Fighting fraud and corruption: World Bank fills out its armoury of counter measures

October 3, 2005

Corruption remains a formidable barrier to development, the recently appointed World Bank President Paul Wolfowitz said in his first address to the annual World Bank and International Monetary Fund meetings in Washington.

“Whether investing in education, health, agriculture or the environment,” he said, “we must be sure that we deliver results. And by results, let me be clear. I mean results that have a real impact in the day-to-day lives of the poor, for which we stand accountable.”

To assist in this work, the Bank’s Integrity Department INT is working on a new anti-corruption tool called the Voluntary Disclosure Program. The aim is to encourage companies to volunteer information about their involvement with fraud and corruption on World Bank projects. In return they will win reduced sanctions and assurances of confidentiality.

The program is one more tool being used to ensure that money advanced by the Bank is dedicated to the purpose for which it is given. This facility for voluntary disclosure could be one of increasing importance because recently the Bank has been giving out much more information about the circumstances surrounding debarments, and publicising the prosecutions that have often followed in home countries.

When last year Acres International was barred from World Bank contracts for a period of three years following its conviction for corrupt activities connected with the Lesotho Highlands water project, the Bank gave an account of the reasons for sanctioning the firm. But in that case did not name anyone on the grounds that the relevant persons were no longer in positions of responsibility.

In its statement on the sanctioning of Acres, the Bank admitted that at an earlier hearing its sanctions committee had concluded that the evidence was not sufficient to show that the company had engaged in corrupt practices. But following Acres’ High Court conviction in September 2002 and the dismissal of its appeal in August 2003, the Bank said it provided extensive support to the Lesotho prosecutors.

And it gave credit to the Kingdom of Lesotho for the benefit the Bank had obtained from the investigative work done by its government in bringing the debarment case against Acres and in reviewing the evidence against others.

Reported increase in debarments

The annual report on investigations and sanctions of staff misconduct and fraud and corruption in Bank-financed projects, published for the first time last February, showed that in the fiscal year 2003-04 the total number of debarments rose to 126. No fewer than 113 of these were against suppliers, contractors and recipients of grants in Indonesia. The others were six two-year debarments in India and two permanent debarments in Sweden. The total is made up by seven letters of reprimand.

In the Swedish cases, two of the Bank’s former staff members pleaded guilty to charges in U.S. District Courts, and two individuals in Sweden were convicted of bribery. Earlier, the Bank had permanently debarred seven Swedish firms, one Dutch firm and two individuals who were subsequently convicted and permanently debarred from future business.

Every one of these sanctions was produced by breaches of the Bank’s procurement guideline 1.15 (a)(ii) which says:

“fraudulent practice” means a misrepresentation of facts in order to influence a procurement process or the execution of a contract to the detriment of the Borrower, and includes collusive practices among bidders (prior to or after bid submission) designed to establish bid prices at artificial, non-competitive levels and to deprive the Borrower of the benefits of free and open competition. As an example of fraud and corruption detected in a rural infrastructure project, the report said that the investigation began when the Bank’s rural investment project team on a regular supervision mission noticed a series of irregularities associated with implementation of this project.

Analysis of documents and interviews with several witnesses resulted in evidence of fraudulent and corrupt practices in the award and implementation of more than 20 sub-projects.

“While significant disbursements were made on a number of infrastructure contracts, contractors had made little progress on the actual works. In addition, the Integrity Department found that in some instances, rural mayors used the Bank-financed funds to finance their political campaigns.”

As a result, the Bank cancelled a portion of the loan and requested reimbursement of the misused funds. In addition, the Bank suspended further disbursements until the borrower took action to prevent future misuse. At the same time the Bank in October 2001 made a criminal referral of its findings to the Bolivian Government.

This resulted in the trial and conviction of numbers of people suspected of wrong-doing. In May this year the World Bank issued a statement congratulating the Bolivian Attorney-General Oscar Crespo for swift action in investigating this corruption case. It explained that this rural investment project had been financed by a $62.8 million loan, with the aim of promoting economic development through sustainable productive investments based on local demand.

The fraudulent practices included bid manipulation, collusion between builders and project officials, request and payment of kickbacks, submission of fraudulent invoices and payment for work not completed or never done.

More than 30 prosecuted in Bolivia

As the outcome of nine trials conducted to that date by a team of anti-corruption prosecutors assembled by the Attorney-General, 15 individuals, all of whom were named in the Bank‚Äôs statement, received sentences of between two and four years. Project officials and members of the bid evaluation committees of the foundation to whom the investment was entrusted were convicted for criminal abstention, fraudulent misrepresentation, use of falsified documents and entering into contracts adverse to the State’s interests. Contractors were convicted for ‘anti-economic practices’.

Prosecution against nine others was suspended on condition that they provided restitution to the Republic of Bolivia. Another 15 individuals have been indicted and at the time of the announcement were awaiting trial.

This kind of action indicates a major shift since the 1990s, when it was revealed that the Bank itself estimated that an average of 30 per cent of its lending in Indonesia was being diverted for corrupt purposes.

At the U.S. Senate Foreign Relations Committee’s hearing last year on combating corruption in the multilateral development banks, Dr. Jeffrey Winters alleged that since its founding the World Bank had participated ‘mostly passively’ in the corruption of roughly $100 billion of its loan funds intended for development.

The former Bank President James Wolfensohn has rightly been given a great deal of the credit for developing the Bank’s anti-corruption policies and for formation of the Department of Institutional Integrity. Whether his successor is ready to devote more resources to this work remains to be seen. The indications are however that under Paul Wolfowitz things are going to be riskier for consultants engaged on World Bank projects who bribe their way into contract awards, the same for contractors and suppliers who engage in ‘anti-economic practices’.

But INT has made it plain that even the $10 million it is spending every year on combating corruption is not sufficient to deal as effectively as it would wish with the scale of the regulatory challenge set out in its ground-breaking report.

Categories: Corruption, Lesotho, Odious Debts

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