Odious Debts

U.S. Foreign Relations Committee given cause to return to development banks examination

The Chartered Institute of Building (CIOB) International News
January 10, 2005

In his presentation to the U.S. Senate Foreign Relations Committee last May on combating corruption in the multilateral development banks, Dr. Jeffrey A. Winters, Associate Professor of Political Economy in the Northwestern University’s Department of Politics based in Evanston, Illinois, alleged that 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 the other multilateral development banks (MDBs) were included, he said, the figure likewise involved in corruption of loan funds would double to around $200 billion. The first statement is a direct quote from the book “Reinventing the World Bank” edited by Dr. Winters and his colleague Jonathan R. Pincus. The chapter from which it is taken is headed “Criminal Debt” which as Dr. Winters explained to the committee refers not to what is called “odious debt” but to that portion of loan funds stolen by officials before they can be used for development.

In one of two contributions to the book, Dr. Winters says that such passive corruption poses three major challenges for the World Bank. The first is legitimacy.

“It is difficult for the Bank to claim a leadership role in development when its loans and projects have been tainted for decades by gross corruption. The willingness of rich governments to support the Bank financially is also undermined.

“The second challenge is response. The Bank cannot begin to retard the rate at which funds are stolen without a thorough understanding of why and how the money was lost. The Bank needs a realistic assessment of its capabilities and limits if it is to ensure that its funds are used for their intended purpose.

“The third and final challenge is responsibility. At present, indebted populations across the developing world are contractually bound to repay their World Bank loans, including the many billions of criminal debt stolen with the Bank’s knowledge by corrupt government officials and their cronies.

Charter obligations to safeguard loans

“The World Bank cites contractual obligations as it presses borrowing populations hard on debt repayment. Meanwhile, the multilateral development banks, which are explicitly obligated under their international charters to safeguard their loans against theft, are not being held financially accountable for failing to uphold their own obligations.

“The Bank’s knowledge that its funds have been systematically stolen over a period of decades, combined with its failure to take effective measures to reduce these losses, violates the Bank’s charter and makes it legally responsible for a share of the corrupted funds.”

Dr. Winters accepts that the World Bank and other MDBs have paid more attention to the problem of corruption since the 1990s. But, held told the Foreign Relations Committee, 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.

The development banks, he said, must do a much better job supervising and auditing projects and loans.

“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, he alleged not without reason, have deep conflicts of interest. This is where the battle within the U.S. administration is likely to develop if Senator Lugar and his committee decide to press the issue of independent auditing. The attitude of the Treasury Department towards such proposals as manifested last year was the clearest possible “hands off” signal to the U.S. Congress. This however is not a battle they can win if the President and the Senate are determined on reform.

Dr. Winters told the committee that under international law, the articles of agreement regulating the World Bank explicitly require the bank to ensure that the funds it lends or guarantees are used for their intended purpose.

“For decades,” he said, “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.

“No-one,” he went on, “is protecting the money of taxpayers in the lender countries from falling into the hands of kleptocrats in borrower states.” Following from that Dr. Winters put a more fundamental question, what are institutions like the World Bank supposed to be and to do? This is one on which members of the Foreign Relations Committee will have done well to reflect during the interval that has elapsed since last October.

Senator Lugar is in no doubt about the importance of these questions. In his introduction to the last meeting of the committee on the MDB issue, at the end of September, he repeated what he had said at the outset:

“Corruption impedes development efforts in many ways. Bribes can influence important bank decisions on projects and 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 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 pay the resulting debts to the banks.”

Treasury admits MDBs have immunity

In his most recent statement, Senator Lugar revealed that the U.S. Treasury Department has in written testimony advised that the international agreements that establish the multilateral development banks, and the U.S. law that implements those agreements, make it clear that the MDBs possess an effective immunity to the authority of the Office of the Inspector General who is currently responsible for their supervision.

This surely gives the committee an unanswerable case for an amendment to the law. At the same time it has recommended that the MDBs should harmonise their anti-corruption policies and mutually recognise blacklists. The position as it stands now allows development banks other than those who have issued a debarment notice to invite tenders from and award contracts to companies subject to sanctions arising from convictions for corrupt practice.

Referring to the Lesotho Government’s successful campaign against corruption over the award of contracts and settlement of claims, the committee noted that how the World Bank deals with international corporations convicted in a court of law for corruption associated with World Bank projects will be a powerful indication of the seriousness of its anti-corruption efforts.”

Within two days of this statement being made public, the World Bank’s sanctions committee announced its three year notice of debarment against Acres International.

Categories: Odious Debts

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