Loan corruption control

Richard Lugar
The Washington Times
July 1, 2005

When the tiny, impoverished African country of Lesotho obtained World Bank loans for more than $160 million as part of a giant dam and tunnel project, its leaders hoped they could earn money from selling irrigation water and also gain badly needed hydropower.

Unfortunately, some European, Canadian and South African engineering firms had other ideas – they saw the project as a fountain of illegal cash.

In a lengthy criminal case that already has produced several convictions, these companies are accused of bribing a Lesotho official to win lucrative contracts. The payoffs helped raise the project’s cost and foster dishonesty that hobbles so many developing countries. Lesotho showed unusual luck – and pluck – in uncovering the sophisticated scheme and spent a large portion of its scarce resources bringing the culprits to justice.

Unfortunately, such opportunities for graft and corruption on loans from the World Bank and similar international lenders are all too tempting. That’s a serious concern for Americans because our tax dollars help support these banks, whose work enhances our worldwide humanitarian and security interests.

That’s why I launched a wide-ranging inquiry last year to look into corruption at the World Bank and the other multilateral development banks (MDBs) – the African Development Bank, Asian Development Bank, European Bank for Reconstruction and Development, and Inter-American Development Bank.

Thus far, I have chaired four hearings of the Senate Foreign Relations Committee and my staff has reviewed thousands of pages of documents, visited projects where corruption has been documented, and interviewed scores of whistle-blowers, experts, academics, nongovernmental organization representatives and local people affected by MDB projects.

Based on this extensive record, I have introduced legislation to promote reform at the banks and bolster their antifraud and anticorruption efforts. If enacted, this legislation will be an important step toward ensuring each development dollar is put to productive use.

Corruption impedes development in many ways. Bribes can influence important bank decisions on what projects are approved and which contractors get the work. Misuse of funds can inflate project costs, deny assistance poor people desperately need and cause projects to fail.

Worse, the impoverished citizens of these countries pay twice for corruption. First they are cheated out of the promised benefits – better schools, clean water, more health clinics – and then are forced to repay the resulting debts.

Congress and successive administrations have supported the World Bank and its sister institutions because they bring expertise in fighting endemic poverty and harness the industrialized world’s resources to promote development and stability in remote areas of the globe. My aim is to improve their effectiveness in this important task.

The World Bank, under departing president James Wolfensohn, has led the MDBs in addressing corruption. I am sure the Bank’s new leader, former Deputy Defense Secretary Paul Wolfowitz, will continue this effort, and my legislation should assist him and other reform-minded MDB presidents.

For instance, it proposes all MDB employees with influence over important decisions disclose their finances, much as we require financial disclosure from the president of the United States, members of Congress and other key officials.

It calls for new incentives within the banks to eliminate the “pressure to lend,” so staffers focus on funded projects’ quality and outcomes, not how many loans they push out the door.

It proposes new procedures to detect fraud and corruption, stiffer penalties for wrongdoers and new mechanisms to encourage borrowing countries to clean up their own corruption. The bill says international companies seeking MDB contracts should be held to tough anti-bribery standards similar to those the United States sets for its own firms.

For poor countries like Lesotho, which uncovered the graft but was nearly bankrupted by the costly investigation and trials that followed, it calls on the Treasury Department to develop a mechanism, such as a special trust fund, to assist in prosecuting corrupt officials and corporations.

This legislation attacks an invidious problem. Guido Penzhorn, who successfully led the prosecution in Lesotho, told my committee: “Corruption is a worldwide industry. What Lesotho has done is show that something can indeed be done about it. All that is required is not merely token, but real resolve.”

Congress can show that resolve by passing this legislation and urging the Bush administration to carry it out vigorously.

Richard G. Lugar, Indiana Republican, is chairman of the Senate Foreign Relations Committee.

Categories: Africa, Odious Debts

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