the single most effective and useful measure they could
undertake; namely, identifying the resources of their own which are
diverted and demanding recovery of these funds from borrowers.

In its future authorization legislation for the MDBs, the Committee
should require the U.S. Executive Directors of the MDBs to promote
cross-debarment of companies and individuals, as well as the
institution of these reporting requirements at each MDB. The
legislation should set a future deadline after which the MDBs’ failure
to implement cross-debarment and produce country and Bank-wide
aggregate reporting estimates for leakage and recovery of lost funds
would require a reduction in U.S. funding for the institution, or
require that U.S. EDs not support future loans until these requirements
are met.

B. Strengthening the Existing Anti-Corruption Units and Initiatives at the MDBs.

A common recommendation of many witnesses focused on strengthening the
existing anti-corruption units in the MDBs through measures to ensure
greater independence and autonomy, increased and better qualified
staffing, additional resources, and an expanded mandate to undertake
systematic pro-active spot audits and investigations, rather than
focusing only on reactive inquiries in response to specific
allegations. The anti-corruption units in the MDBs should report
directly to the President of the institution, not through intermediary
layers of management.

In the case of the World Bank, for example, there has actually been a
regression in the independence of the Department of Institutional
Integrity (INT), which no longer reports directly to the Bank’s
President but rather to managing directors and the legal department.
Every effort has to be made to ensure that the staff of the MDB
anti-corruption units is not influenced by internal pressures to
downplay sensitive investigations; career incentives in the
anti-corruption units should be linked to bringing investigations to a
successful conclusion. The staff should be recruited independently from
the outside focusing on experienced investigators, forensic
accountants, etc.

Additionally, the level of staffing in all of the anti-corruption units
needs to be increased. For example, while the World Bank INT has a
staff of about 55, the report undertaken by Richard Thornburgh and his
associates in 2003 recommended still further increases. [3] The ADB
anti-corruption staff numbers only five. To reach the same proportional
level as the World Bank in relation to the volume of its lending, the
ADB anti-corruption unit should have at least 14 professionals.

Finally, the anti-corruption efforts in the MDBs to date have been
almost entirely reactive and focused on responses to specific
allegations of corruption. Proactive and preventative measures, as the
Thornburgh World Bank reports stress, are equally important. [4] The
anti-corruption units of the MDBs should be given the resources and the
mandates to carry out pro-active spot audits on a much larger scale,
particularly in corruption-prone sectors such as the extractive
industries, large infrastructure projects, and non-project lending.
Additionally, as a minimum preventative measure in a high-risk sector
for corruption, for all MDB-supported extractive industries’ projects,
companies should be required to publish the revenues they pay to
governments and governments should publish the revenues they receive.

Some witnesses have suggested that the establishment of an external,
independent auditing entity for the MDBs would be desirable and
preferable. Over the longer term this may be true, but in the short and
medium term it is essential – and more immediately practicable – to
strengthen existing mechanisms.

In its future authorization legislation for the MDBs, the Committee
should require the U.S. Executive Directors of the MDBs to promote
increased resources and staff for anti-corruption units, greater
independence of these units, and a more pro-active investigative
agenda. The MDBs should also require revenue transparency for
disaggregated company payments and government receipts from all
MDB-supported extractive industry projects.

C. Conditioning Future MDB Replenishments and Capital Increases on GAO Audits of Lending Programs

We support this recommendation made by former World Bank auditor and
task manager Steve Berkman. It is true that the review conducted by the
GAO several years ago was understaffed and had difficulty in obtaining
information from World Bank staff and management. However, as the first
such external audit of the MDBs, the GAO review set an important
precedent. Part of the first investigation’s difficulty lay in the
inadequacy of resources that were allotted for the task.

We would recommend that greater resources be allocated for GAO
investigations in this area, commensurate with the six areas for
prospective audits that Mr. Berkman identified, viz.:

1. A representative sampling of completed project, sector, and
adjustment lending operations to determine if the funds provided by the
Bank had been used, as Article III, Section 5, para. (c) requires, for
the purposes intended and with due consideration to cost effectiveness.

2. A review of tranche, Special Account, and Statement of Expenditure
disbursements to determine if they had been properly accounted for in
accordance with Article III Secion 5 para (c) of the Bank’s Articles of
Agreement. Specific attention should be devoted to the eligibility of
goods, equipment and services procured, value for money, and other
anti-fraud related issues.

3. A review of the anti-corruption and fraud investigation program with
due consideration for the confidentiality of ongoing investigations and
any other sensitive matters.

4. A review of the amount of stolen funds recovered from individuals,
companies, or other non-government entities, which are not to be
confused with the cancellation of credits, or parts of credits.

5. A review of Trust Fund activities managed by the Bank.

6. A review of any other accountability issues that may be deemed appropriate.

[1] Concerning harmonization, coordination and coherence, the
International Conference on Financing for Development that took place
in Monterrey, Mexico in March, 2002 set forth a commitment of donors
and multilateral and bilateral aid institutions to deliver and manage
aid more effectively to increase development impact. A key component of
the “Monterrey Consensus” has been follow-up activities to harmonize
bilateral and multilateral aid policies and guidelines, including in
the areas of financial management and reporting, accounting and
fiduciary standards, and procurement. Indeed, since 2003 efforts in
these areas have been conducted through three major inter-agency
entities: a Working Party on Aid Effectiveness and Donor Practices of
the Organization for Economic Cooperation and Development Assistance
Committee (OECD-DAC-WP-EFF), a MDB Technical Group on Financial
Management including the MDB heads of procurement; and a MDB Roundtable
of Policy Directors and Advisors in the MDBs. (World Bank,
“Harmonization Follow-Up: Global Architecture and World Bank
Activities,” October 1, 2003, SecM2003-0387/1). Although a rather
formidable bureaucratic apparatus appears to have been set up, in
reality there appears to be little progress in strengthening actual
measures to coordinate anti-corruption efforts. A framework for better
coordination and harmonization of financial management, reporting and
auditing among the MDBs has been developed as well as standardized
master documents for international competitive bidding in procurement.
(Ibid., pp. 21-22). But there is no reference to strengthening
anti-corruption efforts; in fact the main driver behind the current
harmonization, coordination and coherence agenda is streamlining and
simplifying procedural requirements for aid recipients and borrowers –
a worthy goal, but one that without strengthened and better coordinated
anti-corruption efforts will in all likelihood inadvertently contribute
to weakened development effectiveness.

[2] Steve Herz, “‘Zero Tolerance?’ Assessing the Asian Development
Bank’s Efforts to Limit Corruption in its Lending Opertions”
(Washington D.C.: Bank Information Center, March 2004).

[3] Dick Thornburgh, Ronald L. Gainer, Cuyler H. Walker, “Report
Concerning the Proposed Strategic Plan of the World Bank’s Department
of Institutional Integrity, and the Adequacy of the Bank’s Mechanisms
and Resources for Implementing that Strategy,” July 9, 2003. pp. 5-6.

[4] Ibid.