Oversight Crisis at Development Banks
www.insightmag.com Posted Feb. 17, 2003 By Martin Edwin Andersen Media Credit: Pierre Roussel/iPhoto IDB President Enrique Iglesias and other officials of multilateral development banks are under increased scrutiny. Yellow police tape sealed off a sixth-floor office in the exquisite headquarters of the Inter-American Development Bank (IDB) just two blocks from the White House. The tape barred entry to the room, but it could not contain the horror within, where a former official of an IDB Central American office, reportedly distraught over misconduct at the multilateral development bank (MDB), had slashed throat and wrists. While doing so, say IDB insiders, the former official wrote in blood on an office wall: "The bank is corrupt!"
The tragedy is reported to have occurred after the official blew the whistle to superiors concerning alleged abuse of power affecting IDB projects in the field. In response, the official had been transferred back to Washington. According to a former IDB officer familiar with the case, the official's "grade [job rank] was lowered" and the whistle-blower "was assigned to a small windowless office -- something very important to bank staff -- and given no responsibility." Then the "silent treatment" began.
Four other sources, including a highly placed bank official, have confirmed part or all of the story. Contacted at home by Insight, the recovering bank officer had been on leave since the July 18, 2002, incident and continued to be under a physician's care. The officer would not comment on what had happened, nor would the IDB.
The incident offers emblematic and tragic evidence of what some officials at the MDBs tell Insight are the risks they face in speaking out against wrongdoing at these institutions supported by U.S. taxpayers. Not only can doing the right thing lead to losing one's job, but foreign hires dependent on bank-sponsored work visas face additional risks. "Everybody is afraid," a well-placed IDB source tells this magazine. "Of course, they fear losing their jobs, but another way [the bank] keeps them in line is by threatening to take away their visas. If they lose their visas, they have to go home."
Similar concerns, say advocates for bank reform, are heard from inside the World Bank, the Asian Development Bank and the African Development Bank. "Experts I work with at the World Bank say that if they make comments critical of the bank's position, they do so at what they have described as 'great risk,' and they end up not being listened to anyway," says Korinna Horta, a senior economist at Environmental Defense, a citizen watchdog group. "I have firsthand knowledge that this happened in the case of the Chad-Cameroon oil-pipeline project."
According to a recent study by Northwestern University political scientist Jeffrey Winters, in the last five decades corrupt officials from Third World countries have skimmed an estimated $100 billion from World Bank loans. Not until 1996 did the World Bank institutionalize a strategy and mechanism for combating the corruption inside the institution, which next to the federal government is the largest employer in Washington. The years passed. In 2000, the bank shifted the chairs on the deck of what seemed to some like the Titanic, merging its corruption-and-fraud-investigations unit and its office of business ethics into a department of institutional integrity. That same year the General Accounting Office (GAO), the U.S. congressional watchdog, issued a report calling on the World Bank to make greater efforts to control corruption.
But the U.S. Treasury Department is the executive-branch overseer of the development banks. And in November 2000 it successfully killed recommendations to Congress proposed by the U.S. Agency for International Development (USAID) that greater public disclosure of the banks' operations be mandated and a better process of external and internal review be established to prevent potentially illegal loans from being approved.
More recently the International Financial Institution Advisory Commission, a congressionally mandated 11-member panel on the role and effectiveness of several international institutions, was created. Known as the Meltzer Commission, it was created amid growing bipartisan discomfort about the slowness of these banks to reform. Those demanding action ranged from the late senator Paul Wellstone (D-Minn.) to former House majority leader Richard Armey (R-Texas). Few were surprised when the commission called for major reform to ensure a more efficient use of U.S. funds -- such as the more than $1 billion provided in the fiscal 2003 foreign-operations bill.
Within the last year, allegations of endemic corruption at the IDB have been accompanied by complaints heard at sister institutions alleging gross mismanagement and violations of U.S. law. In addition, U.S. watchdog groups have charged that all the banks still are reluctant to heed calls for greater transparency and public disclosure concerning the use of public funds for development objectives such as poverty reduction.
In response, there have been increasing calls for greater congressional oversight of the banks. Proposals range from requiring the State Department and the Justice Department more actively to review MDB-funded activities and report to Congress every year, to holding the MDBs' feet to the fire by authorizing their budget only on a yearly basis, at least for the next year or two, rather than on the current three-year schedule. As one congressional source observes, "The banks come up for their money every three years, make a lot of promises, then basically thumb their noses at us until the next appropriations cycle is near."
Rep. Steve Israel (D-N.Y.), a member of the House Financial Services Committee, tells Insight: "The multilateral development banks are critical instruments for reducing poverty around the world and making life better for billions of people. The U.S. makes significant contributions to these banks and it is essential that the Congress find out if we are getting what we pay for. These banks shouldn't be making people rich. They shouldn't be used as personal fiefdoms. They are a public trust, and the people who run them must remember that. If they don't, the Congress should remind them, in the strongest possible terms." And, according to Israel, "We must put their very existence at risk if we are going to get any results."
Senate Finance Committee Chairman Charles Grassley (R-Iowa) emphasizes: "We need to make certain that these development banks are being operated for the common good and are not above the law. Just as the banks require loan recipients to be forthcoming about information, so Congress expects the banks to be responsive and candid to requests for information."
Oversight of operations at the World Bank, says John Ruthrauff, senior policy adviser for Oxfam, is still a hit-and-miss proposition, despite improvements instituted during the 1990s by current bank president James Wolfensohn. Ruthrauff notes that the bank's directors do not see their oversight responsibilities extending to operational issues and, even if they did, they are hamstrung by small staffs and a system of rotation in which most directors last only a few years because 26 executive directors and a similar number of alternates represent 180 countries. "They just don't have the time to look into issues themselves -- there are just too many projects," Ruthrauff adds. "So oversight, where it exists, is left to the staff."
The situation is even worse at the regional development banks, insiders say. "While at the World Bank you might have a Pakistani in charge of programs in Venezuela, in the regional banks it pretty much boils down to an elite group that works with its friends," says one insider. "It is tougher to have an arms-length relationship between borrowers and bank staff, or among the latter, because the regions are smaller and there is a lot of opportunity to develop networks and special friendships."
Most observers agree that, of the international financial institutions, the World Bank appears to have the best internal-review policies, an image carefully bolstered by a first-rate press office. "The World Bank takes its fiduciary and audit responsibilities very seriously," bank spokeswoman Caroline Anstey, says. "To this end, we encourage anyone with a complaint of fraud or corruption involving a World Bank financed project to come forward and report these allegations to our fraud and corruption investigations unit. ... Our experience over the years has shown that a transparent management of public funds represents a key element of good governance, and this, in turn, is indispensable for sustained growth, poverty reduction and a country's overall development."
Treasury's role in the oversight process continues to be controversial. Sources on the IDB board tell Insight that U.S. Executive Director José Fourquet has not provided leadership needed to curb alleged corruption at that bank. Fourquet has not responded to several requests for comment.
On Feb. 3, Rep. Barney Frank (D-Mass.), a longtime proponent of greater oversight of the banks and a supporter of their development mission, wrote to Rep. Jim Kolbe (R-Ariz.), chairman of the House Appropriations subcommittee on Foreign Operations, complaining about Treasury's resistance to outside oversight. "I was very disturbed to learn recently that the Treasury Department reproached some officials at the World Bank for engaging in some detailed, high-level discussions with my office about [funding issues] without Treasury's approval," Frank said. "I think these actions speak to the need for continued, assertive congressional oversight."
Critics contend that without conditions placed on the banks, passage of the omnibus appropriations bill by Congress will result in continued abdication of responsibilities in monitoring institutions that lend tens of billions of dollars each year. Not only are U.S. taxpayer dollars in danger of being squandered, they warn, but less-developed nations continue to be saddled with unwanted debt that all too often ends up in the hands of greedy local politicians or is spent on projects that exacerbate economic and environmental problems.
Martin Edwin Andersen is a reporter for Insight. He worked as an international consultant for the IDB from 1997-2001.