(October 29, 2004) The oral statement presented by Patricia Adams to the US Senate Committee on Foreign Relations and the roundtable discussion on multilateral development bank corruption.

Statement to the US Senate Committee on Foreign Relations Roundtable Discussion On Multilateral Development Bank Corruption

By

Patricia Adams
Executive Director, Probe International, Toronto, Canada
And
Director, Probe International Foundation, New York, USA

October 29, 2004
United States Congress

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Thank you to the US Senate Committee on Foreign Relations for the opportunity to contribute to this important discussion. My name is Patricia Adams. I am the executive director of Probe International, a Canadian non-profit research group. For the past 25 years I have investigated how multilateral development bank loans have created a culture of corruption leading to unrepayable debts, environmental harm, and the demise of democracy throughout the Third World.

Senator Lugar has asked us to provide three recommendations to enhance transparency and accountability in the MDBs in order to reduce corruption in their operations.

I recommend:

1) Effective deterrence;
2) Vigorous enforcement; and
3) Increased US Congressional scrutiny.

I’ll explain my reasons with the following example.

In 1999, prosecuting authorities in Lesotho stunned the world by indicting 13 prominent engineering multinationals from 6 countries for bribing the CEO of their World Bank-funded Highlands dam scheme. No American firm was indicted. This, I believe, was no coincidence.

The US Foreign Corrupt Practices Act has effectively deterred many American executives from corrupt acts. Americans can be prosecuted, jailed, their firms can be barred from work, their names disgraced, and they can face stiff financial penalties.

Not so in other OECD countries. Until recently, firms could deduct bribes as legitimate business expenses and governments facilitated corrupt acts rather than stopped them.

Because US firms make unlikely partners in crime, corrupt players keep them away from MDB contracts. In the Lesotho case, the first company to be convicted was a Canadian engineering firm called Acres International. One of the favors bestowed on Acres in return for its $260,000 in bribe payments, according to court documents, was to receive advice on how to beat the competition Acres was facing from the American firm, Bechtel.

For all western suppliers to face penalties comparable to those Americans face, MDBs must have effective deterrents. Unless the cost of corrupt acts become greater than the benefit, bribery will continue to pay and firms will have an incentive to develop ever-more elaborate ways to hide their crimes.

Deterrents today are slaps on the wrist. The World Bank has debarred Acres, but it has done so more in name than in fact. After Acres was charged, it continued to receive World Bank contracts, the last one after its conviction and just one week before its debarment.

Meanwhile, no other MDB has debarred Acres. In the MDB system, one bank can debar a firm for corrupt behavior one day and the firm can be awarded a contract by another bank the next day.

I recommend that the MDBs follow the principles in the Foreign Corrupt Practices Act and debar a company or individual under investigation or after indictment, until its innocence is established. I also recommend that debarment by one MDB be a debarment by all. Finally, because the US government is the single largest shareholder in the MDBs, I recommend that the US debar firms found guilty of corruption by any MDB.

Strong US actions will be well received in the Third World. According to Guido Penzhorn, the prosecutor in the Lesotho trials, there is a impression in southern Africa that first world countries are more interested in protecting the corrupt companies than seeing them prosecuted. This is clearly the case in Canada, where Canadian officials defended Acres from debarment, saying that Third World courts can’t be trusted because they are known to be corrupt. Moreover, the Canadian government continues to support Acres with federal funds through our aid and export credit agencies. Companies found guilty of corrupt acts, we believe, should be debarred from all government contracts. If the US takes the lead in doing so, countries like Canada will more likely follow.

Finally, the MDBs cannot be expected to vigorously enforce their promises to rid their operations of the cancer of corruption. Their internal conflicts of interest are too many. And they are, in law, answerable to no one. For that reason, I strongly recommend that the US Congress make reauthorizations for any of the MDBs conditional upon regular audits of the effectiveness and enforcement of MDB anti-corruption programs by a US agency, such as the Government Accountability Office.

The US should also require that each MDB publish regular estimates of funds illegally appropriated as well as funds recovered from such activities. If the GAO determines that MDB performance does not match enforcement of US anti-corruption standards, then US taxpayers cannot be assured that their funds will be used as intended and that American firms won’t be unfairly disadvantaged. The US should then withhold funds from the MDBs.

The US, as the major shareholder, has more clout than any other. The US Congress, as the legislature that is more accountable to its citizens than any other legislature, has been, in my experience over the past 25 years, most effective at restraining the MDB’s harmful effects. We, in other countries, will do our part to get our governments to catch up with the US, but we urge you not to wait.

Thank you.

Read statements to the US Senate Committee on Foreign Relations hearings on May 13, 2004, Combating Corruption in the Multilateral Development Banks, including by Dr. Jeffrey Winters, here.