```

[Senate Hearing 108-734]
[From the U.S. Government Publishing Office]

                                                        S. Hrg. 108-734

   COMBATING CORRUPTION IN THE MULTILATERAL DEVELOPMENT BANKS [PART I]

=======================================================================

                                HEARING

                               BEFORE THE

                     COMMITTEE ON FOREIGN RELATIONS
                          UNITED STATES SENATE

                      ONE HUNDRED EIGHTH CONGRESS

                             SECOND SESSION

                               __________

                              MAY 13, 2004

                               __________

       Printed for the use of the Committee on Foreign Relations

 Available via the World Wide Web: http://www.access.gpo.gov/congress/
                                 senate

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                     COMMITTEE ON FOREIGN RELATIONS

                  RICHARD G. LUGAR, Indiana, Chairman
CHUCK HAGEL, Nebraska                JOSEPH R. BIDEN, Jr., Delaware
LINCOLN CHAFEE, Rhode Island         PAUL S. SARBANES, Maryland
GEORGE ALLEN, Virginia               CHRISTOPHER J. DODD, Connecticut
SAM BROWNBACK, Kansas                JOHN F. KERRY, Massachusetts
MICHAEL B. ENZI, Wyoming             RUSSELL D. FEINGOLD, Wisconsin
GEORGE V. VOINOVICH, Ohio            BARBARA BOXER, California
LAMAR ALEXANDER, Tennessee           BILL NELSON, Florida
NORM COLEMAN, Minnesota              JOHN D. ROCKEFELLER IV, West 
JOHN E. SUNUNU, New Hampshire            Virginia
                                     JON S. CORZINE, New Jersey

                 Kenneth A. Myers, Jr., Staff Director
              Antony J. Blinken, Democratic Staff Director

                                  (ii)

  

                            C O N T E N T S

                              ----------                              
                                                                   Page

Bapna, Mr. Manish, executive director, Bank Information Center, 
  Washington, DC.................................................    32
    Prepared statement...........................................    35

Boswell, Ms. Nancy Zucker, managing director, Transparency 
  International USA, Washington, DC..............................    43
    Prepared statement...........................................    46

Brookins, Ms. Carole, U.S. Executive Director, The World Bank, 
  Washington, DC.................................................     3
    Prepared statement...........................................     8

Levinson, Professor Jerome I., distinguished lawyer in residence, 
  Washington College of Law, American University, Washington, DC.    52
    Prepared statement...........................................    56

Lugar, Hon. Richard G., U.S. Senator from Indiana, opening 
  statement......................................................     1

Morales, Mr. Hector, Alternate U.S. Executive Director, Inter-
  American Development Bank, Washington, DC......................    12
    Prepared statement...........................................    13

Winters, Dr. Jeffrey A., associate professor, Northwestern 
  University, Evanston, IL.......................................    25
    Prepared statement...........................................    28

             Additional Statements Submitted for the Record

Adams, Patricia, economist and executive director, Probe 
  International, statement for the record........................    76

Perry, Ambassador Cynthia S., statement for the record...........    73

Rich, Bruce M., Environmental Defense, statement for the record..    79

Watters, Kate, executive director, Crude Accountability, 
  statement for the record.......................................    86

                                 (iii)

  

 
                   COMBATING CORRUPTION IN THE MULTI-
                   LATERAL DEVELOPMENT BANKS [PART I]

                              ----------                              

                         THURSDAY, MAY 13, 2004

                                       U.S. Senate,
                            Committee on Foreign Relations,
                                                    Washington, DC.
    The committee met at 9:33 a.m., in room SD-419, Dirksen 
Senate Office Building, Hon. Richard G. Lugar (chairman of the 
committee), presiding.
    Present: Senators Lugar and Hagel.

        OPENING STATEMENT OF SENATOR RICHARD G. LUGAR, CHAIRMAN

    The Chairman. This hearing of the Senate Foreign Relations 
Committee is called to order.
    Today the committee meets to examine the problem of 
corruption related to the activities of the multilateral 
development banks. The United States has a strong national 
security and humanitarian interest in alleviating poverty and 
promoting progress around the world. That is why the Congress 
funds multilateral development banks such as the World Bank, 
which can leverage our resources and promote economic growth 
and reduce poverty around the world. Of the 6 billion people 
living in the world today, more than 1 billion barely survive 
on less than $1 of income a day.
    In the last fiscal year, the multilateral development banks 
financed projects totaling more than $35 billion. These 
projects helped poor countries pursue critical improvements in 
public administration, transportation, health, education, and 
many other vital areas. The development banks have in recent 
years introduced innovative programs that have enhanced their 
primary mission of poverty reduction. But even the most 
innovative policies will not be effective if they are distorted 
by corruption. It is critical that every development bank 
dollar reaches its intended recipient. Unfortunately, that has 
not occurred in all instances.
    Over the past year, the Senate Foreign Relations Committee 
staff has collected information from public and confidential 
sources related to alleged corruption involving multilateral 
development bank activities and projects. The committee is 
engaging in a multi-track process to review specific 
allegations and to determine the effectiveness of the 
multilateral development banks' anti-corruption strategies. 
This is a process that hopefully will result in a stronger 
anti-corruption infrastructure within the development banks.
    From the outset, I would recognize that the World Bank 
itself has identified corruption as the single greatest 
obstacle to economic and social development. James Wolfensohn, 
President of the World Bank, understands the importance of 
anti-corruption efforts and has brought greater resources to 
bear on the corruption problem. The World Bank has increased 
its anti-corruption efforts in developing countries over the 
past 5 years through education, training, procurement 
restrictions, and other important methods.
    But corruption remains a serious problem. Dr. Jeffrey 
Winters of Northwestern University, who will testify before us 
today, estimates that the World Bank--and I quote Dr. Winters--
``has participated mostly passively in the corruption of 
roughly $100 billion of its loan funds intended for 
development.'' Other experts estimate that between 5 percent 
and 25 percent of the $525 billion that the World Bank has lent 
since 1946 has been misused. This is equivalent to between $26 
billion and $130 billion. Even if the corruption is at the low 
end of the estimates, millions of people living in poverty may 
have lost opportunities to improve their health, education, and 
economic conditions.
    Corruption thwarts development efforts in many ways. Bribes 
can influence important bank decisions on projects and on 
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 
bank 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 repay the resulting debts to the 
banks.
    The Foreign Relations Committee intends to illuminate more 
brightly the problem of corruption surrounding the development 
banks. Those of us who support the valuable work of these 
institutions--and they do have vital and important support in 
our committee--know how important it is to ensure that the 
development banks are doing everything they can to prevent and 
expose corruption within their own institutions, the borrowing 
governments, and the community of contractors who receive 
money.
    This hearing is intended to give the committee an 
opportunity to examine ways that the U.S. Congress and our 
Government can contribute to the anti-corruption efforts 
already underway. We are engaged in what is sometimes called 
congressional oversight. I look forward to insights on how to 
improve the development banks' ability to limit misuse of 
funds, how to strengthen internal controls, how to impede 
corruption in project design, and how to ensure that audits are 
conducted in a thorough manner. I also would like to hear the 
views of witnesses about the impact of immunity privileges that 
apply to development bank employees.
    Throughout this examination, we will keep in mind that the 
poor suffer most from the harmful effects of corruption because 
they are hardest hit by economic crime and are most reliant on 
the provision of public services and, finally, are the least 
capable of paying the extra costs associated with bribery and 
fraud.
    We welcome two panels to discuss corruption and the 
multilateral development banks. On the first panel, we will 
hear from Ms. Carole Brookins, United States Executive Director 
at the World Bank, and Mr. Hector Morales, United States 
Alternate Executive Director at the Inter-American Development 
Bank. On our second panel, we will hear from Professor Jeffrey 
Winters of Northwestern University, Mr. Manish Bapna of the 
Bank Information Center, Ms. Nancy Zucker Boswell from 
Transparency International USA, and Professor Jerome Levinson 
from American University.
    I would also note that we did invite the President of the 
World Bank, James Wolfensohn; the President of the Inter-
American Development Bank, Enrique Iglesias; and the President 
of the African Development Bank, Omar Kabbaj to testify before 
the committee. They declined the invitations, citing the 
established practice of bank officials not to testify before 
the legislatures of their numerous member countries, but their 
letters \1\ of regret will be included in the official record.
---------------------------------------------------------------------------
    \1\ The letters the chairman refers to can be found beginning on 
page 70.
---------------------------------------------------------------------------
    We do thank our witnesses who will be joining us today for 
their testimony. We look forward to their insights.
    Let me indicate that the statements of all the witnesses in 
both panels will be made a part of the record in full. Perhaps 
the witnesses could summarize their testimony in 10-minute 
increments. The Chair will be liberal but, nevertheless, we 
want to make certain that all questions are heard.
    We anticipate that if there are to be rollcall votes this 
morning, we are advised that they may come in about the 11:30-
11:40 neighborhood. That could be disruptive in that there may 
be two or three votes at that point. Therefore, it is our hope 
in the next 2 hours to complete our testimony and our 
questioning.
    Let me call now upon my colleague, Senator Hagel, to ask 
whether he has an opening comment or statement.
    Senator Hagel. No, Mr. Chairman, I do not. I want to 
compliment you on your leadership and focus on a very, very 
critical part of not only America's foreign policy 
responsibilities and the tools that we have to develop our 
relationships, but the other responsibilities that developed 
nations have in the world and your institutions that you 
represent are very, very critical institutions in that effort. 
So, Mr. Chairman, thank you. I look forward to their testimony.
    The Chairman. Well, thank you, Senator Hagel.
    I will ask for testimony in the order that I have 
introduced you. That would be Ms. Brookins to begin with and 
then Mr. Morales. Ms. Brookins.

  STATEMENT OF CAROLE BROOKINS, U.S. EXECUTIVE DIRECTOR, THE 
                           WORLD BANK

    Ms. Brookins. Thank you very much, Mr. Chairman, for your 
opening remarks which I think set the very important tone for 
these hearings today and for your leadership and the leadership 
of the committee. Senator Hagel, thank you for your opening 
remarks.
    I welcome your invitation to come and speak with the 
committee today on a subject which is fundamental to economic 
development and poverty reduction. Improving governance, 
increasing transparency, and combating corruption are a major 
focus of President Bush and our agenda at the World Bank. As 
the President said, when he announced the Millennium Challenge 
Account, ``Money that is not accompanied by legal and economic 
reform are oftentimes wasted. In many poor nations, corruption 
runs deep. When nations refuse to enact sound policies, 
progress against poverty is nearly impossible.''
    Our administration's view is well supported by the bank. In 
fact, combating corruption and building good governance have 
been major ongoing priorities of the World Bank since 1996. At 
the most recent annual meeting in Dubai of the World Bank and 
the International Monetary Fund last September, President 
Wolfensohn said, ``There is still too much cronyism and 
corruption in the developing countries. In nearly every 
country, it is a matter of common knowledge where the problems 
are and who is responsible. Frankly, there is not enough bold 
and consistent action against corruption, particularly at the 
higher levels of influence.''
    During my tenure as Executive Director, representing the 
United States on the bank's board, I have seen up front the 
real impact of the World Bank on people's lives and 
opportunities to emerge out of poverty that good governance 
supported by the World Bank can make, whether it is delivering 
textbooks to children in Nairobi, Kenya, or building a needed 
rural road to a village in Malang, Indonesia. But 
notwithstanding the compelling nature of these personal 
experiences, the question before us today is, how effective is 
the bank as an institution in its anti-corruption efforts, 
thereby ensuring that its assistance can be delivered 
effectively and efficiently to reduce poverty?
    The World Bank continues to be the leader among 
international development institutions in a broad range of 
country-based initiatives to strengthen governance, to build 
effective local institutions and increase transparency. These 
three components are the infrastructure for fighting 
corruption, both its systemic causes and in specific cases 
where it appears. The bank has built a comprehensive structure 
that includes international advocacy, internal controls, 
analytical tools, education and training, and country and 
project operations. Among the MDBs, the bank provides the 
largest amount of finance to support good governance programs, 
lending over $5 billion per year for reforms to strengthen 
public sector institutions. Since 1996, the World Bank has 
launched more than 600 anti-corruption programs in nearly 100 
countries.
    The bank's anti-corruption infrastructure has performed 
effectively in many aspects and in managing many challenges. 
However, there is much more that could be done to strengthen 
the system. Our administration is directly focused on getting 
results, both internally and on the ground in countries where 
the bank operates. Under the committee's 2003 legislation, 
section 581 of the fiscal year 2004 Consolidated Appropriations 
Act, which the committee worked, along with Treasury, to craft, 
this is an important tool for our efforts to enhance 
accountability and transparency.
    The bank's mandate is to end poverty in member countries by 
strengthening their investment climates in support of jobs and 
growth, and in creating local capacity to deliver services to 
the poor. In many cases, the bank's services are in the 
greatest demand in countries where governance standards and 
institutional capacities are lacking. Corruption problems are 
complex and in many cases deeply rooted, cutting across both 
the public and the private sectors. By the very nature of the 
mandate that the bank has, the bank needs to be involved in 
these countries to help improve their governance structures. 
The challenge is to establish procedures that successfully 
mitigate the risks posed by corruption and effectively deliver 
on the bank's mandate. The United States is fully committed to 
meeting this challenge.
    My office has an ambitious agenda with respect to anti-
corruption and transparency. We approach this at three levels. 
At the institutional level, we focus on improving the 
functioning of the bank's internal control processes for 
preventing and responding to corruption and fraud. At the 
project level, we focus on encouraging the bank to conduct 
analysis and design projects and lending policies that are 
directed to reduce opportunities for corruption and ensure that 
bank funds will be properly spent. And at the country level, my 
office is a driving force to increase transparency and 
disclosure of bank operations and analysis.
    I will just very briefly address these areas.
    As a major provider of development expertise and funding, 
the bank recognizes that it must lead by example. Therefore, 
the bank has established systems to ensure institutional 
integrity, accountability, and the rigorous investigation and 
resolution of cases involving fraud and corruption. There are 
12 units responsible for internal controls.
    What is most important I think in this hearing today is the 
Department of Institutional Integrity, which was created in 
November 2000 out of two preexisting offices tasked with 
combating corruption. INT has played an important role in 
investigating allegations of misconduct by firms, by 
individuals, and by bank staff. It supports training for bank 
staff to identify ways to detect and deter fraud and corruption 
in bank operations. It is proactive and does anti-fraud and 
anti-corruption training to all new bank operations staff as 
part of their introductory training, and additionally, there is 
training of field staff which includes integrity awareness in 
this 8-day program. The bank has a hotline, 1-800-831-0463, 
where the public or staff can report incidents of corruption or 
other inappropriate practices.
    Whistleblower protection is ensured and complaints may be 
made anonymously or confidentially. And staff rules require 
that there can be no harassment or retaliation. The fact that 
the number of cases coming to INT right now from staff has 
risen from 20 percent to 50 percent I think attests to the 
effectiveness of whistleblower protection.
    The bank has instituted several reforms that attempt to 
eliminate conflicts of interest and any possible corrupt 
practices among its staff and the board. The bank's internal 
auditing department guides World Bank management in 
establishing and maintaining strong internal controls and risk 
management procedures. The bank has also taken formal steps to 
review its internal controls. Beginning in 1995, the bank 
adopted the internationally recognized internal control 
framework known as COSO, Committee on Sponsoring Organizations.
    In the area of accountability, the World Bank has two key 
institutions, the Operations and Evaluation Department and its 
equivalents at the IFC and MIGA, OEG and OEU, and the Quality 
Assessment Group.
    The World Bank also has actively supported the creation of 
the U.N. Convention Against Corruption in December 2003.
    At the project level, the World Bank utilizes a number of 
effective tools to mitigate the risk of corruption in designing 
projects, as well as mechanisms to address instances when it 
finds that corrupt practices have occurred in the course of 
project implementation.
    First, the bank's procurement and consultant guidelines 
that govern the purchase of goods, civil works, and consulting 
services financed in whole or in part from bank loans for 
investment projects. If the World Bank procurement guidelines 
have not been followed, then the bank can declare a 
misprocurement and the borrowing government will lose the 
relevant funding.
    Related to this, the bank has actively enforced its 
administrative sanctions policy through the Sanctions 
Committee. Under this policy, the bank debars firms and 
individuals from participating in any further bank or bank-
financed projects if they are determined to have engaged in 
corrupt, fraudulent, collusive, or coercive practices in 
competing for or in executing a bank contract. More than 180 
companies and individuals have been debarred from doing 
business with the bank either temporarily or permanently, and 
the bank does make the list of the debarred firms and 
individuals publicly available on its Web site.
    In 1993, the World Bank created the Inspection Panel as an 
independent forum to private citizens who believe that they 
have been or could be directly harmed by a project financed by 
the World Bank. Panel reports are publicly available as well on 
the bank's Web site.
    However, more work is needed to address project level 
concerns. Currently the United States is pushing for the bank 
to adopt a more systemic approach to measuring project results. 
This will facilitate a proactive examination early and 
regularly in the project life cycle of whether bank projects 
are meeting their objectives, particularly where there are 
governance components. Such examination, we believe, can be a 
useful tool in identifying if corruption is playing a role.
    Anti-corruption efforts are also taking place at the 
country level. As I mentioned before, the World Bank is 
providing over $5 billion a year to help countries reform and 
strengthen their systems and to punish corruption. Numerous 
examples of these programs are found in the annual report that 
the U.S. Treasury provides to Congress on anti-corruption 
actions taken by countries as a result of multilateral 
development bank assistance. They include programs that promote 
a wide range of judicial, fiscal procurement, and regulatory 
reform. The World Bank is also at the forefront of supporting 
anti-money laundering and anti-terrorist financing initiatives, 
and I believe that there have been as many as 40 projects up to 
date benefiting more than 115 countries. This is to deal with 
systemic problems.
    The World Bank and other IFI's have intensified efforts to 
assist countries to improve the quality of public expenditures 
which can be the very root of corruption and bad governance. 
The bank has increased its assessment of the content and 
overall efficiency of public expenditures and of country 
procurement. My office is pushing hard to get these reports in 
all borrowing countries and to followup these assessments with 
technical assistance and projects that address the weaknesses 
identified. This is particularly necessary in our view in 
countries that are receiving or will receive adjustment lending 
funds or other direct budget support.
    Another important bank diagnostic is the investment climate 
assessment which attempts to systematically analyze conditions 
for private investment and enterprise development in World Bank 
countries and includes surveys done and conducted with the 
private sector.
    The bank has been a leader in the research and analysis of 
corruption. Particularly notable is the work of the World Bank 
Institute's Director of Governance which has developed new 
approaches to the measuring corruption and assessing its 
monetary and developmental impact.
    The bank's commitment to governance and fighting corruption 
is also illustrated in the way in which the International 
Development Association, or IDA, resources are allocated to the 
77 recipient countries, which include the world's poorest 
nations. Governance is the most important factor in the IDA 
performance-based allocation system which the U.S. championed 
beginning with IDA 12 and then again with IDA 13. The amount of 
money that countries can receive is based upon this assessment. 
Those who have poor governance receive less money or, in many 
cases, very little money versus those who perform well, and 
they are coming back to the bank now to try to find ways that 
they can better improve their policies because of this fact.
    Another key element is the work on transparency in the 
battle against corruption where the bank has been at the 
forefront in terms of disclosure of documents and consultation 
with civil society. The bank has frequently updated its 
information disclosure policy to establish and institute best 
practices among the multilateral development banks. My office 
continues ongoing efforts to work with the board and management 
to ensure that further transparency is achieved in the context 
of additional improvements in the bank's disclosure policy, 
particularly consistent with legislation from Congress in the 
fiscal year 2004 appropriations process, as well as the 
international commitments made at the G-8 at last year's Evian 
summit.
    In conclusion, Mr. Chairman, the bank has made considerable 
progress in establishing the foundation needed to address 
governance and corruption in its operations and in the 
countries where it works. The bank also has the leadership of 
senior management at the forefront of this critical issue. We 
cannot afford complacency, however. Continued work must be done 
both institutionally and in countries receiving assistance. We 
need to update and respond to new knowledge, new technologies, 
and new demands and structural problems that are identified. 
Going forward, we particularly need to achieve greater 
coherence across international institutions on such issues as 
public disclosure of debarment listings, procurement, 
consultant guidelines, fiduciary standards, and transparency. 
The greatest leverage we have is where all the institutions 
work together in a public and transparent way.
    But most important to building a sustainable anti-
corruption culture in the world is building ownership in 
borrowing countries. The goal must be to increase their demand 
for good governance so that they are accountable to their own 
citizens. Mr. Chairman, the United States is committed to the 
full scope of this effort and we will continue to exercise our 
leadership and influence in this vital cause.
    Thank you.
    [The prepared statement of Ms. Brookins follows:]

                 Prepared Statement of Carole Brookins

                  ANTI-CORRUPTION EFFORTS OF THE MDBS
    Mr. Chairman, Members of the Committee, I welcome your invitation 
to come and speak with the Committee today on a subject which is 
fundamental to economic development and poverty reduction. Improving 
governance, increasing transparency and combating corruption are a 
major focus of President Bush and our agenda at the World Bank (the 
Bank). As the President said when he announced the Millennium Challenge 
Account (MCA) on March 14, 2002: ``Money that is not accompanied by 
legal and economic reform are often times wasted. In many poor nations, 
corruption runs deep . . . When nations refuse to enact sound policies, 
progress against poverty is nearly impossible.''
    Our Administration's view is well supported by the Bank. In fact, 
combating corruption and building good governance have been major 
ongoing priorities of the World Bank since 1996. At the most recent 
Annual Meeting in Dubai of the World Bank and International Monetary 
Fund (September 23, 2003), Bank President Wolfensohn said: ``There is 
still too much cronyism and corruption (in the developing countries). 
In nearly every country, it is a matter of common knowledge where the 
problems are and who is responsible. Frankly, there is not enough bold 
and consistent action against corruption, particularly at the higher 
levels of influence.''
    During my tenure as Executive Director representing the United 
States on the Bank's Board, I have seen up front the real impact of the 
World Bank on people's lives and opportunities to emerge out of poverty 
that good governance supported by the World Bank can make in delivering 
textbooks to children in Nairobi, Kenya or building a needed rural road 
to a village in Malang, Indonesia. Notwithstanding the compelling 
nature of these personal experiences, the question before us today is: 
How effective is the Bank in its anti-corruption efforts, thereby 
ensuring that its assistance can be delivered effectively and 
efficiently to promote economic growth and reduce poverty?
    The World Bank continues to be the leader among international 
development institutions in a broad range of country-based initiatives 
to strengthen governance, build effective local institutions and 
increase transparency. These three components are the infrastructure 
for fighting corruption--both its systemic causes and in specific cases 
where it appears. The Bank has built a comprehensive structure that 
includes international advocacy, internal controls, analytical/
diagnostic tools, education and training, and country operations. Among 
the MDBs, the Bank provides the largest amount of finance to support 
good governance programs, lending over $5 billion per year for reforms 
to strengthen public sector institutions.
    The Bank's anti-corruption infrastructure has performed effectively 
in many aspects and in managing many challenges. However, there is more 
that could be done to strengthen the system. Our Administration is 
directly pursuing ways to get the desired results both internally and 
on the ground in countries where the Bank operates. This Committee's 
2003 legislation, Section 581 of the FY2004 Consolidated Appropriations 
Act, which the Committee (working with Treasury) crafted, is an 
important tool for our efforts to enhance accountability and 
transparency.
    The Bank's mandate is to end poverty in member countries by 
strengthening their investment climates in support of jobs and growth, 
and by creating local capacity to deliver services to the poor. In many 
cases, the Bank's services are in great demand in countries where 
governance standards and institutional capacities are lacking. By the 
very nature of its mandate, the Bank needs to be involved in these 
countries to help improve their governance structures. The challenge is 
to establish procedures that successfully mitigate the risks posed by 
corruption and effectively deliver on the Bank's mandate. The U.S. is 
fully committed to meeting this challenge.
    My office has an ambitious agenda with respect to anti-corruption 
and transparency efforts. It approaches this issue at three levels. At 
the institutional level, we focus on improving the functioning of the 
Bank's internal control processes for preventing and responding to 
corruption and fraud. At the project level, we focus on encouraging the 
Bank to conduct analysis and design projects and lending policies that 
help to reduce opportunities for corruption and ensure that Bank funds 
will be well spent. At the country level, my office is a driving force 
to increase transparency and disclosure of Bank operations and 
anaylsis.
Institutional Efforts
    As a major provider of development expertise and funding, the Bank 
recognizes that it must lead by example. Therefore, the World Bank has 
established systems to ensure institutional integrity, accountability 
and the rigorous investigation and resolution of cases involving fraud 
and corruption.
    In November 2000, the World Bank created the Department of 
Institutional Integrity (INT) out of two preexisting offices tasked 
with combating corruption. The INT has played an important role in 
investigating allegations of misconduct by firms, individuals, and Bank 
staff. INT also supports training for Bank staff to identify ways to 
detect and deter fraud and corruption in Bank operations. In order to 
be proactive, anti-fraud and corruption training is provided by INT to 
all new Bank operations staff as part of their introductory training. 
The Bank has a hotline (1-800-831-0463) where the public or staff can 
report incidents of corruption or other inappropriate practices. 
Whistleblower protection is ensured and complaints may be made 
annonomously or confidentially.
    The Bank has instituted several reforms that attempt to eliminate 
conflicts of interests and any possible corrupt practices among its 
staff. In 2003, the Bank announced the strengthening of its financial 
disclosure obligations for senior staff. All of the Bank's senior 
managers and Board members are now required to provide an annual 
statement listing their financial interests and those of their 
immediate families.
    The Bank's Internal Auditing Department (IAD) guides World Bank 
management in establishing and maintaining strong internal controls and 
risk management procedures. IAD performs audits of the internal 
controls of business processes to assess their integrity, and provides 
advice on the design, implementation, and operation of internal control 
systems. In 1997, a special unit within IAD was created specifically to 
review all allegations and guard against fraud or corruption within the 
World Bank Group. This group works with an Oversight Committee Against 
Fraud and Corruption.
    The Bank has taken formal steps to review its internal controls. 
Beginning in 1995, the Bank adopted the internationally recognized 
internal control framework known as COSO (Committee on Sponsoring 
Organizations). More recently, as part of Bank management's annual 
assessment of internal controls, management and the independent auditor 
provide letters regarding the adequacy of internal controls over 
external financial reporting. The two letters are published with the 
financial statements in the Bank's annual report.
    In the area of accountability the World Bank has two key 
institutions, the Operations and Evaluation Department (OED) and its 
equivalents at the IFC and MIGA (OEG and OEU) and the Quality 
Assessment Group (QAG). Established in 1973, the Operations Evaluation 
Department (OED) is independent of management and reports directly to 
the Bank's Board of Executive Directors. OED evaluates the 
effectiveness of the Bank's operations at the project, sector, and 
country level, and assesses its lasting contribution to a country's 
overall development. Quality Assurance Group (QAG) was created in 1996 
with the express purpose of improving the quality of Bank output within 
the broad context of alleviating poverty and achieving development 
impacts. QAG's mandate is to increase management and staff 
accountability by conducting real-time assessments of the quality of 
the Bank's portfolio under implementation as well as the quality of the 
initial formulation of projects and programs.
    A related unit, The Quality Assurance and Compliance Unit (QACU) 
was established in 2001 as part of the World Bank's Environmentally and 
Socially Sustainable Development Vice Presidency. QACU ensures that 
safeguard policies are implemented consistently across the regions, and 
gives advice on compliance with the safeguard policies in projects. 
Safeguard coordinators, with dedicated funding, are appointed in each 
region to oversee project compliance with the policies and assure that 
the proper steps have been taken to avoid or mitigate negative impacts.
Project-Level Efforts
    The World Bank utilizes a number of effective tools to mitigate the 
risk of corruption in designing projects, as well as mechanisms to 
address instances when it finds that corrupt practices have occurred in 
the course of project implementation.
    First, the Bank has procurement and consultant guidelines that 
govern the purchase of goods, civil works and consulting services 
financed in whole or in part from Bank loans for investment projects. 
The guidelines emphasize the need for economy and efficiency in the 
implementation of the project, the importance of transparency in the 
procurement process, and state that open competition is the basis for 
efficient public procurement. The guidelines include anti-fraud and 
corruption provisions and provide for debarment or other remedies if 
the Bank determines that firms have engaged in corrupt or fraudulent 
practices. If World Bank procurement guidelines have not been followed, 
then the Bank could declare a misprocurement and the borrowing 
government will lose the relevant funding.
    Related to this, the Bank has actively enforced its administrative 
sanctions policy. Under this policy, the Bank debars firms and 
individuals from participating in any further Bank, or Bank-financed, 
projects if they are determined to have engaged in corrupt, fraudulent, 
collusive, or coercive practices in competing for, or in executing, a 
Bank contract. More than 180 companies and individuals have been 
debarred from doing business with the Bank, either temporarily or 
permanently. In addition, the World Bank refers matters to national 
justice officials for prosecution in cases when its internal compliance 
unit uncovers evidence that laws have been broken. The Bank makes the 
list of the debarred firms and individuals publicly available on its 
website. This illustrates the strong commitment the Bank has to 
eliminating corruption at the project-level, as well as the financial 
and reputational costs to the private sector of engaging in corrupt or 
non-compliant activities.
    In 1993, the World Bank created the Inspection Panel as an 
independent forum to private citizens who believe that they have been 
or could be directly harmed by a project financed by the World Bank. 
Twenty-seven formal requests have been received since Inspection Panel 
operations began in September 1994. Panel reports are publicly 
available on the Bank's website. The IFC, the Bank's private sector 
institution, and MIGA have a Compliance Advisor/Ombudsman whose role is 
three fold: (1) To advise and assist IFC/MIGA to address complaints by 
people directly impacted by projects in a manner that is fair, 
objective and constructive, (2) To oversee compliance audits of IFC/
MIGA, overall environmental and social performance, and specific 
projects, and (3) To provide independent advice to the President and 
management on specific projects as well as broader environmental and 
social policies, guidelines, procedures and resources.
    The IFC has also been crucial in developing the Equator Principles 
that were adopted by ten leading banks from seven countries announced 
on June 4, 2003. The Equator Principles are a voluntary set of 
guidelines for managing social and environmental issues related to the 
financing of development projects that are based on the policies and 
guidelines of the World Bank and the IFC. Together, these banks 
represent approximately 70% of the project loan syndication market 
globally. In adopting the Equator Principles, a bank undertakes to 
provide loans only to those projects whose sponsors can demonstrate, to 
the satisfaction of the bank, their ability and willingness to comply 
with comprehensive processes aimed at ensuring that projects are 
developed in a socially responsible manner and according to sound 
environmental management practices.
    However, more work is needed to address project-level concerns. 
Currently, the U.S. is pushing for the Bank to adopt a more systematic 
approach to measuring project results. This will facilitate a proactive 
examination early and regularly in the project life-cycle of whether 
Bank projects are meeting their objectives. Such examination can be a 
useful tool in identifying if corruption is playing a role.
Anti-Corruption Efforts at the Country Level
    As mentioned above, the World Bank provides over $5 billion per 
year to help countries reform and strengthen governance measures that 
prevent and punish corruption. Numerous examples of these programs can 
be found in the annual report that the U.S. Treasury provides to 
Congress on anti-corruption actions taken by countries as a result of 
MDB assistance. They include programs that promote a wide range of 
judicial, fiscal, procurement and regulatory reform.
    The World Bank and other IFIs have intensified efforts to assist 
countries to improve the quality of public expenditures. The Bank has 
increased assessment of the content and overall efficiency of public 
expenditures with the help of Public Expenditure Reviews (PERs), 
Country Financial Accountability Assessments (CFAAs), and Country 
Procurement Assessment Reports (CPARs). Expenditure Tracking 
Assessments for Highly Indebted Poor Countries (HIPCs) have also been 
used to evaluate budget formulation, execution and reporting in twenty-
four HIPCs over the last several years. My office is pushing hard to 
get the Bank to conduct PERs, CPARs, and CFAAs in all borrowing 
countries and follow up these assessments with technical assistance and 
projects that address the weaknesses identified. This is particularly 
necessary in countries that will be receiving adjustment lending funds 
or direct budget support.
    Another important Bank diagnostic is the Investment Climate 
Assessment (ICAs), which attempts to systematically analyze conditions 
for private investment and enterprise development in World Bank 
countries. These assessments examine the factors constraining market 
activity, in particular, the weaknesses in a country's legal, 
regulatory, and institutional framework. As a result, ICAs are a useful 
tool in identifying those areas where country reforms could have the 
greatest impact in stimulating private sector activity and reducing 
official corruption.
    The World Bank has also been a leader in the research and analysis 
of corruption. Particularly notable is the work of the World Bank 
Institute (WBI) which has developed new approaches to measuring 
corruption and assessing its monetary and developmental impact. The 
World Bank has joined with some of the very civil society groups 
represented on one of today's panels--Transparency International--to 
co-host an anti-corruption workshop highlighting the challenges in 
overcoming vested interests against reform. Through this and similar 
conferences the Bank is creating a frank dialogue about the roots of 
corruption in the hope of building a stronger social consensus on 
values and ethics in borrowing member countries.
    The Bank's commitment to governance and fighting corruption is 
further illustrated by the way in which International Development 
Association (IDA) resources are allocated to the seventy-seven 
recipient countries, which include the world's poorest nations. 
Governance is a major factor in the IDA performance-based allocation 
system, which the Bank utilizes on an annual basis to determine the 
amount of resources countries are eligible to receive. Consequently, 
countries that improve governance and efforts to combat corruption are 
rewarded with additional IDA resources, while those whose governance 
scores decline receive fewer resources. As a result, the Bank has had 
many requests from countries for advice and assistance in addressing 
issues that would improve their governance scores.
    Another key element in the battle against corruption is 
transparency, where the Bank has been at the forefront in terms of 
disclosure of documents and consultation with civil society. The Bank 
has frequently updated its information disclosure policy to establish 
and institute best practices among the MDBs. My office continues to 
work with the Board and Management to ensure that further transparency 
is achieved in the context of additional improvements to the Bank's 
disclosure policy, consistent with legislation from Congress in the 
FY04 appropriations process as well as international commitments by the 
G-8 at last year's summit in Evian, France.

                               CONCLUSION
    The Bank has made considerable progress in establishing the 
foundation required to address governance and corruption in its 
operations and in the countries where it works. The Bank also has the 
leadership of senior management at the forefront on this critical 
issue. We cannot afford complacency however; continued effort and 
vigilance are required, both institutionally and in countries receiving 
assistance. Among the challenges going forward will be to achieve 
greater coherence across international institutions on issues like 
debarment, procurement and consultant guidelines, fiduciary standards 
and transparency. Most important to building a sustainable anti-
corruption culture is building ownership in borrowing countries. The 
goal must be to increase their demand for good governance, so that they 
are accountable to their own citizens, who will then be better able to 
benefit directly from their own country's development. Mr. Chairman, 
the U.S. is committed to the full scope of this effort and we will 
continue to exercise our leadership and influence in this vital cause.

    The Chairman. Well, thank you very much, Ms. Brookins. I 
very much appreciate your emphasis on transparency and the 
building of a culture in countries all over the world. As you 
know, just this week, the President announced 16 countries that 
will be a part of the Millennium Challenge situation, in which 
good governance and some of the items that we are talking about 
today are very much paramount, in terms of taxpayer funds that 
will go in foreign assistance on our own. The parallel work at 
the World Bank is much appreciated.
    Mr. Morales.

STATEMENT OF HECTOR MORALES, ALTERNATE U.S. EXECUTIVE DIRECTOR, 
                INTER-AMERICAN DEVELOPMENT BANK

    Mr. Morales. Thank you, Mr. Chairman. Senator Hagel, thank 
you for your opening remarks.
    I am extremely pleased to be here to discuss the efforts of 
the Inter-American Development Bank to address corruption and 
increase transparency. Although I have not been in my current 
position for very long, I hope that I can answer the 
committee's questions and shed light on this important area of 
the IDB's work.
    I would like to focus my remarks today on three levels of 
anti-corruption efforts that the IDB has undertaken, at the 
institutional level, at the project level, and at the country 
level.
    With regard to institutional, although much remains to be 
done, the IDB has made significant strides toward creating an 
institutional culture that promotes transparency. A new 
information disclosure policy, strongly advocated by this chair 
and adopted by the bank late last year, requires that 
information concerning the bank and its activities be made 
public in the absence of a compelling reason for 
confidentiality and that such information also be made 
available in the bank's member countries.
    The policy also features mandates for release of the 
minutes of the executive board meetings and for an annual 
review of implementation to measure how effective its projects 
have been.
    The bank has also created an Office of Institutional 
Integrity and gave it the responsibility of pursuing 
allegations of impropriety through committees on oversight, 
fraud, and corruption, conduct review, and ethics. Allegations 
may be reported anonymously via a toll-free hotline and 
informants receive full whistleblower protection.
    The IDB also has an independent mechanism to investigate 
allegations that the bank has failed to correctly apply its own 
operational policies.
    The U.S. chair is also championing reform of the IDB's 
corporate and project procurement systems, including the 
evaluation of both systems by outside consultants. When this 
review is completed, I will work diligently with IDB management 
and my fellow members of the board of directors to push for 
implementation of those recommendations that are consistent 
with the best practices at other MDBs.
    Going forward, I see two areas of focus to improve 
institutional transparency at the IDB. First, increased 
disclosure of financial information and creation of an 
independent audit committee to identify and eliminate conflicts 
of interest. Second, an adoption of a policy of debarment for 
corruption to which firms participating in IDB-financed 
projects must adhere.
    With regard to projects financed by the IDB, the bank's 
independent evaluation office recently completed a study of its 
system of project review and found that not all supervision 
requirements are being met on a regular basis and that there is 
no centralized authority responsible for monitoring compliance. 
The U.S. chair has urged the management to address flaws in the 
current system immediately by reducing the number of reporting 
requirements, while at the same time strengthening the 
consistency and the quality of the reporting.
    Another fundamental area of reform is the project 
procurement system. This chair has urged IDB management to 
adopt the guidelines issued by the working group of the IFI 
heads of procurement so that that there are uniform policies 
and procedures at all MDBs. This includes the mandatory use of 
standardized bidding documents and a project procurement policy 
that is available to the public.
    With respect to the private sector, the IDB group's new 
development strategy will promote best practices for corporate 
governance and social responsibility in line with the IFC's 
Equator Principles. The United States has strongly advocated 
that the MDB work exclusively with private sector firms that 
are committed to good corporate governance and to the use of 
environmental and social safeguards. I am disappointed more 
U.S. firms do not participate in IDB project procurement and I 
hope that by creating a more transparent mechanism, we can 
encourage American companies to become more actively involved 
in the bank's work.
    With regard to efforts at the country level, the IDB's 
institutional mandate includes encouragement of governmental 
reforms to foster commerce and productivity. The IDB, through 
its long relationship with the countries in the region, is well 
placed to dig deeply into governmental policies and structures 
and to improve these governments' use of the IDB resources for 
the benefit of their societies.
    In this same area, the IDB has created its business climate 
initiative which draws on the work of the World Bank and other 
multilateral institutions to assess weaknesses in the business 
climates of various countries in the region and proposes 
programs to target those weaknesses.
    In conclusion, I am encouraged that the pace and number of 
institutional reforms to combat corruption have accelerated 
recently and I am hopeful that a positive synergy has emerged. 
Because the bank is a leader in the region, the United States 
is committed to seeing that this leadership is utilized to send 
a strong signal of the importance of anti-corruption and 
transparency and to seeing that these reforms have exponential 
effects.
    Mr. Chairman, thank you.
    [The prepared statement of Mr. Morales follows:]

                  Prepared Statement of Hector Morales

                  ANTI-CORRUPTION EFFORTS OF THE MDBS
    Mr. Chairman, members of the Committee, I am extremely pleased to 
be here today to discuss efforts of the Inter-American Development Bank 
to address corruption and increase transparency. Although I have not 
been in my current position for very long, I hope I can answer the 
Committee's questions and shed light on how the IDB operates.
    One of my primary concerns is development effectiveness; by 
effectiveness I mean that the development efforts of the IDB can only 
have their intended impact if projects and policies are implemented 
transparently and free of corruption from inception to completion. When 
the bank provides loans and technical assistance grants to the most 
vulnerable populations of the Western Hemisphere, guaranteeing the 
efficacy of those resources is critical. While multilateral development 
banks are accountable to all shareholders, they can be important 
vehicles to transmit U.S. policy interests.
    I would like to focus my remarks today on three levels of anti-
corruption efforts by the IDB: within the institution, by project, and 
by country, and provide you with a U.S. view of the Bank's progress in 
each of these areas. The IDB has accelerated its progress in these 
areas recently, but still has much work to do. The Office of the U.S. 
Executive Director has been, and will continue to be, a strong advocate 
for reform at the IDB. I am aware of the considerable challenges facing 
the IDB in the area of anti-corruption. My focus in the U.S. Executive 
Director's Office will continue to be on critical areas that impact the 
Bank's core development mandates. Among my current priorities are: an 
overhaul of the IDB's corporate and country project procurement 
systems, creation of a separate audit committee of the Board and 
adoption and implementation of an internationally recognized framework 
of internal controls, and further work on disclosure and transparency 
in IDB projects and policies.
Institutional Efforts
    The IDB has made significant strides with respect to institutional 
anti-corruption issues. Progress is being made on creating an 
institutional culture which promotes transparency. The new Information 
Disclosure policy, adopted late last year, contains a strong statement 
on the presumption of disclosure. As a result of strong U.S. advocacy, 
the policy, including release of the Minutes of Executive Board 
meetings, advances the IDB beyond many of the standards in other MDBs 
and includes several of the objectives of the transparency language in 
Section 581 of the FY 2004 Appropriations Legislation on which the 
Treasury Department worked closely with this Committee. As part of the 
IDB policy, an annual review of implementation will be conducted. I 
will use this opportunity to advocate for additional measures to 
enhance disclosure.
    As you may know, President Iglesias has made a strong commitment to 
fight against corruption within the Bank and in the Bank's member 
countries. To strengthen his pledge to fight corruption at the IDB, the 
Office of Institutional Integrity was created in 2003, and is now 
responsible for pursuing allegations of impropriety through three 
different Bank committees--the Oversight Committee on Fraud and 
Corruption, the Conduct Review Committee and the Ethics Committee. 
Allegations may be reported anonymously, via a toll-free hotline, with 
full whistleblower protections afforded as the result of a new policy 
in 2003. Semimonthly reports on the activities of the Oversight 
Committee on Fraud and Corruption are available on the IDB's public 
website. Since its inception in April 2002 through April of this year, 
183 allegations have been received, averaging 7 per month. The OCFC/OII 
has opened 92 investigations during the past two years. Also in 2003, 
the Board of Executive Directors adopted for the first time its own 
Code of Ethics as distinct from the Code of Ethics for Bank Management.
    These are important steps, but they need to be strengthened by 
encouraging participants in IDB projects to come forward with 
allegations, and for those allegations to be vigorously prosecuted.
    There are two additional transparency-enhancing mechanisms at the 
IDB which I would like to highlight: the inspection panel and the 
Office of Oversight and Evaluation. The IDB's independent inspection 
mechanism was established in 1994 as part of the implementation of the 
Eighth General Increases in Resources of the Bank. During the 
negotiations for the Eighth Replenishment, the Governors of the Bank 
expressed a desire to increase the transparency, accountability and 
effectiveness of the Bank's performance by the introduction of an 
inspection function, to be performed independently of Management, which 
would investigate allegations by affected parties that the Bank had 
failed to apply correctly its own operational policies. To date there 
have been five requests for inspections and information on the 
activities of the inspection mechanism are available on the Bank's 
website.
    The Office of Evaluation and Oversight reports directly to the 
Board of Directors and is independent of Bank management. The office 
undertakes independent and systematic evaluations of the Bank's 
strategies, policies, programs, activities, delivery support functions 
and systems. The evaluation office provides the Board of Directors with 
a vehicle for obtaining independent views of the effectiveness of the 
Bank's operations, policies, and programs. The Auditor General performs 
audits, reviews, and investigations designed to help assure management 
of the adequacy, effectiveness and efficiency of the Bank's internal 
controls and resource utilization.
    The U.S. Chair has been a strong advocate for reform of the IDB's 
corporate and project procurement systems. We pushed for a review of 
both systems by external consultants and management is expected to 
recommend concrete reforms in the near future. The U.S. will continue 
to drive the agenda on this issue with the objective of creating a 
best-practice, transparent and accountable project procurement system 
at the IDB which is fully harmonized with that of the other MDBs.
    Going forward, in addition to Section 581 reforms, I see three 
areas of focus to improve institutional transparency efforts at the 
IDB: mandatory disclosure of financial information for IDB employees, 
creation of an audit committee of the Board, and adoption and 
implementation of an internationally recognized framework of internal 
controls. To avoid conflicts of interest at the staff level, financial 
disclosure is a key component. The establishment of an audit committee 
and the adoption of a formal internal controls framework are consistent 
with U.S. policy.
IDB Financed Projects
    To address corruption in the execution of bank-financed projects, 
the IDB has a supervision system of reviews and evaluations during the 
project cycle. The IDB's independent evaluation office recently 
completed a study of this system and found it to be deficient. Bank-
wide, not all supervision requirements are met on a consistent basis, 
and there is no centralized authority in the Bank responsible for 
monitoring compliance on all of the supervision instruments. The U.S. 
Chair was supportive of the evaluation's recommendations for reform, 
and has urged the Management to immediately address flaws in the 
current system. By reducing the number of reporting requirements to key 
reports at the beginning, mid-term, and end of a project's 
implementation and at the same time strengthening the consistency and 
quality of reporting, we expect to see improved project supervision. I 
intend to hold IDB management accountable for addressing the weaknesses 
identified by the evaluation.
    Another fundamental area where the IDB can play a role in improving 
governance at the project level is through reform of the project 
procurement system. This Chair has urged the IDB to work with the other 
MDBs to agree on a best-practice set of procurement and consultant 
guidelines, standard documents and processes. Updated project 
procurement and consultants policies must be available to the public 
and referenced in all IDB investment loan agreements with Borrowers and 
must mandate the use of appropriate standard documents.
    With respect to the private sector, the IDB Group's new private 
sector development strategy will promote best practices for corporate 
governance and social responsibility. The U.S. has been a strong 
advocate of the MDBs working exclusively with those private sector 
firms committed to corporate governance. We have also encouraged the 
IDB to promote capacity building and best-practice awareness among 
smaller firms so that they might improve competitiveness along with 
governance and safeguards.
    The IDB representation in each of the borrowing member countries is 
a key factor in improving project performance. The IDB needs to focus 
additional energy and resources, if necessary, on properly staffing and 
training the country offices so that they are capable of providing 
project supervision, exercising fiduciary oversight over procurement 
processes, and reporting back to the Bank when participants in local 
projects are unsatisfied with any of the fiduciary or governance 
aspects of IDB projects.
Anti-Corruption Efforts at the Country Level
    I would like to highlight to the Committee that the Treasury 
Department prepares an annual report on the anti-corruption efforts of 
all of the Multilateral Development Banks. The report focuses on the 
country impact of MDB actions to improve governance.
    The IDB's institutional strategy explicitly prioritizes 
modernization of the state as an area of Bank action. Before projects 
are developed, the country strategy which defines IDB's engagement will 
consider anti-corruption, governance, and institutional strengthening 
in the strategy. Public sector reform and modernization of public 
administration are key components in virtually every country strategy 
paper the IDB adopts.
    In 2003, the IDB financed 19 projects for a total of $772 million 
for public sector reform and modernization. These projects ranged from 
strengthening internal controls in Brazil's Federal Court of Accounts 
to promoting fiscal reform in Bolivia and Peru. In 2004, the IDB has 
financed several projects of note: $7.8 million for capacity building 
of municipal governments in Panama; $25 million in concessional finance 
to Honduras to improve bank supervision; and a grant of $150,000 to 
Paraguay to improve management between the Executive and Legislative 
branches.
    Through the Multilateral Investment Fund, the IDB also makes 
extensive use of grant financing for demonstration projects to show the 
benefits of politically difficult commitments that benefit the private 
sector, such as strengthening auditing and accounting standards in the 
Caribbean, and developing benchmarks to combat money laundering across 
the region. The MIF focuses on innovative private sector projects with 
large demonstration effects. Recent areas of activity include: 
accounting and auditing standards, financial sector reform and 
supervision, and improving regulatory frameworks.
    To encourage market forces to provide a strong positive 
demonstration effect, the IDB has created its Business Climate 
Initiative, which will draw on the work of the World Bank and other 
multilateral institutions. The initiative will fund a diagnostic 
assessment of the weaknesses in country business climates, and then 
propose a program to target these weaknesses.
    Results from early governance and anti-corruption elements of 
larger loans have shown that conditions for disbursement related to 
anti-corruption efforts such as sub-national financial reporting and 
investigation of financial crimes have largely been met. We need to 
capitalize on these incentive mechanisms and enhance the Bank's ability 
to achieve improvements in anti-corruption activities.
    In my view, a critical area for further reform at the country level 
is building the capacity of project executing agencies in the country, 
usually Ministries or coordinating bodies of the executive branch. 
Executing agencies are subject to tremendous political pressures and a 
governing culture which often does not lend itself to full 
transparency. The IDB, through its long relationship with countries, is 
well-placed to dig deeper into the institutional culture and improve 
the government's use of IDB resources for the benefit of civil society.
Conclusion
    In conclusion, while the pace of institutional reforms to combat 
corruption has accelerated recently, I recognize that the IDB still has 
much work to do. Because the bank is a leader in the region, a strong 
signal of the importance of anti-corruption and transparency 
initiatives in the Bank's institutional culture will have exponential 
effects in the countries of the region. This is an aggressive agenda, 
but as the largest shareholder in the Bank, the U.S. is working 
aggressively on the need for further reform.
    In his address to the IDB Board of Executive Directors last July, 
Secretary Snow remarked on the critical need to improve the investment 
climate in Latin America, saying that ``capital is a coward'' and only 
goes to places where it feels adequately protected. It is our job to 
enhance anti-corruption and transparency activities at the IDB to 
create the conditions for capital to flourish and for our development 
assistance to be effective.

    The Chairman. Well, thank you very much, Mr. Morales, for 
that excellent report of work at the bank.
    We will have a period of questioning now and we will limit 
ourselves to 10 minutes per Senator. Then we will have another 
round, if required, to complete our questioning.
    Before I begin my questioning, I want to mention that in 
our audience today are women from Indiana. They are from the 
Women of Excellence series. This is a program that encourages 
outstanding leaders in Indiana to become more effective in 
public leadership in our State and in our Nation. We are proud 
of them, and we are especially pleased they could join this 
hearing this morning.
    Let me begin by asking two questions about employees of 
your banks. I think that there is some recognition that, given 
the international quality of this lending, at some stage the 
country that receives the money is most responsible for the 
outcome. Employees of the banks cannot always foray into a 
sovereign country to pursue all of the aspects under 
consideration. On the other hand, the design of the loan, the 
criteria, the basis on which this money is disbursed are all 
factors that fall under the responsibility of employees of your 
institutions.
    Is the quality of these loans an important factor in terms 
of staff evaluations? In other words, as people's careers 
proceed through the banks, is there some scrutiny of what kind 
of a batting average they have, or what kind of loans were 
made, how well designed they were, and their outcomes as 
criteria for how well they succeed in those careers? Ms. 
Brookins, do you have a comment on that?
    Ms. Brookins. Mr. Chairman, first of all, I would like to 
join your welcome to the women from Indiana. I am from Indiana. 
I am a constituent of yours.
    The Chairman. Yes, indeed.
    Ms. Brookins. So I have met in the past in a former life 
with the leadership groups from Indiana. So I want to also 
personally welcome them.
    The Chairman. That makes your testimony especially welcome 
on this occasion.
    Ms. Brookins. I think the issue of quality of loans and 
whether there is an incentive for bank staff to push out money 
and not be responsible for results is always an issue. In any 
situation with a financial institution the incentive must be to 
have quality loans which will be repaid and will be managed 
properly. And it is particularly an issue with development 
institutions where this money is so precious to the people who 
are receiving it.
    There has been, I think, in recent years much more focus on 
getting a results agenda going and the United States has been 
at the forefront of this. The bank has begun to implement a 
major results framework, in fact, designing loans from the very 
outset with impacts, outputs, outcomes, and with the type of 
interim indicators that are necessary. I think there still are 
some areas where people will try to get loans through for their 
clients, for the countries, but I think the bank is doing a 
great deal to change incentives, and we, the United States, 
have been at the forefront of moving in that direction. I agree 
with you totally that this is the core of the issue of 
effectiveness.
    The Chairman. Given the extraordinary needs, just looking 
at this in a humanitarian way, a country comes along, and says, 
we have a lot of people that are near starvation. We very badly 
need this money for a particular humanitarian project. It could 
make an enormous difference for us. Now, the bank employees 
take a look at this situation. Here is a country that appears 
to have a long history of corruption. Its leadership siphons 
off money routinely. This is not only public knowledge, but it 
is almost respected in the culture of the country. How do you 
approach a situation of that variety?
    Clearly, the development and humanitarian aspects, are 
enormous. There is some desire to push money toward the needy, 
but clearly you would have to be very hard-hearted not to 
understand that these folks who happen to be citizens, poor 
people in such a country, are between a rock and a hard place, 
with corrupt leadership, and poverty besides. How do you deal 
with that?
    Ms. Brookins. Well, I think there are two to three 
different responses I would like to make to you because that is 
at the heart of the bank's work, which is to relieve poverty 
and certainly to address really chronic poverty conditions for 
people.
    First of all, that was the purpose of the whole 
performance-based allocation system of IDA, where the United 
States took leadership beginning with IDA 12. We are now 
beginning the negotiations for IDA 14. So countries who do not 
perform well, who do not respond to their citizens properly, 
with governance being a key component, do not receive as much 
money. So if they are not receiving the money from IDA, be it 
in the form of grants or credits, which are highly 
concessional, they feel the pinch at the national level. So 
that is one way of controlling the amount of money going into 
less favorable or perceived corrupt environments.
    The second area is the problem in terms of how to deal with 
areas in terms of post-conflict or where there has been an 
emergency or a crisis, in which case money can go in for 
preventing starvation or for particular issues like HIV/AIDS, 
but it is done in a very controlled way with a positive list of 
imports that the money can be paid out for. So it is controlled 
in that way to go for those purposes.
    The other way, which is a deeper issue which I think you 
raised, is what do you do where your overall national 
environment is not conducive to clean government? The bank has 
found that there are many ways to go and get involved at the 
community level, with sub-national governments, or putting 
money through with NGOs involved and monitoring it so the money 
actually goes to those people affected.
    I have been in Indonesia and I have been in Kenya over the 
past several months. In Indonesia I have seen what happens with 
a community project where half of the funds that the bank is 
lending are only going, in the past few years, to those 
community projects and good governance being taught, because 
the money that is being lent is posted right on the project 
wall. You have a committee of civil society and government 
people at that level. So that if there's a project of $12,000 
or $14,000 to build a feeder road from that farm community, the 
people know it is being spent and it is tracked and there are 
criminal corruption procedures if it is not being spent 
properly. These funds are given to villages based on 
competition. So if there is a corrupt village, they cannot 
compete in the future for any funding. So this is beginning to 
work.
    In Kenya or Uganda they are posting the amount of money 
that is supposed to be going into the school on the wall of the 
school, and there is a committee of local authorities.
    I did not mean to go on so long, but I am pretty passionate 
about this and I know that you are also. I think that the issue 
for the bank is identifying where can we work, how can we work, 
and to tailor the interventions that the U.S. sees are 
appropriate for the bank and conveys this to bank authorities 
as to where the bank can be effective in getting funds to 
people who need it.
    The Chairman. I appreciate your detail, because the common 
impression is that these loans are made to corrupt officials at 
a central spot. What you are pointing out is that the 
sophistication of this lending now comes down through NGOs or 
through specific village councils with a sophisticated level of 
accountability. That is a very different impression than I 
think is commonly held.
    Let me ask about this problem of staff immunity. 
Essentially, immunity is conferred upon World Bank employees, 
for example, from prosecution by various countries. This is a 
common circumstance in international dealings, to ensure that 
there will not be discrimination or intimidation by 
participating countries that have all sorts of political 
systems.
    What is the impact upon performance and behavior? In the 
first round of questions I was asking, we got into the batting 
average of how well these loans do. If there cannot be 
prosecution by all sorts of governments that are involved, how 
do you try to mitigate the problems that this might cause, in 
countries where people have this sense of immunity?
    Ms. Brookins. Well, I think the immunity for employees 
arises from the founding documents of the institution, of the 
articles of agreement, and all officers and employees of the 
bank shall be immune from legal process with respect to acts 
performed by them in their official capacity except when the 
bank waives this immunity. So I do not know all the legal 
details of this, but I would certainly be happy to get back to 
you and also ask the bank and ask the Treasury legal counsel to 
give you any indication of where these waivers have applied.
    [At the time of publication no information had been 
forwarded.]
    The Chairman. That would be important to have in our 
committee record. There is some anecdotal evidence that these 
investigations start with maybe tens of people, say, out of 
10,000, but then they sort of simmer down, and cases are 
dismissed, and ultimately almost no one is found culpable. I 
would like to get some track record of how your investigations 
go, if there are internal controls, leaving aside prosecution 
by sovereign nations. How is wrongdoing met?
    Ms. Brookins. There are internal controls and the bank has 
conducted and very definitely does enforce these complaints--
the hotline is very important also in terms of potential staff 
abuse.
    The Chairman. What is the hotline?
    Ms. Brookins. The hotline is the 1-800 number, 831-0463, 
where the public or staff can report incidents of corruption or 
other inappropriate policies or inappropriate practices. I 
think what is important, as I mentioned before, is that the 
number of cases being reported or complaints being reported by 
staff has risen from 20 percent of all complaints to the 
Department of Institutional Integrity up to 50 percent, and 
this is because of the proactive work of the bank in training 
both at the institutional level at the bank in Washington, but 
also in the field staff, training field staff to identify 
problems not just of staff but of outside procurement issues.
    There have been I understand--and I can check these numbers 
for you, Mr. Chairman--27 cases that have come to the 
Department of Institutional Integrity regarding alleged staff 
misconduct, of which 8 members of staff have been terminated 
from the institution. And one member of staff was severely 
reprimanded because that staff member had been approached by 
someone to take a bribe, had not taken it, but had not reported 
it.
    So I think that the internal controls of the institution 
are extraordinarily important to the United States and we, the 
United States, very much want to have a culture of zero 
tolerance, particularly of bank staff. If the staff of the 
World Bank is not fully compliant with zero tolerance, this is 
a very serious problem in terms of what the World Bank is 
expecting of the borrowing countries.
    The Chairman. Senator Hagel.
    Senator Hagel. Mr. Chairman, thank you.
    Mr. Chairman, just on a personal note, it is always good, 
reassuring to have a room full of Hoosiers with us.
    I do not know if there are any Cornhuskers present. But we 
always appreciate the chairman's hospitality. He is very 
gracious with asking various groups from around the country to 
come and be part of these hearings and I think it is important 
that these various individuals, leaders of communities and 
States have an opportunity to get some sense of what we do 
here. We do not allow much criticism, however. That is part of 
the contract.
    Thank you both for coming before us this morning and for 
what you do. Give your colleagues our regards and pass on our 
thanks as well.
    Ms. Brookins, you mentioned in your statement that your 
office--I am reading from your statement--``has an ambitious 
agenda with respect to anti-corruption and transparency efforts 
and approaches this issue at three levels.'' And you define 
those three levels, starting with institutional efforts. If I 
could read one of your last points in that area. ``In 1997, a 
special unit within IAD was created specifically to review all 
allegations and guard against fraud or corruption within the 
World Bank Group. This group works with an oversight committee 
against fraud and corruption.''
    My question is, is there an outside, independent oversight 
effort, an outside, independent oversight board, or do you use 
oversight from the inside?
    Ms. Brookins. We have our own oversight committee, but we 
will bring outside attorneys or others, as needed, to conduct 
the investigations conducted by the bank units or to deal with 
specific issues when it is needed. I can get back to you with 
details of when they have been called in or under what 
conditions.
    Senator Hagel. But not a regular system or a regular 
oversight body that you would use.
    Ms. Brookins. No.
    Senator Hagel. Staying in that general universe, in your 
response to one of Chairman Lugar's questions, you were talking 
about results criteria developed by the bank, established by 
internal guidelines. Again, that results criteria that you were 
talking about, is that only internally driven by internal 
guidelines or, again, is there any outside input? For example, 
NGOs, other institutions. Do you ask them for their input into 
this results criteria?
    Ms. Brookins. There is regular consultation and discussion 
with members of civil society and with other organizations like 
Transparency International. In fact, on governance and 
corruption, the World Bank actually sponsored a meeting with 
Transparency International. The bank also has the Office of 
Operations and Evaluation Department which is the bank's audit 
group that reports directly to the board on evaluating the 
effectiveness of the bank's operations at the project, sector, 
and country level and assesses the contribution of whether 
these projects have been effective, whether the strategy in a 
certain area, like agricultural or rural development, is 
effective. As the bank calls it, OED, the Operations and 
Evaluation Department does use outside experts and does call 
them in and has independent review bodies, and these are 
presented then to the board and to management.
    Senator Hagel. Thank you.
    Following in this same area here under the second group of 
priorities that you listed, project level efforts, a specific 
question. You mentioned related to this, the bank has actively 
enforced its administrative sanctions policy, and then you 
develop that and other points in the following paragraph.
    Here is my question. Is there a recovery mechanism for 
money lost at the World Bank? You spend a lot of time talking 
about what you are trying to do to prevent it, to enhance 
transparency, good governance. But go back and reflect on how 
do you recover or can you or what do you do about that?
    Ms. Brookins. Yes, there is. On an investment loan--and I 
will refer to legal counsel to clarify it and give you the 
exact terms on this, but as I understand it, when there has 
been a misprocurement on an investment loan--let us say there 
is a $50 million loan and it is discovered that the contractor 
has not done the right things with the road and that is $2 
million or $3 million or $5 million or $10 million--it is the 
policy of the bank then, if it declares a misprocurement, to 
cancel that portion of the loan allocated to the goods and 
works that have been misprocured. So that is taken out of that 
country's money which has been lent to it for that loan. So it 
is deducted from that. So the money, in a sense, is taken back 
by the bank from the country.
    Senator Hagel. And that is a well-established process, 
mechanism.
    Ms. Brookins. Yes, it is. It is in the bank's legal 
guidelines and I would be happy to get a copy of that to you.
    Senator Hagel. Thank you.
    You mentioned later on in the testimony--I quote from your 
testimony--``currently the U.S. is pushing for the bank to 
adopt a more systematic approach to measuring project results. 
This will facilitate a proactive examination early and 
regularly in the project life cycle of whether bank projects 
are meeting their objectives.''
    Would you explain that in a little more detail, 
specifically the measuring? You referenced measuring project 
results. What do you mean by that and how do you do that?
    Ms. Brookins. That is a very, very good question, Senator. 
In many cases--I think that Senator Lugar alluded to this 
earlier--money was being lent to countries in some cases 
because it let us lend money. We focus on whether the bank is 
spending the money effectively and whether it is meeting all 
our time tables to get the money spent. In some cases the loan 
design did not have the kind of outputs and impacts and 
outcomes desired. Results are not just whether money is going 
in to build schools. As the U.S., we ask: Do we have a baseline 
to identify how many children are in school in this village, 
how many girls are in school in this village, how many children 
over 10 years, how many children have completed a certain 
number of years in school?
    So these types of data are being put in right in the 
beginning of the project cycle so that as you measure it over 1 
year or 2 years or 3 years, your interim indicators can tell, 
No. 1, are you getting the results that you want. No. 2, if you 
are not, is it because the funds are not being properly spent, 
or is this village not performing and another city performing 
or one school district versus another because you have the data 
that you need and you have also set the outcome or the targets 
that you want.
    This has been particularly important in the IDA 13 
replenishment where there are absolutely measurable results 
data on measles immunization rates, on primary completion 
rates, which are required as part of IDA 13 for the poorest 
countries, and the third one is how many days does it take, as 
you all understand, to start a business and what is the cost of 
starting a business. Are you able to reduce those so that your 
private sector, your small and medium enterprises can start up. 
So it is getting very specific.
    Many of the bank's loans in the past did have outcomes and 
impacts; the bank was looking for results, but in many cases 
lacked the specificity that we are trying to get built into 
that. And the bank has been very enthusiastic in the past 2 
years about embracing this type of deeper and richer results 
agenda.
    Senator Hagel. Thank you.
    Let me ask a question for each of you. Mr. Morales, we will 
let Ms. Brookins take a rest and we will go to you.
    The same question. The chairman referenced the Millennium 
Challenge Account program, the Millennium Challenge 
Corporation. I think the chairman's points here are very much 
on target with each of your testimony this morning and what 
your institutions are attempting to do.
    My question is explain to me how each of your institutions 
intends to, is now working in parallel with MCA because as you 
both know, the objectives of MCA are much the same as your 
institutions and cut right to the core issues and challenges 
and problems.
    Mr. Morales.
    Mr. Morales. Thank you, Senator.
    You are absolutely right. The same goals and initiatives 
that MCA has are very much in line with the Inter-American 
Bank. Fighting corruption is critical. We want to reward 
countries that are implementing the kind of policies that we 
know will lead to increased productivity and eventually reduce 
poverty.
    In terms of outreach, the bank's management--and I have 
encouraged bank's management to do this, is to initiate 
discussions with MCA to specifically identify how we can work 
together. There are three countries, Bolivia, Nicaragua, and 
Honduras, that have been mentioned under the MCA designation. 
So clearly, we want to make certain that we work very closely 
with MCA to align those interests.
    Senator Hagel. Thank you.
    Ms. Brookins.
    Ms. Brookins. That is a great question because much of the 
bank's diagnostic or analytical work has gone in to help found 
or be part of the core work in terms of identifying who makes 
the cut in MCA. So there is work that is being provided by the 
banks to MCA in terms of making these determinations, in terms 
of tracking countries. I think it has been extraordinarily 
valuable and there has been an interaction between the MCA team 
from the very beginning and the World Bank in a very 
constructive way to see how the bank can be useful.
    Most importantly, I think that MCA has created a whole new 
higher benchmark for countries. As I mentioned in my earlier 
testimony, the performance allocation for IDA and the poorest 
countries has been helpful in trying to get countries to better 
perform. But setting up this real carrot with MCA of having 
access to a really significant amount of money to help your 
people under the Millennium Challenge Account funding is just 
another example of how the United States has led this move 
toward excellence in terms of improving governance and 
improving the fight against poverty.
    So I think MCA will continue to be strongly related to the 
World Bank's work. The bank will work in any way that it can 
and my office will facilitate. We will facilitate in any way we 
can knowledge or information that helps to strengthen MCA.
    Senator Hagel. Thank you. Thank you, each, very much. Mr. 
Chairman.
    The Chairman. Thank you, Senator Hagel.
    Let me ask just one final question of both of you. We have 
talked principally today about project loans. You have even 
described Ms. Brookins down to the school level or the 
community level or what have you. How do we evaluate loans that 
are not project loans but really do go to the governments 
themselves for dispensing the funds or administration of that? 
Can you describe? Are there criteria or methods that you found 
are most helpful in that respect?
    Ms. Brookins. Well, as you work in the bank, you have a lot 
of acronyms, but this term ``fiduciary diagnostics'' is not 
exactly an acronym but it sometimes makes me feel like a 
doctor. The fiduciary diagnostics the bank conducts with 
countries in terms of public expenditure reviews, country 
financial accountability assessments, and country procurement 
assessment reports. These are all used to look at the country 
level to identify where there are weaknesses in terms of 
whether a country is ready to have budget support lending or 
programmatic lending. The key is to have a certain threshold of 
accountability so that money can go into the government budget 
directly without having to be accounted for under bank 
procurement guidelines and under investment lending 
restrictions.
    So I think this is a very big issue. It is one that has to 
be constantly updated, when we raise the thresholds. There are 
these fiduciary controls in place and we take them very 
seriously and we, the United States, have been leading the 
efforts in the board to make sure that we improve the 
thresholds under which countries can be eligible for this type 
of direct budget support lending. It is a crucial issue.
    The Chairman. You mentioned the term of diagnostics. Does 
the bank have a computer program, for example, in which you 
plug in various evaluations, much like the credit scores that 
average Americans have, and they can phone in, and find out 
what their score is? Does that pertain to this?
    Ms. Brookins. Yes, absolutely. It includes governance. It 
is particularly used, as I said, for allocating funds to IDA 
countries who get the highly concessional moneys. But this is 
done for every country that is a recipient of bank lending.
    The Chairman. That is helpful to know.
    Mr. Morales, do you have a further comment on this subject?
    Mr. Morales. Mr. Chairman, we at the IDB use a 
macroeconomic debt sustainability analysis, and it is a series 
of ratios that are evaluated. Obviously, depending on the 
country, those ratios may change, but the point is before any 
policy based lending or emergency lending is made, there has to 
be a program that is in place and sustainable. In fact, with 
regard to emergency lending, the bank looks to the fund 
programs to make certain that they are in compliance. So 
clearly, before any of that type of lending is done, there is a 
check that is made.
    The Chairman. Thank you.
    Senator Hagel, do you have further questions of the 
witnesses?
    Senator Hagel. One brief question for each of our 
witnesses. We have spent the last hour talking about the U.S. 
effort to clean up the process, transparency, good governance, 
all the other areas that you have spent some time developing. 
What about other nations, the other developed nations, senior 
nations like the United States who are large contributors to 
this effort? Are they putting commensurate efforts into 
cleaning up the process, doing the things that you have talked 
about? Are they lagging behind? If so, why and who, and what do 
we need to do to encourage their efforts? Or are we all on the 
same frequency here and working intensely to accomplish your 
objectives?
    Ms. Brookins. The G-8 at the Evian summit did fully support 
disclosure and transparency efforts at the institution. Working 
with the other 23 board members and the other 183 countries who 
are shareholders of the bank, there has been a very strong 
support for anti-corruption efforts and a very strong support 
for strengthening bank policies and practices in both the 
Committee on Development Effectiveness, and the Audit 
Committee. There has not been any indication that we have seen 
that there is not a full ownership into this.
    There is a recognition, in fact, among many of the 
developing countries, who are also represented on the board. 
They have to face these issues day in and day out in their 
countries and we see very strong support, by and large, from 
them as well because they see this as truly impeding their 
efforts at improving the lives of the people in their 
countries. There may be specific issues where we oftentimes 
will want to see more investment lending, some other countries 
will want to see more adjustment lending going into budget 
support, and we will discuss these and try to build consensus 
on it. But I think overall the leadership of the head of the 
institution, President Wolfensohn, and his senior management 
team and the leadership of the other developed countries is 
very unanimous on this.
    Senator Hagel. Thank you.
    Mr. Morales.
    Mr. Morales. Senator, in my experience the environment is 
certainly pointed in the right direction. I think an example of 
that is the information disclosure policy that was recently 
passed. That could not have been passed without strong support. 
So clearly there is a message that transparency is important 
and corruption only serves to undermine the development 
effectiveness of the bank. So I think the trend is in the right 
direction.
    Having said that, a lot more needs to be done and that is 
certainly the charge of this chair and I am making it a 
priority.
    Senator Hagel. Thank you, Mr. Chairman.
    The Chairman. Thank you very much, Senator Hagel.
    We thank both of you for your testimony, for your papers, 
and for your responses. Please followup on the additional 
questions and information that you have indicated you would 
supply for the record.
    Mr. Morales. Thank you, Mr. Chairman. Thank you, Senator.
    The Chairman. The chair would now like to introduce our 
second panel. It will be comprised of Dr. Jeffrey Winters, 
associate professor, Northwestern University, Evanston, 
Illinois; Mr. Manish Bapna, executive director, Bank 
Information Center, Washington, DC; Ms. Nancy Zucker Boswell, 
managing director, Transparency International USA, Washington, 
DC; and Professor Jerome Levinson, distinguished lawyer in 
residence, Washington College of Law, American University in 
Washington, DC.
    I mentioned to the earlier panel that the statements you 
have written will be placed in the record in full. My hope is 
that you might be able to summarize your testimony in 10 
minutes, more or less. We will then proceed with questions, as 
we did with the first panel.
    I will ask you to testify in the order that I introduced 
you, which would mean, first of all, Dr. Winters, then Mr. 
Bapna, Ms. Boswell, and Professor Levinson. Would you please 
proceed, Dr. Winters?

   STATEMENT OF DR. JEFFREY A. WINTERS, ASSOCIATE PROFESSOR, 
                    NORTHWESTERN UNIVERSITY

    Dr. Winters. Chairman Lugar, thank you very much. I am 
grateful for this opportunity to present the results of nearly 
15 years of research on the multilateral development banks, the 
matter of corruption, and particularly how the problem is 
manifested in the region of Southeast Asia, my geographical 
area of specialization.
    I am co-editor of a recently published book entitled 
``Reinventing the World Bank,'' and this book contains two 
chapters devoted to the problem of corruption, specifically in 
the World Bank.
    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 we include the corruption of 
loan funds from other multilateral development banks over the 
same period, the figure roughly doubles to $200 billion.
    I refer to these loan funds as criminal debt. The debt is 
criminal in two senses: first, because it was a crime to allow 
the development funds to be stolen in the first place, and 
second, because it is, as you mentioned, an injustice to expect 
poor populations around the world that never received these 
funds to bear the heavy burden of repayment. On average, the 
poor have received about 70 cents on the dollar in loan funds 
from MDBs and yet they are obligated to repay 100 percent of 
the loans, plus interest.
    Although part of my scholarly work has been devoted to 
criticisms of the MDBs, I would like to preface my comments by 
saying that I am deeply committed to public sector lending. I 
do not sign onto those who think that institutions like the 
World Bank should be shut down. I think this is a problem which 
can be addressed and I am happy that this committee's work is 
part of getting to that problem.
    I would like to make a few specific points and then make a 
couple of observations and close.
    For a very long time, the MDBs, and in particular the World 
Bank, has had what I refer to as a ``don't ask/don't tell'' 
posture on corruption. More recently, especially since the mid 
and late 1990s, the World Bank and other MDBs have paid more 
attention to the problem of corruption, but the impact of this 
attention has been, in my view, minimal in stopping most of the 
theft of loans because the bank's approach is inappropriate to 
the problem.
    Most of the way that the bank has approached the problem is 
to try to lend its way out of the criminal debt problem. That 
is, it comes as a natural response to the bank to increase 
programs, spend more money to try to solve the problem of the 
theft of money.
    I would like to emphasize that the problem of corruption 
occurs mainly at three levels, what I would call the micro, the 
middle, and the macro level. The macro level is, of course, the 
global governance problem related to corruption, and I would 
admit that that is a governance issue. At the middle level, 
that is, the problem of corruption across whole societies, that 
is also a governance issue. But at the micro level--and that is 
the nexus between the multilateral development banks and their 
clients in their projects and in their programmatic loans--I 
would argue that this is not a governance issue. This is an 
issue of supervision and auditing.
    Unfortunately, the bank's greatest core competence should 
and ought to be in watching its own programmatic and loan 
funds, but this happens to be the area in which the least 
effort is made. In fact, the greatest effort is made, as we 
heard in the testimony just a moment ago, in trying to deal 
with governance and corruption at the broader societal level. 
That is an admirable goal, but I do not think it is the most 
effective way. I think what the bank needs to do is get its own 
programmatic and project money safeguarded first and deal 
secondarily with the broader problem of corruption across whole 
societies, which by the way is not the bank's job. That is the 
job of civil society and the people struggling in their own 
countries.
    The MDBs must do a much better job supervising and auditing 
projects and loans, but the only effective way, in my view, 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 have 
deep conflicts of interest. This multilateral auditing agency 
should be empowered to spot-audit all MDB operations, loans, 
and projects. Career advancement within what I am calling the 
MAA, the multilateral auditing agency, must be linked to 
success in detecting fraud and the theft of development funds.
    All of the incentives built into MDB operations facilitate 
rather than retard the criminal debt problem. A pressure to 
lend creates a bias in favor of quantitative rather than 
qualitative results, and corrupt elements in client governments 
know this. No matter how much money is stolen, the MDBs 
currently bear no financial burden for these losses.
    The vast majority of criminal debt arises in the 
relationship between the MDBs and borrowing governments, and 
yet this is the nexus where the least effort has been made to 
stem losses. While it is admirable that the World Bank now 
investigates its own employees and has caught a few of them 
red-handed, corruption among these individuals is actually 
minimal. Similarly, the black-listing of international firms 
engaged in corrupt practices is also a positive move. However, 
the scale of losses through corrupt firms internationally is 
also minimal.
    My research indicates that at the rhetorical there has, 
indeed, been progress. No one ever used to talk about 
corruption. We are now talking about it. We now have Senate 
hearings about it. But on the ground, the progress has been 
much more limited.
    There was mention of whistleblowing. One of the problems 
with having an 800 number is that you cannot dial an 800 number 
from outside of the United States, and the vast majority of the 
places where one would need to have access to a whistleblower 
are actually in the client countries themselves.
    Let me mention a couple specific cases. The case of Dennis 
DeTray, who was a top World Bank official in Jakarta in the 
1990s, is illuminating. When an individual running a bank-
funded project in Indonesia came to Mr. DeTray to ask the bank 
to do something about blatant theft of project funds, he was 
told, ``Wrong address, call the police.''
    When I blew the whistle in 1997 on the fact that a third of 
all World Bank loan funds to Indonesia had been stolen, a 
senior vice president at the bank headquarters in Washington 
issued a press release denying the allegations and labeling me 
an irresponsible scholar. Within a year, two secret documents 
from inside the bank would leak fully supporting the 
allegations I had made.
    Does the World Bank make effective arrangements to 
safeguard the loans and the loan process and project 
implementation? Is supervision really taken seriously? My 
research and interviews indicate, especially with task 
managers, those people who work most closely with projects and 
the distribution of money, suggest that it is not.
    Let me give you a quote. Katharine Marshall, a senior bank 
official in a direct interview with me, said the following. 
``We look more than anything else at what the project achieves, 
not really the money. We look, for instance, at whether schools 
get built, not how the money was spent to build them.''
    Julian Schweitzer, another senior bank official, went even 
further in our joint interview, making direct reference to the 
estimate that a third of the bank's funds loaned to Indonesia 
had been stolen. He said, ``If you take the amount of a 30 
percent loss, it means 70 cents on the dollar got used for 
development after all. That's a lot better than in some places 
with only 10 cents on the dollar,'' actually being used 
effectively.
    I will just close by saying we will never have precise 
figures on levels of criminal debt accumulated since the MDBs 
began operation. However, citizens groups in the client 
countries have already begun demonstrating. It is more 
fashionable to demonstrate against the IMF. The World Bank has 
begun to have demonstrations outside their headquarters in 
countries around the world on the criminal debt issue.
    Those who are demanding relief for criminal debt, between 
$100 billion and $200 billion globally, are not trying to 
repudiate their debts. What they are trying to do is gain 
relief for funds for having to repay funds that they never 
received, and that is something that I think would be very good 
for the lender countries such as the United States to get on 
board with.
    Thank you.
    [The prepared statement of Dr. Winters follows:]

              Prepared Statement of Dr. Jeffrey A. Winters

    Chairman Lugar, Senator Biden, distinguished Senators:
    I am grateful for this opportunity to present the results of nearly 
15 years of research on the MDBs, the matter of corruption, and 
particularly how the problem is manifested in the region of Southeast 
Asia, my geographical area of specialization. Together with my co-
editor, Jonathan Pincus from the University of London, we have recently 
published a book entitled ``Reinventing the World Bank.'' The book 
contains two chapters devoted to the problem of corruption and the 
World Bank.
    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 we include the corruption of loan funds 
from the other Multilateral Development Banks (MDBs) over the same 
period, the figure roughly doubles to $200 billion.
    In our book I refer to these lost funds as ``Criminal Debt.'' \1\ 
The debt is criminal in two senses--first because it was a crime to 
allow the development funds to be stolen, and second because it is an 
injustice to expect poor populations around the world that never 
received these funds to bear the heavy burden of repayment. On average, 
the poor have received about 70 cents on the dollar in loan funds from 
MDBs. And yet they are obligated to repay 100% of the loans plus 
interest.
---------------------------------------------------------------------------
    \1\ Jeffrey A. Winters, ``Criminal Debt,'' in Reinventing the World 
Bank, Jonathan R. Pincus and Jeffrey A. Winters, eds. (Ithaca, N.Y. and 
London: Cornell University Press, 2002), pp. 101-130. Criminal debt is 
distinct from ``odious debt,'' which refers to loans that help an 
oppressive government further oppress its citizens. Criminal debt 
refers more narrowly to only that portion of loan funds that are stolen 
by officials before they can be used for development.
---------------------------------------------------------------------------
    I would like to begin by making a few key points, followed by 
additional explanation:

          1. The World Bank and other MDBs have paid more attention to 
        the problem of corruption since the late 1990s. But 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.

          2. The MDBs must do a much better job supervising and 
        auditing projects and loans. But 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 have 
        deep conflicts of interest). This Multilateral Auditing Agency 
        should be empowered to spot-audit all MDB operations, loans, 
        and projects. Career advancement within the MAA must be linked 
        to success in detecting fraud and theft of development funds.

          3. All the incentives built into MDB operations facilitate 
        rather than retard the criminal debt problem. The ``pressure to 
        lend'' creates a bias in favor of quantitative rather than 
        qualitative results, and corrupt elements in client governments 
        know this. No matter how much money is stolen, the MDBs 
        currently bear no financial burden for the losses.

          4. Under international law, the Articles of Agreement 
        explicitly require the World Bank to make arrangements to 
        ensure that the funds it lends or guarantees are used for their 
        intended purpose. For decades 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. It is the people who repay debt, not 
        governments. But the people have no advocate and no legal 
        standing to seek debt relief. Also, no one is protecting the 
        money of taxpayers in the lender countries from falling into 
        the hands of kleptocrats in borrower states.

          5. The more fundamental question behind the corruption 
        problem is: what are institutions like the World Bank supposed 
        to be and do? Our position is that the Bank's core competence 
        is in being a public sector lender. The MDBs have evolved over 
        the decades into unwieldy bodies, the components of which 
        function poorly. The World Bank is not an effective ``knowledge 
        bank,'' nor do its thousands of economists produce cutting edge 
        research. The World Bank is not an effective environmental 
        agency, nor a development agency, nor anti-poverty crusader, 
        nor is it an NGO well suited to advance gender relations or 
        ``participation.'' The World Bank will work best if it is 
        scaled back to its core function as a public sector lender. As 
        such, it can devote more resources to ensuring that its loan 
        portfolio is well protected against systematic theft. The other 
        elements of the MDBs should be spun off, unpacked, or closed.

          6. Whether on corruption or other MDB matters, it is 
        unrealistic to expect an institution that has grown to 
        unmanageable proportions on the basis of internally driven 
        change to manage its own reform program. The World Bank cannot 
        be reformed and certainly cannot reform itself. It must be 
        reinvented. It is the responsibility of the major shareholding 
        countries to undertake this task. Anything else will be 
        patchwork on a broken system.

                             CRIMINAL DEBT
    The vast majority of criminal debt arises in the relationship 
between the MDBs and borrowing governments. And yet this is the nexus 
where the least effort has been made to stem losses from theft. While 
it is admirable that the World Bank now investigates its own employees 
(and has caught a few red-handed), corruption among these individuals 
is minimal. Similarly, the blacklisting of international firms engaged 
in corrupt practices is a positive move. But the scale of losses 
through corrupt firms is also minimal.
    The lion's share of the theft of development funds occurs in the 
implementation of projects and the use of loan funds by client 
governments.
    Not everyone at the MDBs is to blame for allowing so much of their 
loan funds to be systematically stolen. Many individual task managers, 
who deal with projects at a more micro level, have long complained that 
too much theft was going on and that projects and the broader 
developmental effort were being compromised.
    But for decades, the top management at the MDBs averted their eyes 
from the abundant evidence of systematic corruption in almost every 
country where they were operating--as did the major shareholder 
governments such as the U.S. Institutions like the World Bank had a 
global ``don't ask, don't tell'' policy regarding criminal debt. Why? 
Because the only people with an incentive to speak up--the world's poor 
and indebted--were not being listened to, and they lacked the power to 
restrain greedy and powerful elites.
    From the end of WWII until the mid-1990s, the MDBs themselves had 
no incentive even to speak or write the word ``corruption'' regarding 
their own loans, and indeed they did not. No matter how much was 
stolen, the MDBs were confident they would not have to shoulder any of 
the financial burdens. And moving up in the Bank hierarchy is a 
function of successful lending, defined almost entirely by the 
impressive size of one's lending portfolio, not how much of the money 
was actually used for its intended purpose.
    For an ambitious Bank employee, there are still no career rewards 
today for focusing on corruption at any stage in the lending process. 
And a key problem is that there never will be.
    The case of Dennis DeTray, the top World Bank official in Jakarta 
in the 1990s, is illuminating. When an individual running a Bank-funded 
project in Indonesia came to Mr. DeTray to ask the Bank to do something 
about the blatant theft of project funds, he was told, ``Wrong address, 
call the police.''
    When I blew the whistle in 1997 on the fact that a third of all 
World Bank loan funds to Indonesia had been stolen, a senior vice-
president at Bank headquarters in Washington issued a press release 
denying the allegations and labeling me an irresponsible scholar. 
Within a year, two secret documents from inside the Bank would leak 
fully supporting the allegations.

        CORRUPTION AND GOVERNANCE--THE BANKS' MISTAKEN APPROACH
    It is fashionable in MDB circles to cast the criminal debt problem 
as a broader ``governance'' matter. Corruption at the societal level 
does indeed reflect a national governance failure, just as corruption 
at the global level reflects an international governance failure.
    But corruption in World Bank lending operations reflects a World 
Bank supervisory and auditing failure. Before the MDBs attempt to solve 
the daunting problem of reducing corruption across entire societies, it 
would be far more useful to do a competent job of reducing the theft of 
funds within the Banks' own lending and project portfolios.
    The World Bank's misguided answer to the corruption problem is 
driven primarily by an institutional compulsion to respond in ways that 
generate additional lending and require the provision of expensive 
technical expertise.
    Power relations and impunity lie at the heart of corruption. It is 
the absence of effective detection, constraint, and punishment that 
makes corruption possible and probable. At the national level, these 
are absent because power is concentrated in ways that block effective 
checks and balances in politics.
    Corruption ranges in scale from petty to grand, in scope from 
personal to systemic, and in impact from negligible to ruinous. But it 
is rarely caused by a lack of education or training (everyone knows 
what corruption is) and can rarely be addressed significantly by 
writing better laws, reorganizing institutions, or upgrading personnel 
through ``integrity'' workshops.
    Most countries where corruption is endemic have reasonably good 
laws on the books. The problem is implementation and enforcement. This 
leads to an immediate question: What should be the primary focus of the 
MDBs' response to the challenge of corruption? To answer, it is 
important first to distinguish clearly between efforts directed at 
reducing corruption on a micro level, in projects and programs financed 
by the Banks, at a middle level, within and across whole societies, and 
at a macro level, in the relations and transactions among countries 
globally.

          Recommendation: The MDBs currently focus most of their 
        efforts at the middle level (corruption across whole 
        societies), when they should instead focus on the micro and 
        macro levels (that is, on supervision and auditing of their own 
        lending, and on strengthening international coordination and 
        safeguards).

    It is precisely in the nexus between the Banks and their borrowers 
that the Banks have both the leverage and the legal justification to 
act forcefully and consistently against corrupt practices. As 
multilateral bodies, they also can play an effective coordinating and 
legitimating role to strengthen international institutions, norms, and 
sanctions linked to corruption.
    The Banks are at their weakest, most ineffective, and most 
politically vulnerable in the middle zone--in the battle against 
systemic corruption across whole governments. The Banks will have a 
muted impact at this level while encountering the greatest disruptions 
in their relations with borrower countries, the Banks' Boards of 
Directors, and the international community.
    Moreover, it is not the World Bank's job to solve a society's 
corruption problem. It is the proper task of groups and actors in each 
society where corruption is rampant to challenge the power relations 
that make the abuses possible. The MDBs are ill-equipped to put checks 
and balances in place--except in their own projects and activities, and 
in the international environment.
    And yet, it is precisely in this middle range of the corruption 
problem that the MDBs have decided to focus their efforts. ``The main 
thrust of the Bank's support for countries' anticorruption efforts,'' 
declares a key World Bank document on the subject, ``will be in helping 
to design and implement government programs.''
    The MDBs cannot lend their way out of the criminal debt problem.
    The benefits for the Bank of focusing its efforts at the micro and 
macro levels and avoiding a mezzo approach are several. First, because 
the Bank can control through internal decisions how its loans are used, 
it can respond rapidly and credibly to the chorus of critics charging 
that Bank funds are being stolen on a massive scale (which damages the 
reputation of the Bank and exposes the institution to legal 
challenges).
    Second, it quite properly removes responsibility from the Bank's 
shoulders for any lack of progress in reducing corruption at the 
broader societal level. The Bank's own studies recognize that systemic 
corruption is complex and cannot be addressed quickly. Reducing 
corruption across the country should not be the centerpiece of the 
Bank's response to kleptocracy.
    And third, by using tighter fiscal supervision built into its own 
projects as a ``best practices'' model, the Bank can more credibly 
position itself as a leader in the international effort to combat 
corruption in bilateral and multilateral lending.

            THE ARTICLES OF AGREEMENT--FAILURE ON THE GROUND
    The Articles of Agreement represent the founding charter of the 
World Bank, setting forth the Bank's purpose, membership, operations, 
rights, limitations, and responsibilities. It is a binding Constitution 
subject to all the rules and norms of international law. For purposes 
of the present discussion of corruption and accountability, the most 
relevant part of the charter is Article III, Section 5, Paragraph (c), 
which states: ``The Bank shall make arrangements to ensure that the 
proceeds of any loan are used only for the purposes for which the loan 
was granted, with due attention to considerations of economy and 
efficiency and without regard to political or other non-economic 
influences or considerations.''
    This is an unambiguous statement against allowing Bank funds to be 
corrupted. It places a clear burden and responsibility on the Bank to 
make arrangements that ensure its funds are not stolen or misallocated, 
and it admonishes the Bank to carry out this function in a manner that 
is economical, efficient, and unbiased politically.
    Does the World Bank make effective arrangements to safeguard the 
loan process and project implementation? Is supervision taken 
seriously? My research and interviews with Bank officials and task 
managers suggest it is not.
    ``We look more than anything else at what the project achieves,'' 
explained Katharine Marshall, a senior official with the Bank, ``not 
really the money. We look, for instance, at whether schools get built, 
not how the money was spent to build them.''
    Julian Schweitzer, another senior official at the Bank, went even 
further in our joint interview, making direct reference to the estimate 
that a third of the Bank's funds loaned to Indonesia had been stolen 
and became criminal debt. ``If you take the amount of 30 percent 
loss,'' Schweitzer stated, ``it means 70 cents [on the dollar] got used 
for development after all. That's a lot better than some places with 
only 10 cents on the dollar.'' \2\ He was referring to certain Bank 
clients in Africa where nearly all of the loan funds are misallocated, 
diverted, unaccounted for, or simply stolen.
---------------------------------------------------------------------------
    \2\ See Winters, ``Criminal Debt,'' 2002, p. 111.
---------------------------------------------------------------------------
    One World Bank task manager who struggled for years to get his 
employer to take the corruption issue seriously responded to the 
``glass is 70% full'' perspective:

          That's the old argument, isn't it? They've been saying that 
        for years. [. . . .] There are a couple fallacies there, and it 
        is much too cavalier an attitude. That's because, in fact, my 
        experience has been--and it's the experience of a lot of other 
        people there [on the operations side of the Bank]--if they're 
        busy stealing 30 percent, they're not paying any real attention 
        to the other 70, even assuming 30 percent is all they're 
        taking. What you're really doing is really ruining the whole 
        effectiveness of the investment itself. I try to tell people [. 
        . . .] it's like giving the money to buy a car but they're 
        stealing the money that would buy the gasoline. So what good is 
        the car? It is a fact, I can demonstrate it, and I'll stand by 
        it. I'll prove it anytime.

    He offered the following example:

          You cut corners and nobody cares. If you let out a contract 
        for $2 million, and you get the few civil servants at the top 
        sharing $600,000 or 30 percent, do they care if the contractor 
        puts in concrete that is just sand and water? Do they care if 
        the contractor doesn't put reinforcing steel in the structures? 
        They don't care. So when Bank people say we're at least getting 
        70 cents of good development on the dollar, no you don't. 
        Because the contractor either has to make back the money that 
        he's kicked back, or he just figures, ``hey, it's open season, 
        I do what I want and no one is going to challenge me.'' And so 
        you have this feeding frenzy, and the end result is you get 
        very little development.

    Putting aside who is fiscally responsible to repay the lost 30 
percent, he questioned what genuine value a country or the poor really 
get from projects conducted in ways where such levels of theft are 
tolerated.

          If you get only one dollar out of ten that goes to the poor, 
        is that really worth it? And have you done anything to 
        strengthen the economy for the long term? No. You've only 
        nourished a corrupt government that has no intention of 
        providing services. To me, those arguments are hollow.

                       RELIEF FROM CRIMINAL DEBT
    The primary concern of the Senate in these hearings is combating 
corruption in MDB operations. This is a forward-looking agenda, and it 
is to be commended. There are a range of likely motivations for 
engaging in this combat. U.S. representatives want to ensure that the 
development funds from U.S. taxpayers are not wasted or used to buy 
mansions or fund sectarian militias. They must also be motivated by a 
desire to make development spending effective in alleviating the 
poverty around the world, which carries too many benefits to list here.
    In the spirit of being forward-looking, I have offered some 
specific ideas about what approaches or reforms can and should be 
adopted. But being forward-looking leaves an important part of the 
criminal debt problem untouched.
    One problem with accumulated debt burdens is that they have this 
tendency to be mired in the past. Since it is unlikely that the debt 
slate is going to be wiped clean for borrowing countries, it is simply 
not possible to be exclusively forward-looking.
    We will never have precise figures on levels of criminal debt 
accumulated since the MDBs began operations. My own research suggests 
that the figure of $200 billion presented at the outset is, if 
anything, an under-estimate. When citizens groups and NGO in developing 
countries demand, as they have several times in demonstrations in 
Indonesia and elsewhere, that the criminal portion of their debt be 
written off, they are not acting irresponsibly or trying to repudiate 
their obligations.
    They are simply pointing out that there is something very wrong 
about demanding repayment for funds the people never received. The 
money was delivered from the World Bank and other MDBs, but it was 
intercepted along the way and ``privatized'' illegally. It is easy to 
demonstrate that officials in the MDBs were aware of these practices 
for decades and, in violation of legal obligations under the Articles 
of Agreement, did nothing at all to stop the corruption. On the 
contrary, in almost every case, flows of funds from the MDBs increased 
as pressures to lend mounted.
    This was a bonanza for those positioned to skim the riches. And the 
populations below could do little or nothing to constrain the behavior 
of the authoritarian leaders over them. The only powerful actors with 
the leverage to make arrangements to ensure that development funds were 
used for their intended purpose, the MDBs themselves, cooperated with 
the foxes raiding the chicken coop.
    The indebted poor of the world are legally entitled to an immediate 
debt reduction of $200 billion, not as an act of charity or generosity, 
but because the debt is criminal in every sense of the word.

    The Chairman. Thank you very much, Dr. Winters.
    Mr. Bapna.

STATEMENT OF MANISH BAPNA, EXECUTIVE DIRECTOR, BANK INFORMATION 
                             CENTER

    Mr. Bapna. I would like to begin by thanking you, Chairman 
Lugar, and the committee for organizing this important and 
timely hearing on corruption in the multilateral development 
banks.
    I am the executive director of the Bank Information Center. 
BIC's mission is to empower citizens and civil society 
organizations in developing countries to influence the projects 
and policies of the World Bank and multilateral development 
banks in a manner that fosters social justice and ecological 
sustainability. BIC has promoted transparency, citizen 
participation, and public accountability in the activities of 
the multilateral development banks since 1987.
    Previously, I had worked as a senior economist and a task 
team leader at the World Bank itself for 7 years.
    I am grateful to Professor Winters for describing the 
context, a bit about the nature and impacts of corruption in 
MDB activities. I would like to make just one more kind of 
initial contextual statement on corruption.
    MDBs can and must clearly do more to reduce corruption and 
thereby improved development outcomes. Success at a more 
systemic level will require positive steps and commitment from 
multiple actors in a multi-pronged approach, including strong 
political commitment from governments and a vibrant and 
independent society, in addition to major substantive 
improvements in anti-corruption efforts by MDBs themselves.
    I would like to concentrate my oral testimony on five 
specific policy and program recommendations related to MDB 
operations that, if taken collectively and with strong 
political commitments, would help meaningfully mitigate 
corruption in MDB-financed projects.
    First, MDBs need to more explicitly evaluate corruption 
risks in project and sector operations. As a first step, MDBs 
should develop and implement clear diagnostic tools for staff 
to conduct a rigorous assessment of corruption risks in project 
and sector operations. These methodologies should clearly set 
out guidelines for preparing country and sector strategy 
documents, project appraisal reports, and project monitoring 
reports.
    More specifically, the methodologies should provide 
guidance to staff to determine the nature and scale of 
corruption risks; assess the likely impacts of corruption; 
design appropriate mitigation and supervision action plans; 
importantly, to avoid financing certain operations where the 
risks in the project or in the sector are too high; and last, 
to report periodically on the impacts of the above activities 
in reducing corruption.
    It is critical that these tools actually inform the design 
and implementation of project and country operations. This has 
been the main failing in the past. Diagnostics are done, but no 
changes are actually made.
    BIC has done recently a study on the Asian Development 
Bank's ability to comply with its own policy and has concluded 
that there has been major shortcomings in the ability to 
implement the policy effectively because, in large part, the 
failure to implement these tools as I just described.
    Second, MDBs should focus first on public and corporate 
governance, especially in controversial sectors. Corruption is 
especially acute in extractive industries, oil, mining, gas, in 
large infrastructure and in certain private sector operations 
because of the unique investments in these particular sectors. 
Arguably, the most important step that can be taken to reduce 
corruption and ensure that investments generate positive 
development impact is to focus first on public and corporate 
governance. Investment lending in controversial sectors should 
only take place after adequate governance exists to manage the 
inherent risks. Moreover, early lessons from MDB experiences in 
extractive industries indicate that transparent and accountable 
revenue management systems is a prerequisite to addressing 
corruption in extractives and enhancing participation in the 
overall public budgeting processes can help mitigate corruption 
in the broad societal country level.
    With respect to private sector operations, focusing on 
partner selection and improving transparency, including a more 
nuanced interpretation of business confidentiality, are also 
critical steps.
    Third, domestic and international donors should promote the 
active participation of civil society and the media. Civil 
society organizations, media, churches, and the general public 
are the most important resources that can be deployed in the 
fight against corruption. In order to address the systemic 
nature of corruption, civil society actors will need to be at 
the center of anti-corruption efforts.
    Steps at two levels should be promoted.
    First, MDBs should encourage stronger civil society 
participation in their operations. Although some improvements 
have been made, clearly more needs to be done.
    Second, we need to recognize and support more generally the 
role of independent civil society organizations and media to 
play a watch dog role in ensuring that country, sector, and 
project level revenues and expenditures are managed 
transparently and appropriately.
    Fourth, transparency and disclosure needs to be enhanced in 
MDB operations. Openness is essential to guard against 
corruption. Congress, the Treasury Department, and the U.S. 
executive directors can do more, especially during the IDA 
replenishment process to enhance transparency and improve 
information disclosure by promoting greater openness and 
information disclosure throughout the project cycle from 
project preparation through board approval to project 
completion and evaluation; to promote disclosure of draft 
policies and strategies, including draft country strategies, in 
order to allow for public comment or consultation prior to 
policy or strategy approval; to ensure full disclosure of a 
list of debarred firms ineligible for funding at the 
multilateral development banks; stronger whistleblower 
protection to provide protection to employees when seeking to 
report corruption, fraud, violations of law, or other serious 
problems; and disclosure of all written statements from the 
U.S. executive directors to the board of directors at the 
multilateral development banks.
    Fifth is the importance of aligning institutional 
incentives to strengthen anti-corruption initiatives. Critical 
to mitigating corruption is to get the incentives right, and 
this is getting at the heart of the matter. Although 
improvements have been made in some multilateral development 
banks, management incentives still reflect a pressure to lend 
and a culture of approval where promotions and rewards are 
based more on the amount of loans approved than on development 
impact, quality, and compliance with key safeguard and 
fiduciary policies. This incentive bias manifests itself in 
many ways such as it underpins pressure to engage in countries 
and sectors with poor governance. It gives a preference for 
large projects. It is also reflected in the resources dedicated 
to project preparation versus project supervision.
    Aligning institutional incentives to the multilateral 
development banks' missions is ultimately required if the 
multifaceted anti-corruption initiatives proposed above are to 
take route. Changing management and staff incentives is a 
difficult and fundamental challenge but one that I suggest we 
consider carefully, and I think this requires further thought.
    I have outlined more concrete policy steps including 
specific actions related to existing or future legislation in 
my written testimony, including reviewing the International 
Organization Immunities Act to explore trimming back immunity 
that it or the courts may have granted that is in excess of 
what is required. Stronger committee oversight to ensure full 
implementation of title 13 of the International Financial 
Institutions Act, in particular, implementation of the new 
legislation, section 1504 of this act, which establishes 
important accountability, transparency, audit, law enforcement, 
and policy enforcement goals. And third, to ensure timely 
authorization of U.S. participation in the MDBs in order to 
provide the committee greater voice in these important matters.
    To conclude, I believe that establishing a more effective 
model to channel development aid resources is critical in 
overcoming poverty. It deserves the dedicated attention of the 
entire development community. Mitigating corruption in MDB 
operations is an important but one of many steps in this 
process.
    Thank you for this opportunity to talk.
    [The prepared statement of Mr. Bapna follows:]

                   Prepared Statement of Manish Bapna

                        I. INTRODUCTORY REMARKS
    It is an honor to be invited to share my views on the deep-rooted 
and systemic problem of corruption in multilateral development bank 
financed operations, and to suggest some steps that the banks should 
take to overcome it. I would like to thank you, Mr. Chairman, and 
Senator Biden, for the leadership you and your staff have demonstrated 
in advancing dialogue on the important role of multilateral development 
banks (MDBs) in international development and the challenges that these 
global institutions face in fulfilling their missions.
    I am testifying today on behalf of a number of US-based non-
governmental organizations: Bank Information Center, Environmental 
Defense, Government Accountability Project, and Public Services 
International. I am the Executive Director of the Bank Information 
Center (BIC). BIC's mission is to empower citizens and civil society 
organizations in developing countries to influence World Bank and other 
Multilateral Development Bank projects and policies in a manner that 
fosters social justice and ecological sustainability. BIC has promoted 
transparency, citizen participation, and public accountability in the 
activities of MDBs since 1987.

                 II. THE MULTIPLE IMPACTS OF CORRUPTION
    Corruption, generally defined as ``the abuse of public office or 
private office for personal gain,'' \1\ can notably undermine the 
overarching missions of the MDBs. These institutions are important 
conduits for financing development projects to reduce poverty and 
stimulate sustainable and equitable growth in borrowing countries. The 
misuse of these scarce public resources, and the MDBs failure to 
properly discharge their fiduciary duty to safeguard them, has several 
significant impacts that undercut these objectives, including:
---------------------------------------------------------------------------
    Footnote references are at end of statement.

   increases debt in developing countries. Corruption diverts 
        resources from their intended use to benefit society at large 
        and instead confers benefits on an elite few. However, citizens 
        (most of whom are poor) of developing countries that borrow 
        from the MDBs bear the burden of the debt that their 
        governments are still contractually liable to repay. In 
        countries where corrupt regimes have incurred large foreign 
        debt burdens, an increasing number of citizen groups view this 
        debt as criminal and illicit, for which subsequent governments 
        should not be obliged to repay in full. (Professor Jeffrey 
        Winters addresses this issue in more detail concerning the case 
        of Indonesia.) Given the unsustainable levels of debt in many 
        low-income countries, the additional burden posed by corruption 
---------------------------------------------------------------------------
        is unacceptable and undermines their prospects for development.

   undermines the development objectives of MDB financed 
        projects and programs. Equally important, corruption in MDB-
        financed projects often causes significant negative economic, 
        social, and environmental impacts. Corruption can undermine the 
        development impact of these projects in countless ways. 
        Examples of project-level corruption impacts include diluting 
        the quality of cement in civil works (e.g. rural roads, 
        irrigation canals, etc.) which reduces the safety, efficiency 
        and sustainability of these investments; permitting illegal 
        timber harvesting in restricted forest areas; and granting 
        profitable public contracts to well-connected cronies of 
        Government officials. Corruption can also be a major issue in 
        non-project, policy-based adjustment lending, which is an 
        increasing proportion of MDB loans (recently 30-40% in the 
        World Bank).

   undermines the legitimacy of MDB financed projects and 
        programs. Corruption in MDB financed development projects and 
        programs also contributes to a loss of confidence in public 
        decision-making. Public decisions taken for private gain lack 
        legitimacy under any defensible understanding of representative 
        or democratic governance, especially where they entail the 
        allocation of considerable social benefits and costs. 
        Corruption also breeds public cynicism towards political 
        processes--which in turn diminishes the credibility of the 
        Government to serve the interests of its citizens. This poses a 
        particular problem for MDBs whose principal counterpart is the 
        Government.

   diverts resources from priority sectors. Corruption can 
        divert scarce public resources from priority sectors such as 
        health and education and squander them on uneconomic projects 
        that generate lucrative payoffs. Political and commercial 
        pressures often create a bias towards large projects and large 
        contracts (extractive industries, infrastructure).

    Despite the fact that corruption threatens their core missions, 
most MDBs have been slow to address it in a forthright and 
comprehensive manner. While MDBs profess ``zero tolerance'' for 
corruption in their projects and programs, this rhetorical commitment 
has not always been meaningfully implemented. Pressure to lend and a 
``culture of loan approval'' have inhibited a ``culture of 
accountability'' from taking root--although this does vary across MDBs. 
As a result, there is little if any internal or external accountability 
for anticorruption results. For example, BIC's recent review of the 
ADB's anticorruption policy and its implementation found that ADB was 
not doing enough and almost never complied with its policy commitments 
to explicitly address corruption issues in its country and project 
level reports, assessments, and evaluations.\2\

                III. THE NATURE AND SCALE OF CORRUPTION
    Corruption and initiatives to reduce it take place at different 
levels, and though the levels are distinct they are also inter-related 
and inter-connected. There is corruption at the level of individual MDB 
staff. In any large organization with thousands of employees there will 
be problems with a few individuals. Funds from internal MDB 
administrative budgets can be diverted, or the corruption could 
involve, for example, kickbacks from borrowing country and/or 
contracting company officials. There is corruption at the level of 
procurement with local and international companies for goods and 
services for specific projects. Individual MDB staff, local government 
officials and ministries, and employees and management of contracting 
companies may all be involved. A number of fairly notorious MDB 
financed projects have been associated with allegations of large-scale 
procurement corruption. It is these first two areas that have received 
the most attention from the donor community in general and the World 
Bank in particular, which several years ago established a Department of 
Institutional Integrity to investigate corruption allegations.
    However, the most systemic corruption is the pervasive, across the 
board corruption embedded in governments. Here whole government 
ministries and governments themselves have semi-institutionalized the 
systematic diversion of funds from international and domestic sources, 
including from MDBs and other donor agencies. In the case of Indonesia, 
which Professor Winters discusses in more detail, for some three 
decades through the late 1990s the World Bank Jakarta office itself 
estimated in a leaked 1997 memorandum and reiterated in subsequent Bank 
documents in 1998 and 1999, that an average of 30% of World Bank 
lending was diverted for corrupt purposes--and in some government 
ministries, as much as 50%. The total amount stolen from World Bank 
lending in Indonesia was estimated to be more than US$8 billion 
dollars.
    Although the World Bank claims it is addressing corruption better 
in its current lending to Indonesia, there is an important question of 
how much MDB lending is being systematically diverted in other major 
borrowing countries with weak governance and well publicized problems 
of corruption. If the average amount of corrupt diversion for all MDB 
lending is only ten or fifteen percent, and this is a rather 
conservative estimate--this would total billions annually.
    The MDBs have unique institutional characteristics which make 
accountability for corruption more difficult and thus, if not 
counteracted by specific measures to address the problem, facilitate 
it. The notion of a bank is usually connected with the idea of 
financial risk for the lending institution. If a private commercial 
bank lends to notoriously corrupt borrowers, it may entail a higher 
risk of default; and if it makes such lending a practice it may suffer 
financial losses. But the MDBs are repaid by borrowing governments out 
of general revenues as preferred creditors in the international system. 
In the unlikely event of a whole government defaulting, then MDB losses 
are covered by the paid-in and callable capital of donor governments. 
In the world of MDB lending, there is no institutional financial risk 
in approving loans which in significant part are not used for the 
economic or social investments intended. Nor, because of the legal 
immunity in the MDB charters, is there potential civil or criminal 
liability for corrupt lending practices where gross negligence is 
proved. Thus, the need for multifaceted strategies and measures to 
address corruption in MDB lending is all the more necessary and urgent.
    iv. policy and program recommendations to be adopted by the mdbs
    Our recommendations below are intended to help provide an 
organizing framework to understand the nature of corruption in 
multilateral development bank financed operations and to describe steps 
that can be taken to overcome this pervasive problem.\3\ The 
recommendations should be adopted collectively and will require 
commitment at the highest levels of management and at the Board of 
Directors in each MDB. It is interesting to note that the varying 
performance in anticorruption initiatives at the MDBs can be attributed 
to differences in leadership commitment. Moreover, the respective MDB 
Boards will need to play a more proactive role in reducing corruption 
but the asymmetric nature of the Board (only developing countries are 
to comply with anticorruption provisions) creates a real challenge that 
requires further thought. That said, political commitment is an 
absolute prerequisite--where the commitment is in place, the 
recommendations can be usefully taken up, but without it there is 
little hope for progress.
    The organizing framework demonstrates that anticorruption 
recommendations will require steps in multiple areas of MDB operations 
\4\ including (i) improving tools and methodologies for evaluating 
corruption risks explicitly; (ii) focusing first on public and 
corporate governance; (iii) enhancing transparency and disclosure; (iv) 
promoting the active participation of civil society and media; (v) 
aligning institutional incentives; and (vi) developing strong recourse 
mechanisms.
A. Evaluating Corruption Risks in Project and Sector Operations 
        Explicitly
    Although MDB charters and operational policies require the 
institutions to ensure that their funds are used for their intended 
purposes, it is clear that both the political commitment and a 
comprehensive system to fully implement these directives are absent. 
The risks of corruption in a particular project or within a particular 
sector are not systematically assessed by all of the MDBs. Measures to 
mitigate corruption risks beyond existing procurement guidelines, 
supervision missions, and audits are not regularly adopted, and these 
financial controls are often inadequate. Perhaps most critically, there 
appear to be no standard thresholds above which the risks of corruption 
are so great that a particular project or an entire sector-lending 
program in a country is reconsidered. (See Attachment 1 at end of 
statement for an example from Thailand.)
    As a first step, MDBs should develop clear diagnostic tools for 
staff to conduct a rigorous assessment of corruption risks in project 
and sector operations. These methodologies should clearly set out 
guidelines for preparing country and sector strategy documents, project 
appraisal reports, and project monitoring reports. Separate approaches 
should be developed for project loans and budget support loans to 
account for the different issues that arise in each context. More 
specifically, the methodologies should provide guidance to staff to:

          (i) determine the nature and scale of corruption risks in the 
        operation in question;

          (ii) assess the likely impacts of corruption and factor these 
        impacts into the calculation of the project's economic rate of 
        return (the preferred metric for evaluating project viability) 
        and into the environmental and social impact assessments;

          (iii) design appropriate mitigation and supervision action 
        plans;

          (iv) avoid financing certain operations where the risks in 
        the project or in the sector are too high; and

          (v) report periodically on the impact of the above activities 
        in reducing corruption.

    It is critical that these actions inform the design of project and 
country operations. This has historically been a major problem; key 
studies are often conducted in isolation and do not affect project 
design. Therefore, the analysis above should feed directly into the 
selection and design of each project operation. Staff should be held 
accountable for the quality and consistency with which they implement 
these guidelines.
B. Focusing First on Public and Corporate Governance in Controversial 
        Sectors
    Extractive Industries (Oil, Mining, and Gas)--Certain controversial 
sectors, such as extractive industries or large-scale infrastructure, 
are particularly vulnerable to corruption. It is at the sector and 
country level where the most profound and devastating impacts of 
corruption take place and where more rigorous scrutiny is required. The 
World Bank recently commissioned an independent Extractive Industries 
Review which concluded that extractive projects are not likely to 
produce positive development outcomes in countries where governance is 
weak and government commitment and ability to manage project risks is 
questionable. Proceeding with these operations in an environment of 
inadequate governance amounts to negligence: a layering of governance 
risk upon environmental, social, technical and financial risks. 
Moreover, large projects in small countries rife with corruption often 
result in excessive public debt--creating an unacceptable burden for 
the country's citizens for decades to come.
    MDBs should not lend in controversial sectors like extractive 
industries or large-scale infrastructure unless and until public and 
corporate governance is strong enough to appropriately manage the 
inherent risks. If the MDBs are to be involved, the institutions 
should:

          (i) ensure that the host country meets a minimum standard of 
        governance based on an open assessment of ``core macro'' (see 
        Attachment 2) and ``sector'' governance criteria;

          (ii) carry out sector and project-level due diligence 
        (diagnostic tools described in previous recommendation) to 
        identify and mitigate corruption risks; and

          (iii) help create an open environment conducive for civil 
        society and media to monitor the project (e.g. procurement, 
        revenue management, etc.) throughout implementation.

    Importantly, another main recommendation from the Extractive 
Industries Review and several other similar initiatives is the 
importance of ensuring that revenues generated from extractive 
industries are managed in a transparent and accountable manner. The 
``resource curse'' which has affected many developing countries 
highlights the challenges in revenue management and public 
expenditures. This is especially true in small economies with limited 
experience in democracy and a weak civil society. To help contain 
arguably the most egregious opportunities for corruption, MDBs should 
ensure that transparent and accountable revenue management systems are 
in place before supporting an extractive project that has the potential 
to generate income for the country.\5\ Experiences to date (for 
example, see Attachment 3 on the Chad-Cameroon Pipeline Project) 
demonstrate the profound difficulties in establishing an open, 
transparent system that can counter the pervasive corruption that often 
accompanies these projects.
    Private Sector Operations. Annually, MDBs lend billions of dollars 
to support private sector operations in developing countries. These 
public resources are channeled through private and public loans and 
represent a different yet major risk and source of corruption--in part 
because of the more secretive nature of private sector operations. The 
following issues deserve attention:
    Partner Selection. The most important step to help reduce 
corruption in private sector operations is to improve partner 
selection. MDBs need to adopt a more rigorous process to screen their 
private clients especially, with respect to corporate governance and 
social responsibility. A more systematic and consistent approach to 
identifying and debarring firms that misuse public resources needs to 
be adopted by all MDBs. Moreover, penalties to engaging in corruption 
are not severe and should be strengthened. For example, the Inter-
American Development Bank still does not disclose a list of private 
firms that violate anticorruption policies.
    Corporate Transparency. U.S. Executive Directors should request 
MDBs to adopt much broader corporate transparency and disclosure 
requirements for companies receiving public finance through the MDBs. 
One interesting initiative, Publish What You Pay, calls on MDBs to 
promote mandatory disclosure of extractive industries revenues in the 
projects they finance as well as require disclosure of production 
sharing agreements and related contracts.
    Business Confidentiality. Private firms that borrow from MDBs often 
refuse to divulge most project information on the grounds that the 
information is commercially sensitive. While there are legitimate 
reasons not to disclose certain information (e.g. loan terms), all too 
often business confidentiality is overextended to include, for example, 
royalty and other payments to Government; project sponsor's commitments 
to the local community; environmental mitigation measures, etc. 
Business confidentiality can give cover to corruption in the private 
sector. The MDBs therefore need to address explicitly the extent to 
which business confidentiality poses a legitimate constraint to the 
public's interest in information disclosure. The U.S. Executive 
Directors can help promote greater transparency in the private sector 
operations of MDBs.
    Public Sector Reform. Loans that finance privatization or 
concession of public services have a particular history of corruption. 
Without adequate controls or oversight, high-level government officials 
use borrowed funds to renovate public service enterprises and sell or 
concession them to ``associates'' at prices well below their actual 
market values. As a result, the public suffers job losses, rate 
increases, and debt increases at the same time. Often the deterioration 
of services occur as well, as the contracted renovations do not take 
place as specified. It is in this process that corruption manifests one 
of its most dangerous consequences: popular disillusionment with 
democratic governance.\6\
C. Promoting the Active Participation of Civil Society and the Media
    Civil society organizations, media, churches, and the general 
public are arguably the most important resources that can be deployed 
in the fight against corruption. Often, citizens and civil society 
organizations have the most nuanced understanding of the forms and 
pathways of local corruption and can provide invaluable information on 
where corruption may be occurring and how to prevent it. Moreover, 
involving press and the public in overseeing projects and programs can 
deter corruption by increasing the likelihood of exposure. By bringing 
the insights and interests of the public to bear on the fight against 
corruption, the public can be mobilized to serve as an ``army of 
auditors'' of government operations. Citizen empowerment by 
strengthening participation and public voice and increasing 
transparency are essential to any comprehensive anticorruption strategy 
and would complement more conventional public sector management tools 
such as increasing civil service wages or strengthening internal 
oversight and enforcement. Researchers at the World Bank confirmed this 
finding in a recent study, which concluded that ``corruption [usually] 
has been reduced not so much by overreaching visions of good government 
as by the growing ability of people and groups outside the state to 
defend themselves against official abuse and to check the unfair 
advantages of others.'' This should take place at two levels:
    Encourage participation in MDB operations. Although some 
improvements have been made, MDBs should facilitate more proactive 
participation in the operations they finance. Potential initiatives 
include, inter alia: (a) conducting regular consultations during 
preparation and implementation with affected peoples, local 
governments, professional organizations, other civil society 
organizations;\7\ (b) carrying out client surveys to determine 
corruption in procurement, contracting, and service delivery within a 
project; (c) requiring increased transparency on project costs and 
expenditures; and (d) instituting strong whistleblower protections and 
incentives for speaking out against corruption. At the country level, 
MDBs should expedite initial efforts to promote participatory budgeting 
and monitoring of public expenditures. Increasing transparency and 
public participation in the Government's budgeting process at the 
country level would be a significant step towards reducing corruption 
at a broader level.
    Oversight by independent ``watch-dog'' civil society organizations 
and media. Beyond stronger participation in MDB operations, it is 
critical that independent ``watch-dog'' civil society organizations and 
media emerge and play a more proactive role in monitoring corruption 
and the role of Government and international institutions. Since the 
independence of these organizations is key to their effectiveness, 
direct support from MDBs or Government is not the answer. Ideally, more 
independent sources of funding (e.g. private foundations) can be 
secured to support these organizations and the indispensable watch-dog 
role they can and do play.
D. Enhancing Transparency and Disclosure in MDB Operations
    Openness is essential to guard against corruption. Exposing 
clandestine government operations to the disinfecting light of public 
scrutiny is one of the most powerful tools available for uncovering and 
deterring corruption. This entails ensuring that government decision 
making and policy making are transparent, and that civil society, 
media, and Parliaments have timely, complete, and convenient access to 
the information they need to meaningfully scrutinize official 
activities. MDBs should therefore view improving transparency and 
access to information as critical to controlling fraud and corruption 
in every project or program they support. As public institutions, the 
MDBs need to do a much better job of providing access to information 
regarding all aspects of their operations.
    Congress has begun to demand greater transparency and 
accountability standards at the MDBs in Section 580 and 581 of the 
Consolidated Appropriations Act FY2004 (P.L. 108-199). However, the 
United States can still do more to enhance transparency and fight 
corruption in MDB operations. In the context of the ongoing and future 
Information Disclosure Policy Reviews and MDB replenishment 
negotiations, the US Executive Directors should promote the following:

          (i) greater openness and information disclosure throughout 
        the project cycle--from project preparation through Board 
        approval to project completion and evaluation. This should 
        include greatly expanded public access to such critical 
        information as economic and technical feasibility studies, aide 
        memoires, appraisal documents, loan covenants in the public 
        interest, and project monitoring reports.

          (ii) disclosure of draft policies and strategies, including 
        draft country strategies, in order to allow for public comment 
        or consultation prior to policy or strategy approval.

          (iii) disclosure of full reports of independent audits of the 
        MDB's operational effectiveness and internal control 
        mechanisms.

          (iv) disclosure of a list of debarred firms ineligible for 
        funding at each MDB.

          (v) stronger whistleblower protection for employees seeking 
        to report corruption, fraud, violations of law or other serious 
        problems.\8\

          (vi) disclosure of all written statements from the US 
        Executive Directors to the Board of Directors at the MDBs 
        (establish best practice by leading through example).

    Furthermore, the Disclosure Policies at the MDBs are governed by a 
``presumption in favor of disclosure.'' However, none of the Banks has 
effectively put in practice this principle. Instead, the MDBs generally 
operate under a ``presumption against disclosure'' unless specific 
direction is given to disclose. This represents a negative bias within 
the institutions which fosters confidentiality, reduces the 
effectiveness of participation, and masks corruption. In order to 
enhance transparency at the MDBs, the United States Congress can begin 
to investigate current disclosure practices and identify gaps in MDB 
standards. BIC recently completed a comparative analysis which examines 
the transparency standards of the World Bank and major regional 
development Banks across almost 250 indicators of transparency.\9\
E. Aligning Institutional Incentives to Strengthen Anti-Corruption 
        Initiatives
    Most MDBs currently lack clear institutional direction and a 
culture of accountability with respect to anticorruption. Overall, 
mixed signals exist on whether fighting corruption (in its many forms) 
is an institutional priority. This is evident in the incentive 
structure within the institutions themselves. Management incentives 
still reflect a ``pressure to lend'' and a ``culture of approval'' 
where promotions and rewards are based more on the amount of loans 
approved than on development impact, implementation quality, and 
compliance with key safeguard and fiduciary policies. This incentive 
bias is reflected in the resources dedicated to project preparation 
versus supervision. Most independent evaluations at the MDBs have 
concluded that the quality of project supervision remains weak along 
many dimensions (not only corruption) and that the lack of adequate 
administrative resources is one important explanation. Moreover, the 
institutional imperative to lend often leads to engagement in countries 
and sectors with poor governance and to a preference for large projects 
which present greater opportunities for high-level corruption. Finally, 
appropriate recourse does not exist for MDB negligence or complicity 
related to corruption. As a result, MDBs are not sufficiently 
accountable for their actions. Without a more appropriate system of 
recourse and accountability in those instances that the MDBs are indeed 
negligent, it is difficult to understand how political commitment 
within the MDBs will emerge.
F. Further Steps Toward Redress
    Greater focus on compliance with applicable laws: Congress has 
taken important initial steps in the new Section 1504 of the IFI's Act, 
enacted this January, by requiring reports on the extent to which each 
MDB has included in each public sector loan (and in several other kinds 
of documents), the resources and conditionality necessary to ensure 
that applicable laws are obeyed. Congress may want to ask the Treasury 
Department how it intends to recommend that the MDBs address this 
``rule of law'' provision.
    The question of immunity: There are many sound reasons why 
international institutions are provided varying degrees of legal 
immunity. However one must recognize that a certain moral hazard 
problem emerges in regards to corruption in MDB-financed operations. 
Immune from lawsuits and legal challenges, the MDBs know that they will 
be paid-back regardless of how much money is diverted or stolen. This 
situation provides weak incentive to properly exercise full fiduciary 
duty to ensure that the money goes to its proper purposes. The Articles 
of Agreement of the World Bank indicate every intention to comply with 
final judicial rulings, even as to the attachment of assets, and 
certainly to rulings that do not threaten its ability to carry out its 
development purposes. The UN Convention Against Corruption recommends 
recognizing the criminal liability of institutions as well as of 
natural persons and waiving immunity of such institutions in cases of 
corruption. Thus the Congress may want to review the International 
Organizations Immunities Act to explore trimming back immunity that it 
or the courts may have granted that is in excess of that required.
    Compliance with US Law. The United States has a number of important 
legal requirements pertaining to its membership in the MDB system:

   Title 13 of the International Financial Institutions Act 
        establishes critical review and reporting requirements on 
        natural resource impacts and overall development effectiveness 
        by US agencies when considering proposals of MDBs. Several of 
        these requirements have not yet been fully implemented and 
        deserve Congressional attention;

   Section 1504 of the International Financial Institutions 
        Act, (as noted briefly above) establishes important 
        accountability, transparency, audit, law enforcement and policy 
        enforcement goals to be sought by the U.S. Government by June 
        of 2005 in the MDBs, with reports due to Congress from Treasury 
        by September 2004 and March 2005. Congressional oversight of 
        progress with these goals and reports is important;

   SEC regulations that provide for the SEC to require MDBs 
        (that float bonds on the US market) to report information to 
        the public concerning risks and other factors relevant to their 
        overall financial health (in the Sarbanes-Oxley Act, Congress 
        increased the reporting required of corporations but did not 
        address the MDB requirements). Therefore, Congress may want to 
        ask the SEC whether it intends to use its existing authority to 
        bring the reporting requirements for the MDBs up to date so 
        that the MDBs are not perceived as undercutting corporations 
        and other entities who compete with the MDBs on the bond market 
        but must report in seemingly greater detail to the potential 
        bond-buying public;

   Furthermore, it is worth exploring whether the Treasury 
        Department could ensure that U.S. companies involved in MDB 
        projects are in compliance with relevant U.S. anti-corruption 
        laws, such as the Foreign Corrupt Practices Act (FCPA). 
        Researchers have identified a number of cases, from Nigeria to 
        Bolivia, where MDBs seemed to ignore evidence and allegations 
        of corruption in violation of the FCPA. This law not only 
        forbids bribing government officials overseas, but also 
        requires US corporations to keep their books in such a way as 
        to help the Justice Department determine whether such bribes 
        have been paid.

                         V. CONCLUDING REMARKS
    I would like to thank you, Mr. Chairman, for the opportunity to 
share our views with you today on corruption and the Multilateral 
Development Banks. I hope that the testimonies provide the Committee 
with constructive and concrete ideas of mitigating corruption in MDB 
financed projects and programs and also help identify other development 
challenges facing the MDBs. The role of appropriate and effective 
international development aid is critical in overcoming poverty and 
deserves the dedicated attention of the entire development community.

                             [Attachment 1]

        Samut Prakarn Wastewater Management Project in Thailand

                      A FAILURE TO FOLLOW POLICIES
    The Asian Development Bank (ADB) funded Samut Prakarn Wastewater 
Management Project in Thailand is a clear example of how corruption can 
transform a potentially important initiative into a major development 
debacle. Based on a feasibility study funded by the ADB, a ``two 
facility'' site was selected for the project in 1995. The ADB Board 
approved the project which proposed a ``turnkey contract'' for each 
facility. When land acquisition became a problem, the Thai Government 
changed the project design and allowed bids for a single treatment 
plant. Only one contractor submitted a final bid for a single treatment 
plan not on the original site approved by the ADB but near the village 
of Kiong Dan, 20 kilometers away from the approved location. The ADB 
accepted all changes as a routine matter. Construction on Samut Prakarn 
was stopped in 2002 when Thai investigators determined that corruption 
by government officials, private investors, and land owners led to the 
inflation of the land price by as much as 1000%. The ADB did not 
intervene even though project changes had led to an 87% increase in 
costs prior to loan signing. The Samut Prakarn case illustrates that:

   affected communities are often the last to know about 
        projects that impact their lives.

   the ADB had no meaningful impact in limiting or exposing the 
        corruption at any stage of the project cycle, despite its 
        ``Zero Tolerance'' Anti-corruption Policy.

   the ADB believed a ``turnkey'' contract exempted the 
        institution from its oversight responsibilities such as 
        questioning substantial design changes that contravened ADB 
        policies and the loan covenants.

   the ADB accepted the site change despite the fact that no 
        environmental, social or alternatives assessment was ever 
        conducted and the Procurement Policy was violated.

   the ADB did not object when a single bidder was awarded the 
        contract despite international competitive bidding procedures.

    When the ADB finally responded to corruption allegations raised by 
the Kiong Dan community, its Special Review Mission found no evidence 
of any irregularities. When the community asked the ADS Board and Anti-
corruption Unit (ACU) to investigate the matter, the Board never 
pursued the matter and delegated it to the ACU which never conducted an 
appropriate investigation. This is in stark contrast to the Thai 
Government project investigation that has confirmed corruption and 
started to prosecute those involved.

                             [Attachment 2]

                 World Bank Extractive Industry Review

                   RECOMMENDATIONS ON CORE GOVERNANCE
    The criteria of governance adequacy should be developed 
transparently and with the involvement of all stakeholders and should 
include minimum core and sectoral governance criteria. For the core 
macro-governance, they should include:

   government capacity and willingness to publish and manage 
        revenues transparently and to maintain macroeconomic stability;

   government willingness to allow independent audits of its 
        receipts from the extractive sector;

   the existence of effective frameworks for revenue sharing 
        among local, regional, and national authorities;

   the quality of the rule of law;

   the absence of armed conflict or of a high risk of such 
        conflict

   the government's respect for labor standards and human 
        rights; as indicated by its adherence to international human 
        rights treaties it has ratified; and

   the government's recognition of and willingness to protect 
        the internationally guaranteed rights of indigenous peoples.

    The above is taken directly from Striking a Better Balance, the 
Final Report of the Extractive Industries Review, December 2003.

                             [Attachment 3]

                       Chad-Cameroon Oil Pipeline

    THE CHALLENGES OF GOVERNANCE AND REVENUE MANAGEMENT IN REDUCING 
                               CORRUPTION
    The World Bank-financed Chad-Cameroon oil pipeline is frequently 
cited as a model extractive industry development because of the revenue 
management, oversight and monitoring measures designed for the project. 
However, in reality, these extra-ordinary mechanisms have been layered 
on top of an unsound foundation. The (as of yet undemonstrated) ability 
to mitigate risks of corruption and negative impacts related to oil 
development ultimately depends on the broader governance context and 
political will in the country. To date, the indications are not good: 
the first oil bonus money was used to purchase arms; expenditure on 
priority sectors has lagged behind targets; the President is attempting 
to modify the constitution to allow him to stay in office indefinitely 
and has appointed his brother-in-law to the oil revenue oversight 
mechanism, to name a few examples.
    Despite persistent problems with the management of public revenues, 
misuse of HIPC funds and other earmarked resources in Chad, MDB funds 
were approved for the Chad-Cameroon pipeline project, paving the way 
for a potential doubling of the government's national revenues. The 
World Bank's own documents indicate that governance problems pose the 
most fundamental risks to development prospects in Chad, generally, and 
the success of the oil project in particular, including the risk of 
``political turbulence and deteriorations in the rule of law more 
broadly.'' They note that ``[a]s oil revenues begin to accrue and the 
stakes rise, power may be contested by violent means. And road 
blocking, violent crime, and the theft of public resources may 
increase.'' (CAS, December 2003, pp 31-32). If these risks materialize, 
the costs will be borne by the population living in Chad--i.e. the 
purported ``beneficiaries'' of the project. Thus without determining 
whether countries meet minimum governance criteria (based on an open 
assessment of core and sector governance indicators) prior to 
supporting projects in sensitive sectors, MDBs risk facilitating 
corruption--providing money not to benefit the poor but an elite few.

                               FOOTNOTES
    \1\ It is useful to note, however, that in US law, an agreement or 
attempt to commit any offense, or violation of federal law, or to 
defraud the US or any agency of the US includes, under 18 U.S.C. 371 of 
the criminal code, any ``. . . conspiracy for the purpose of impairing, 
obstructing, or defeating the lawful functions of any department . . . 
'' which is broader than abuse for personal gain. (See, Haas v. Henkel, 
216 U.S. 462.)
    \2\ See ``Zero Tolerance?--Assessing the Asian Development Bank's 
Efforts to Limit Corruption in its Lending Operations,'' Bank 
Information Center, 2004. www.bicusa.org
    \3\ These recommendations are intended to build upon the 
recommendations made by the General Accounting Office in its series of 
reports on the MDBs, including reports of April 2000 on measures for 
controlling corruption in World Bank lending, and the reports of 
December 2001 and June 2003 on external audits of the regional banks 
and World Bank respectively.
    \4\ Corruption within the procurement processes of MDB lending 
operations has received perhaps the most significant amount of 
attention at the institutions, with the establishment of fraud and 
corruption units, and guidelines for procurement and consulting 
services. I have consciously not focused this testimony on this issue 
given its detailed treatment in other recent literature including by 
the US Government.
    \5\ See Ian Gary and Terry Karl, Bottom of the Barrel: Africa's Oil 
Boom and the Poor, Catholic Relief Services, June 2003. 
www.catholicrelief.org/africanoil.cfm
    \6\ See for example, Eduardo Lora and Ugo Panizza, Structural 
Reforms in Latin America, Inter-American Development Bank, Washington, 
D.C., March 11, 2002. These analysts suggest that the level of 
corruption inherent in the privatization processes in some countries 
has actually undermined popular support for democratic governance.
    \7\ The GAO found significant weaknesses in public consultation on 
environmental assessments of World Bank in its September 1998 review. 
The World Bank's Inspection Panel and the IFC's Compliance Advisory 
Ombudsman have continued to find violations of the policies requiring 
proper consultation on proposals and alternatives to them.
    \8\ See forthcoming assessments of whistleblower protection at the 
four largest MDBs now being completed by the law firm and advocacy 
group, the Government Accountability Project (GAP).
    \9\ This study was prepared by the Bank Information Center and an 
early draft of the data and summary (April 2004) is available upon 
request.

    The Chairman. Well, thank you very much, sir, for that 
testimony.
    Ms. Boswell.

     STATEMENT OF NANCY ZUCKER BOSWELL, MANAGING DIRECTOR, 
                 TRANSPARENCY INTERNATIONAL USA

    Ms. Boswell. Thank you, Mr. Chairman, and thank you for 
taking the time to look at this important issue, and for 
inviting Transparency International to participate.
    I am the managing director of the U.S. chapter of 
Transparency International, as well as a member of its 
international board of directors.
    I am here today on behalf of Peter Eigen, the founder and 
Chairman of our organization, and it may interest the committee 
to know that Peter spent his entire career at the World Bank. 
In the early 1990s, when he expressed his deep concern about 
the impact of corruption on the bank's efforts to alleviate 
poverty, the bank leadership refused to take the issue on. So 
it was that in 1993 he left the bank to found Transparency 
International as a nongovernmental, nonpartisan organization 
committed to raising awareness about this issue and to securing 
systemic reform.
    Ten years later, TI now has national chapters in over 90 
countries and the World Bank has a president who is, as has 
been noted, committed to fighting corruption. We believe this 
reflects a growing understanding that the bank's mission to 
alleviate poverty depends on success in this issue and, indeed, 
the achievement of the millennium development goals also 
depends on reducing corruption.
    The World Bank Institute research now clearly demonstrates 
the devastating impact. We note a recent estimate that more 
than $1 trillion are paid annually in bribes, both in rich and 
developing countries. Clearly it means that corruption 
increases the cost of doing business and that the private 
sector contributes enormously to the problem. But this figure 
does not include embezzlement of public funds, theft of public 
assets, high costs and poor quality purchases, or most 
important, the social and economic impact on the poorest where 
corruption is most prevalent.
    This is an intolerable situation that requires urgent 
attention, and we would like to offer two specific 
recommendations drawn on the experience of our chapters around 
the world. They apply equally to the World Bank as to the 
regional banks.
    First, every opportunity should be taken so that lending 
decisions are based on governments taking specific steps to 
increase their transparency and accountability to their 
citizens, and second, that the banks take steps to reduce 
private sector bribery. As you note, Mr. Chairman, a bank 
policy that rewards such actions will reinforce a similar 
approach under the Millennium Challenge Account.
    By transparency, we mean publication of information that 
affects citizens and how public funds are used. It includes 
publication of laws, regulations, judicial decisions, assets of 
public officials, budgets, procurement, campaign finance, and 
voting records, and legislation to ensure that when that 
information is not routinely published, citizens can get access 
to it.
    These may seem like routine issues but they are not in most 
countries and they contribute to the problem that we are 
confronting. Without such transparency in government operations 
there can be no accountability and citizens can neither monitor 
nor have an impact on decisions that affect their daily lives. 
Moreover, business cannot know with certainty what the rules 
are, leaving opportunities for manipulation and distortion, and 
thus we find that foreign investment does not flow to those 
countries where corruption is a problem.
    The bank has several mechanisms through which to promote 
transparency. You have been discussing some of them: country 
assistance strategies, budget support lending, investment 
lending, and procurement, in addition to the moral suasion of 
the leadership.
    In country assistance strategies, governance is already a 
factor in determining the amount and content of financial 
assistance, but the benchmarks are not explicit. We believe 
they need to include transparency measures that I have just 
listed. We note that many of the borrowers have already made 
such commitments in adopting anti-corruption conventions and 
trade agreements. Many are participating in important followup 
mechanisms on the anti-corruption conventions, which the U.S. 
Government is very generously funding. Those mechanisms 
identify deficiencies in compliance and issue recommendations 
for remedial action.
    Encouragement and help from the multilateral banks to 
governments to carry out these commitments should be a 
priority. The bank can use its significant influence by raising 
these issues in discussions with governments and encouraging 
their inclusion in activities and in the benchmarks.
    In all of this, the bank needs to provide the technical 
support to both the governments and to bank staff to reach 
these benchmarks. Our understanding is that bank staff with 
expertise is much in need. For example, the bank has such 
expertise for environmental issues. It is not currently in the 
bank for anti-corruption and transparency programs.
    As to project evaluation that Senator Hagel raised, after a 
project is completed, OED should assess not only operational 
effectiveness but also the level of transparency and anti-
corruption.
    Another opportunity is one you raised in connection with 
budget support lending. The bank is shifting significant 
amounts of lending through this mechanism, and the example of 
community engagement that you and Ms. Brookins discussed 
earlier--those amounts are dwarfed by the amount of money that 
flows through general budget support. It is essential that such 
flows be conditioned on essential transparency reforms that I 
mentioned earlier, and the bank needs to ensure that these 
conditions are actually met.
    The bank also needs to address the fact that adjustment 
lending cannot be traced in the same way that investment 
lending can, and so it needs to build into these agreements the 
covenants and mechanisms necessary to permit effective followup 
monitoring.
    Turning to the area of bank lending and procurement, there 
are still opportunities for the bank to use its substantial 
leverage to further strengthen procurement processes when it 
comes to transparency. In our written testimony, we have 
provided a very detailed list of reforms. Let me just mention a 
few that could help remedy the deficiencies.
    First of all, significant project documents must be made 
public so that citizens can be fully informed about the 
amounts, scope of work, and companies and contractors involved. 
The decision to publish such documents should not be deferred 
to governments as the current practice too frequently is that 
governments do not disclose this information. Publication in a 
timely manner on the bank's Web site would enable citizens and 
local officials to exercise meaningful oversight for projects.
    Second, reducing corruption requires tight controls, and 
staff time for supervision in the field, we understand, has 
been reduced and too often there is not the opportunity to do 
more than ask controlling questions of local project staff. 
More staff must be allocated for this oversight function.
    Third, a growing share of total bank-financed procurement 
is not according to open international competitive bidding 
rules, and when this is the case, we believe bank staff 
decisions to permit other processes should be justified and 
published so as to allow later review.
    I want to also emphasize the critically important work of 
the Department of Institutional Integrity and the Sanctions 
Committee that was discussed earlier. We do believe that the 
published black list does create a strong deterrence for future 
misconduct. It also identifies systemic problems and these need 
to be mainstreamed through bank programs.
    Let me turn to the other central issue that we believe 
needs attention and that is a bank requirement that all bidders 
on bank financed projects must have anti-bribery compliance 
programs. If anti-corruption and anti-bribery conventions are 
to be effective, the private sector simply must abide by new 
rules. The OECD convention, which this committee did so much to 
bring into force, depends on whether the 34 other signatories, 
companies enact anti-bribery compliance programs.
    A World Bank requirement would do a great deal to move 
toward that outcome. We are pleased to note that the bank seems 
willing to review its prior decision not to adopt such a 
requirement and we hope that this hearing today and the new 
circumstances will permit it to move forward on this very easy, 
preventive, risk management tool.
    Finally, I would concur with my colleague from BIC that 
improvements are needed in the bank's institutional 
transparency. There are still instances where key documents are 
kept confidential or released only after commitments have been 
made. As a public institution, lending public funds for a 
public purpose, the bank has a duty to ensure that the public 
is informed in a timely manner.
    In conclusion, let me say that bank has made impressive 
progress, but it is time to accelerate the pace and the 
resources necessary for specific action to enhance transparency 
and reduce bribery. As you note, Mr. Chairman, and as was 
raised by the prior testimony, it must also ensure that bank 
staff are confident that their efforts to reduce corruption 
will be as highly valued as their more traditional functions 
and that they will be supported by sufficient supervisory 
staff.
    We know there are still obstacles to overcome. Members of 
the bank are at once its borrowers, and at times some of them 
are at the heart of the problem. Some have little patience with 
calls for greater transparency and may have a vested interest 
in the status quo. Even some contributors have special 
interests.
    Therefore, sustained pressure by the U.S. Government will 
be necessary to strengthen the proponents of reform within the 
bank. The leadership that you have demonstrated today at this 
committee is vital in the global fight against corruption with 
regard to the bank, and more generally across the board. It 
will be critical in the future as other priorities compete for 
attention and resources. So we thank you for this hearing today 
and we look forward to your questions.
    [The prepared statement of Ms. Boswell follows:]

               Prepared Statement of Nancy Zucker Boswell

    I would like to thank the Chairman and the Committee for inviting 
Transparency International to address this hearing on ``Combating 
Corruption in Multilateral Development Banks.'' I am the Managing 
Director of the U.S. Chapter of Transparency International and a member 
of TI's international board of directors. I appear today on behalf of 
Peter Eigen, founder and Chairman of Transparency International, who 
spent his career at the World Bank.
    In the early 1990's, Peter expressed his growing concern to the 
Bank hierarchy about the devastating impact of corruption on efforts to 
promote economic and social development. He urged the Bank to address 
the problem. The Bank leadership refused, finding the issue too 
``political'' and not an economic issue for the bank to address.
    In 1993, convinced of the importance of the issue, Peter left the 
Bank to create Transparency International, a politically non-partisan, 
non-governmental organization, committed to raising awareness about the 
impact of corruption and to securing systemic reforms.
    Today, TI has national chapters in over 90 countries and the World 
Bank has a president who is committed to fighting corruption! Since his 
1996 speech to the World Bank/IMF meetings on the ``cancer of 
corruption,'' James Wolfensohn has demonstrated great courage and 
leadership in reversing the Bank's prior policy position and in seeking 
to institute measures to eliminate fraud and corruption from within the 
Bank and in the countries where it operates. He has given this issue 
far greater priority, recognizing that the Bank's mission to alleviate 
poverty depends on it.
    TI commends Mr. Wolfensohn and his colleagues for the steps taken 
to date. We recognize that this is a long-term undertaking and many 
challenges remain. For purposes of our testimony today, we would like 
to offer only a few specific recommendations to help achieve the 
reduction in corruption we are all seeking. While they are in the 
context of the World Bank, these recommendations apply equally to all 
the multilateral banks.
    First, the Bank should use every opportunity to see that 
governments provide the broad range of transparency measures that 
permits citizens to hold their governments accountable. Second, the 
Bank should ensure that the private sector plays its role, by requiring 
bidders on Bank-financed projects to adopt anti-bribery policies.
    Before I elaborate on these recommendations, let me say a few words 
about TI's approach to fighting corruption and how it affects my 
testimony.

            I. TI'S SYSTEMIC APPROACH TO FIGHTING CORRUPTION
    TI's approach to combating corruption is holistic, recognizing that 
it requires a range of systemic and institutional steps. These include 
preventive measures as well as criminal laws and prosecutions.
    TI works with government and with the private sector, encouraging 
each to play its part in reducing the incidence of bribery and 
corruption. TI chapters are independent and locally-based, setting 
their agendas to reflect local circumstances. Nonetheless, they value 
the anti-corruption conventions concluded by the OECD, OAS, Council of 
Europe and the UN. These conventions provide a roadmap for reform in 
both the public and private sectors, represent the political commitment 
of the government and provide a platform for citizens to hold their 
governments accountable.
    TI focuses on systemic reform and not on individual cases of 
corruption. Accordingly, my comments today do not discuss the specific 
projects about which the Committee has raised questions. Rather, they 
address steps the Bank has and should take to minimize the likelihood 
of those questions arising in the future.
    My testimony includes some recommendations TI has already submitted 
to the Bank in a meeting initiated by Mr. Wolfensohn in March 2003. 
Some action has been taken. I should also note that this testimony does 
not pretend to fully reflect all the steps the Bank has taken or an 
exhaustive assessment of those that should be taken. Finally, our 
recommendations should be considered to apply to all the multilateral 
banks.

        II. THE COMPELLING CASE FOR THE BANK FIGHTING CORRUPTION
    The Bank has made great strides in addressing the issue of 
corruption, starting with its acceptance of the view that corruption 
undermines the Bank's efforts to alleviate poverty. The World Bank 
Institute (WBI) has done formidable research, demonstrating the 
devastating impact of corruption on economic development and putting to 
rest old arguments that some types of corruption can be beneficial.
    The WBI recently estimated that more than $1 trillion dollars is 
paid each year in bribes--in both rich and developing countries. This 
figure dwarfs earlier estimates, but as stunning as this figure is, it 
does not include the cost of embezzlement of public funds or theft of 
public assets or higher costs and poorer quality purchases or, most 
important, the economic impact on the poorest in those countries where 
it is most prevalent.
    WBI Director of Governance, Daniel Kauffman, notes that ``the total 
amount of corrupt transactions is only part of the overall costs of 
corruption, which constitutes a major obstacle to reducing poverty, 
inequality and infant mortality in emerging economies.'' The result can 
be social breakdown and alienation, with the potential for instability 
and sometimes violence.
    Corruption also discourages sorely needed foreign investment. Lack 
of transparency undermines predictability and creates opportunities for 
extortion. In short, it increases the cost of business.
    Having made a compelling case regarding the costs of corruption and 
the need to address it, the Bank is moving forward. The following 
recommendations indicate ways to strengthen its efforts.

              III. BANK MECHANISMS TO SECURE TRANSPARENCY
    TI recommends that the Bank condition country assistance 
strategies, structural adjustment, project lending and procurement on 
making progress on specific transparency reforms. Bank policy rewarding 
a demonstrated commitment to transparency and reducing corruption 
reinforces a similar approach under the Millennium Challenge Account.
    Among the required transparency measures are legal and regulatory 
transparency, access to information legislation, asset disclosure by 
public officials, budget and procurement transparency and transparency 
of campaign finance and voting records. Recent anti-corruption 
conventions and trade agreements reflect a consensus that these 
transparency measures are an essential and integral part of an 
anticorruption program.
    Promoting government transparency will strengthen accountability 
and create a sound investment climate that will support economic 
development. This will permit private sector development, leading to 
job creation, higher incomes and tax revenues essential for public 
expenditures.
    Without transparency in all aspects of government operations, there 
can be no accountability. Citizens can neither monitor nor have an 
impact on government decisions or expenditures that affect their daily 
lives. Business cannot know with certainty what the rules are, leaving 
opportunities for manipulation and distortions in decision-making. Lack 
of transparency discourages long-term foreign investment.
A. Country Assistance Strategies:
    Country assistance strategies (CAS) should underscore and promote 
more explicit and effective programs to increase transparency. The Bank 
has taken an important first step, making ``governance'' a factor that 
must be considered in determining the amount of financial assistance as 
well as the specific content of lending and non-lending programs. CAS 
objectives have included transparency, accountability and integrity of 
government, but the benchmarks have not been adequately specific to 
accomplish this objective.
    TI recommends that the benchmarks for securing financial assistance 
include publication of laws, regulations, budgets, procurement rules, 
officials' assets and other key aspects of government operations. 
Programs to improve public resource management and a more effective 
regulatory framework will be enhanced by incorporating transparency 
requirements. Programs focusing on other sectors will also be more 
effective if transparency requirements are an integral part.
    The Bank should provide the necessary technical support to enable 
governments to reach these benchmarks. To this end, the Bank should 
develop adequate in-house expertise to assist in the design and 
execution of transparency and other anti-corruption components of 
country projects. Although the Bank has determined that governance is 
an important factor to be addressed, it has not provided the resources 
and level of expertise needed by bank staff as it has, for example, on 
environmental issues. Without the necessary expertise and already 
heavily burdened with other priorities, Bank staff are unlikely to be 
able to provide the detailed attention required. The considerable WBI 
expertise, developed in some instances in concert with TI and its 
national chapters, should be more routinely ``mainstreamed'' into the 
Bank's country programs. For a start, a practical handbook with 
detailed recommendations would be useful for Bank staff.
    Finally, after a project is completed, it should be assessed not 
only for its operational effectiveness but also on the level of 
transparency and absence of corruption.
B. Structural Adjustment Lending
    Given the Bank's increasing shift to providing significant amounts 
of lending through budget support mechanisms, the Bank should condition 
such lending on implementation of the essential transparency reforms 
outlined above, including procurement reform. This is a constructive 
and straightforward use of Bank leverage to increase transparency for 
both local citizens as well as the international community.
    Recognizing that conditions imposed are frequently not performed or 
performed in form, but not in substance, the Bank should ensure that 
transparency and anti-corruption conditions are actually carried out.
    Another issue requiring Bank attention reflects the nature of 
adjustment lending. With investment lending, the Bank can trace whether 
funds have been used as specified. With adjustment lending, the funds 
are, essentially, transferred to a national treasury, where they are 
commingled with other assets and become impossible to trace. The Bank 
should build into structural adjustment agreements the covenants and 
mechanisms necessary to permit effective follow-up monitoring.
C. International Initiatives
    Many of the Bank's borrowers have already made transparency and 
other anti-corruption commitments in adopting anti-corruption 
conventions and trade agreements. For example, the Inter-American 
Convention Against Corruption and the new UN Convention on Corruption 
call for asset disclosure, procurement transparency and greater access 
to information. The WTO Government Procurement Agreement has detailed 
procurement transparency requirements. Recent trade agreements, such as 
the CAFTA, also have detailed procurement transparency requirements, 
and call for publication of laws and regulations and for providing an 
opportunity for prior comment.
    Encouraging and helping governments carry out these commitments 
should be a Bank priority. The Bank can use its significant influence 
by raising the convention commitments in discussions with governments 
and encouraging their inclusion in relevant activities in country 
programs. We note, for example, that most government procurement is not 
financed by the Bank and, therefore, is not subject to Bank guidelines. 
Bank programs to reform procurement systems should ensure that domestic 
systems are in compliance with agreed transparency norms.
    For those governments participating in convention follow-up 
mechanisms, the Bank should help them remedy the deficiencies 
identified by these mechanisms. It should provide the resources and 
skills many countries urgently need to give their legal and judicial 
institutions, regulatory and administrative agencies the capacity to 
fight corruption.
    The 2003 G-8 Leaders Action Plan and the Nuevo Leon Declaration in 
this hemisphere call on the Bank to provide such support for these 
initiatives.
D. Bank Lending and Procurement
    TI welcomes the important steps the Bank has taken to reduce 
corruption in bank lending and procurement, from specific anti-
corruption and anti-fraud provisions in its Procurement Guidelines and 
Guidelines for the Selection of Consultants to blacklisting offenders. 
There are still opportunities for the Bank to use its substantial 
leverage to further strengthen these processes, particularly with 
regard to transparency.
    We note that there has been some progress toward ``harmonization'' 
of procurement documents among the World Bank and regional development 
banks. However, greater consistency is still needed for procurement 
guidelines and use of standard documents. A common approach, especially 
with increasing co-financing, is in the interest of the borrowers and 
the suppliers. Further progress is also needed with regard to 
consistent definitions, investigations and sanctions procedures and to 
sharing and respecting each other's blacklists.
            1. Strengthening Transparency Requirements
    As TI has noted in its prior submissions to the Bank, it must take 
every opportunity to ensure a transparent procurement process from 
inception through execution. The following Bank requirements can help 
achieve this.

   Borrowers should publish project features and justification 
        in advance and provide an opportunity, such as a public 
        hearing, for public comment well before final decisions are 
        made.

   All significant project documents must be made public. The 
        Bank should publish or obligate governments to publish all 
        contracts and sub-contracts entered into on projects financed, 
        even in part, by the bank. Information, including the amounts, 
        scope of work, and companies or contractors involved, should be 
        made public. There should be a presumption that such documents 
        are public unless there is a demonstrated need for 
        confidentiality. The decision to publish should not be deferred 
        to governments as all too frequently they do not disclose this 
        information, and there are no domestic legal mechanisms for 
        citizens to require disclosure. Publication in a timely manner 
        on the Bank's website will enable citizens and local officials 
        to exercise meaningful oversight throughout the process.

   Borrowers should publish contract awards and the basis on 
        which competing bids were evaluated. This would help reduce 
        manipulation.

   There should be a grace period between the ``publication of 
        the award'' and signing the contract to permit legitimate 
        complaints to be taken into account while there is still time 
        for consideration.

   Clarification sought by bidders must not be permitted to 
        change the substance of the bid and should be notified to other 
        bidders. Such ``hidden changes'' are not uncommon and should be 
        reviewed carefully as part of the Bank's supervision.

   Borrower discretion should be minimized as it permits 
        corruption. While some discretion may be necessary, the 
        exercise of even a minor degree should be recorded, justified 
        and disclosed.

    Finally, in those cases where contractors and other stakeholders 
may need Bank assistance in dealing with Borrowers, the Bank should 
provide a central office where complaints or protests can be lodged. It 
should see that complaints are investigated and, in appropriate 
circumstances, intercede.
            2. Audit and Supervision
    Keeping procurement corruption-free requires tight controls as well 
as stringent rules. Staff time for supervision in the field has been 
reduced and staff too often does not have the opportunity to do more 
than ask ``controlling questions'' of local project staff. Adequate 
staff must be allocated for supervision.
            3. Other Practices
    Non-ICB Bidding: A growing share of total Bank-financed procurement 
does not follow open international competitive bidding (ICB) rules. 
Bank staff decisions to permit other processes should be justified and 
the decision recorded, so as to allow later review.
    Change Orders: Improper change orders have become a common form of 
corruption during project implementation. Change orders should not be 
used to change the contract. The Bank should require borrowers to 
introduce a domestic review by senior staff (or tender committees or 
boards) when cumulative change exceeds a 15% threshold. This would 
avoid collusion between the site engineer and contractors to approve 
relatively small change orders which, in the aggregate, lead to major 
cost increases.
    Selection of Consultants: The bank should help ensure that 
consultants do not undermine the integrity of the project. Consultants 
should certify in their contract application that they have no conflict 
of interest. The Bank should take steps to assure that consultants have 
the appropriate expertise, particularly when rare or highly technical 
expertise is needed .
            4. Investigations and Sanctions
    The work of the Department of Institutional Integrity and the 
Sanctions Committee is critically important to creating a strong 
deterrence for future misconduct and for identifying systemic problems 
brought to light by particular cases. These objectives would be 
furthered by publication of the number of cases under investigation, 
the types of allegations and the results of investigations.
    Lessons learned should be systematically addressed, including in 
country assistance and project lending. The Bank should assist with 
technical capacity and training for prosecutors and judges for 
countries eager to pursue wrongdoing. Prior cases demonstrate that some 
of the poorest governments cannot easily bear the burden and may not 
have the requisite skills to gather evidence abroad and prepare cases 
against companies around the world.
    TI believes that the sanctions reforms recently sent to the Bank 
board have the important potential to de-politicize the process, such 
as by expanding Sanctions Committee membership to outside experts. 
Other issues requiring further consideration are the application of the 
Sanctions process to IFC lending and the weight to accord court 
convictions with regard to Bank blacklisting.
    The blacklist has been a constructive and powerful instrument for 
promoting private sector reform. The Bank should consider moving beyond 
the information posted on the website regarding the INT and Sanctions 
Committees work and procedures to a broader awareness-raising program. 
The private sector has expressed interest in learning more and could 
contribute valuable insights. One such important issue is voluntary 
disclosure, which can assist the Bank in determining where systemic 
problems are most acute.

                  IV. ANTI-BRIBERY BIDDER REQUIREMENTS
    Let me turn to the other central recommendation that will help in 
the Bank's efforts to reduce the risk of bribery in Bank-financed 
projects: a requirement that all bidders have anti-bribery compliance 
programs. According to the TI Bribe Payers Index (BPI), bribery is 
still a common practice. The BPI finds that large multinationals are 
still engaging in grand scale payments and that domestic concerns are 
even more likely than foreign enterprises to engage in bribery.
    This situation should begin to change with recent anti-corruption 
conventions prohibiting bribery and providing tools, such as mutual 
legal assistance, to pursue cases. The OECD Convention on Bribery of 
Foreign Public Officials is particularly important because it extends 
transnational bribery prohibitions, similar to those in the Foreign 
Corrupt Practices Act, to most of the world's major exporters. Its 
entry-into-force in 1999 was encouraged by the prompt action of this 
Committee to secure US ratification.
    Since then, all 35 OECD signatories have enacted new laws 
criminalizing foreign bribery, and an OECD monitoring process is 
promoting their enforcement. Some major companies are adopting 
compliance programs.
    A World Bank requirement that all bidders on bank-finance projects 
must adopt anti-bribery compliance programs would stimulate broader 
adoption of such programs, promoting compliance with these new laws. 
This would be a powerful preventive measure, reducing the likelihood of 
bribery on bank-financed projects. It would also help ensure that 
exporters from non-OECD member countries abide by similar practices.
    There are plenty of models for companies to consider in developing 
their own programs, including the TI Business Principles for Countering 
Bribery. Under the Business Principles, companies commit to prohibit 
bribery in all forms and to adopt an implementation program. They 
commit to maintain accurate books and records which properly document 
all financial transactions and prohibit off-the-book accounts. These 
provisions are consistent with the FCPA and with the OECD Convention 
requirements.
    In light of Sarbanes-Oxley, it is also notable that the Business 
Principles require the enterprise to maintain internal control systems, 
in particular accounting and record keeping practices, and submit them 
to regular audits to provide assurance that they are effective in 
countering bribery.
    The TI Business Principles were developed by a multi-stakeholder 
task force including multinationals from different industry sectors. 
They were adopted this year by leading companies in the engineering and 
construction sector. Members of a task force, led by the Fluor 
Corporation working with TI, have since joined in calling on the World 
Bank to enact such a requirement. They see it as an effective means to 
level the playing field and to combat extortion.
    TI's work with other industry sectors, including energy, 
extractives, pharmaceuticals and defense, would be facilitated by a 
World Bank requirement. TI national chapters have also conducted 
country workshops to promote broader adherence of the Business 
Principles. These workshops reach an audience of local companies and 
subsidiaries of MNEs. Cooperation with the Bank in such outreach 
activities could help reduce corruption in the supply-chain on Bank-
financed projects.
    Concern has been raised that imposing a bidder requirement might 
exclude small and medium size enterprises from bidding. However, no 
bidder, regardless of size, is excluded from legal prohibitions against 
bribery. The Bank should encourage compliance by all bidders, and even 
the smallest can develop appropriate policies using the available 
models without imposing a significant burden. The Bank could start by 
implementing the requirement on contracts above a certain threshold.
    We are pleased to note that the Bank has agreed to permit 
governments to use a TI tool, the Integrity Pact, under which the 
borrower will only accept bids from those who have anti-bribery codes 
and who certify they will not bribe. The government agrees to conduct a 
transparent process, often with expert oversight. This new tool has 
contributed to lower costs and less corruption in several countries. It 
has demonstrated that integrity is possible even in an environment or 
an industry that has historically been corrupt. TI hopes that the Bank 
will do more to encourage its broader use.
    TI also looks forward to working more closely with the IFC and 
Global Corporate Governance Forum on giving greater prominence to the 
issues of bribery, corruption and internal controls in their corporate 
governance training and materials. TI believes this will be important 
to expanding the number of enterprises adhering to best practices. This 
will not only help create a better investment climate but will also 
improve the performance of IFC investments.

                     V. INSTITUTIONAL TRANSPARENCY
    Throughout this testimony, TI has highlighted examples of 
improvements in the Bank's own institutional transparency as well as 
areas where further improvement is still needed. There are still 
instances where key documents have been kept confidential or have been 
released only after commitments have been made, rather than when they 
were under discussion. As a public institution lending public funds for 
public purposes, the Bank has a duty to ensure there is public 
participation in the design and implementation of Bank policies and 
activities. Transparency should be practiced not only by the Bank's 
members but by the Bank itself. This requires timely and accessible 
dissemination of information by the Bank and its members.

                               CONCLUSION
    In TI's judgment, the Bank has made impressive progress under the 
leadership of Jim Wolfensohn. However, it must take additional, 
specific steps to mainstream the fight against corruption throughout 
its operations and activities. It must also ensure that Bank staff 
receive as much encouragement for their efforts in this arena as for 
more traditional functions.
    TI intends to continue its campaign to promote action on the 
recommendations outlined in this testimony. We know that there are 
still obstacles to overcome. The shareholders of the Bank are at once 
its borrowers and, at times, at the heart of the problem. Some have 
little patience with calls for greater transparency or may have vested 
interests in the status quo.
    Therefore, sustained pressure by the US Government will be 
necessary to strengthen proponents of reform within the Bank. We 
welcome the Committee's ongoing interest in this issue and we hope the 
foregoing makes a constructive contribution to the Committee's work. 
The leadership of the US Government and of this Committee has been 
vital to the global fight against corruption. It will be critical in 
the future as other priorities compete for attention and resources. We 
hope we may count on your continuing interest and support and we 
welcome your questions.
    Thank you.

    The Chairman. Well, thank you very much, Ms. Boswell, for a 
remarkable statement, as well as the more voluminous testimony 
which backs this, and the reforms that you have mentioned. We 
appreciate it.
    Dr. Levinson.

STATEMENT OF PROFESSOR JEROME I. LEVINSON, DISTINGUISHED LAWYER 
  IN RESIDENCE, WASHINGTON COLLEGE OF LAW, AMERICAN UNIVERSITY

    Dr. Levinson. Thank you, Mr. Chairman. In a previous 
incarnation, I sat on the other side, so this is a 
transformation for me, if you will.
    I will be brief in my oral comments.
    I think paradoxically the larger the project and the more 
international bidding, the easier it is to control the 
prospects of corruption because on the large projects, you 
generally have international competitive bidding. You have the 
two envelope system. The first envelope, prequalification on 
technical grounds without reference to price, only after the 
first set has been passed of qualified bidders, do you get to 
the second, the price issue. The envelopes have to be opened in 
public session, and if it is properly administered, it should 
be a completely transparent process with the prospect of 
corruption minimal in my opinion.
    This is not to say that there will not be controversy. In 
every case which I saw as general counsel to the Inter-American 
Development Bank, where you have a large project, you are going 
to have the losers complain that they lost because of corrupt 
payments rather than the fact that their price was higher or 
that their goods were inferior. That is why you have 
procurement committees within the institutions to review these 
matters.
    By and large, I think that where you have competitive 
international bidding on projects, it is very exceptional to 
find significant corruption in that part of the project, 
subject to that competitive bidding.
    The problem of corruption on large projects comes 
particularly with suppliers credits where particularly the 
Europeans build into the price of the product illegal payments, 
and as you well know, in many countries in Europe those 
payments have been deductible as ordinary business expenses. 
The OECD convention urges countries to discontinue this 
process, but it is dependent upon individual countries adopting 
the necessary measures. As you also know, a number of countries 
have been slow to do that. So we should not exaggerate what the 
multilateral financial institutions can and cannot do.
    My own view is that where they are financing on a large 
project, a significant input and their input is desirable from 
the point of view of the private participants, they have every 
right to demand that the bidding processes apply not only to 
that part of the project being specifically financed by the 
MFI, the multilateral financial institutions, but to the entire 
project because they cannot insulate themselves from corruption 
and claim, well, that was not on the part that we were 
financing. It contaminates the whole project and destroys their 
credibility. So I think that is very reasonable, and it is not 
always the case, but I think they ought to extend that 
practice.
    The other thing I think which is quite effective is this 
business, which has been in the last decade adopted, of the 
Sanctions Committee where firms which do engage and are shown 
to have engaged in such corrupt practices can be barred from 
particularly World Bank projects, and now the IDB has a similar 
program under consideration. I understand that they expect that 
it will be shortly enacted.
    What is interesting, I think impressive, is the degree of 
specificity and institutional maturity in terms of due process 
for the companies that are accused. The easy case is the 
Lesotho water dam project, water dam authority, where the head 
of the authority was convicted in the Lesotho courts and the 
contractors were convicted. But not every country is going to 
use its judicial process in such a really effective and 
transparent way. So that imposes a requirement upon the 
institutions to conduct their own independent investigation and 
that requires internal processes which assure due process to 
the companies. I think as I have looked at those processes they 
are quite impressive in assuring due process. The companies 
that are, in fact, sanctioned have very little basis to 
complain. I think that this is a very effective innovation.
    I do not understand this idea that Professor Winters has 
put forward of hundreds of millions of dollars in criminal 
payments being siphoned off from the direct lending of these 
institutions. As I say, on the large projects where there is 
international competitive bidding, I think there are such 
built-in checks and balances that I am skeptical about that.
    In the project approval process, in the Inter-American 
Development Bank, you have a project team on every project that 
is going to be financed. It consists of a lawyer. It consists 
usually of an economist, a financial analyst, an institutional 
specialist or water specialist, depending on what the project 
being financed is. Before a project is authorized, it has to go 
for preliminary approval to a committee headed by the president 
of the bank. Only when it passes that approval committee is the 
project team organized. Any individual in the bank has a very 
hard time bringing about approval of a project by him or 
herself because it is surrounded by so many checks and 
balances. Then the project has to go to the loan committee for 
approval. It then has to be approved by the board of executive 
directors. At these different levels of scrutiny, you have so 
many people involved, so many institutional checks and 
balances, that the approval process itself, it seems to me, is 
relatively integrated from accusations of corruption.
    I think the more difficult issue which has been alluded to 
by the previous speaker is the structural adjustment lending 
where the money goes to the central bank. It is then 
conditioned upon reforms where the reforms are disconnected 
from the use of the money. The central bank can use the money. 
It can keep it in its reserves. It can use it for remittances. 
It can use it for general consumption imports, not necessarily 
for the reforms, say, in the banking sector or in the electric 
power sector where you are asking for institutional reforms the 
money is not necessarily directed to that particular sector 
which is different from a project where the money is used for 
specific purposes.
    How then do you trace the money? It has gone into the 
central bank funds. Money is fungible. The money from the World 
Bank or the IDB does not have a little ticker on top which says 
this is an IDB or World Bank dollar. It goes through the 
system. So you cannot generally trace that with a great degree 
of security. Everybody recognizes that is a problem. They try 
and deal with it by post-audit financing, but even that is at 
least questionable.
    When I first became general counsel of the Inter-American 
Development Bank, the Mexicans invited me to Mexico, as they 
always do with high officials of these institutions. And they 
are wonderful hosts and my host was a high official in the 
finance ministry. At the lunch which began at 2 and ended at 5 
and we were into the second bottle of wine, things got warmer. 
And I asked him, why are you doing this?
    The IDB at that time in the early 1980s could only provide 
$250 million to the big countries, what they call the A 
countries in the IDB, Argentina, Brazil, Mexico, and Venezuela. 
This is a pittance. Mexico was going to the financial markets 
to raise a $2 billion jumbo loan. I said, so why are you 
bothering with me? I mean, it is wonderful. I am having a 
wonderful time. The lunch is elegant and everything else.
    And he said to me you underestimate the quality of the 
multilateral financial institutional lending. You are going to 
give us $250 million. That is going to go into an agricultural 
credit project. Because of our size, we put up $500 million. So 
that is $750 million for this program. You also require that 
the entire program, not just your funds, be audited by an 
independent auditor. That was always a fight with the Mexicans 
who wanted to have a government auditor and we always insisted 
that it be an auditor independent of the government. He said, I 
know with reasonable certainly what happened to that money, not 
only the $250 million but the $500 million that we put up as a 
counterpart. He said, in all candor, I cannot say that to you 
with respect to this $2 billion jumbo loan that we are going to 
the market for.
    So I think that there are reasonable checks and balances. 
This is not to say they are perfect, especially when you are 
giving money. For example, rather than financing specific 
schools, you are giving it to the ministry of education which 
then is expending the money. It is very difficult. I think it 
would be foolish to say that there is not some kind of kickback 
or so on in the expenditure of that money of the ministry, 
which gets mixed up with the bank money. You can have all the 
post-audits you want, at the local level, there is going to be 
some level of corruption.
    Let me just conclude with one other factor because it has 
been alluded to in terms of the general climate of corruption 
in a country. There are extreme cases, for example, Kenya, 
where the IMF actually insisted that a UK national be put in 
charge of the central bank because the corruption was so 
pervasive. It was almost a return to colonialism, but the 
Kenyans accepted it because the corruption was so notorious.
    Reference has been made to Indonesia. There is no question 
that Indonesia under Suharto was an egregious case. And there 
is a remarkable June 16, 1998 article in the Wall Street 
Journal which says exactly what Professor Winters says, that 
the World Bank officials in Indonesia knew that some of their 
money was being siphoned off.
    I once had a conversation with Lou Preston, who was then 
president of the World Bank, who tragically died of cancer, and 
he was telling me how he was really looking forward to going to 
Indonesia because the staff was telling him what a star 
performer Indonesia was. I said to him, has the staff also 
suggested to you that on every major deal in Indonesia, a 
member of the Suharto family has to be cut in, that the absence 
of free trade unions and a free press and an independent 
judiciary, that there are no checks and balances in this place? 
What is the plan for post-Suharto political transition? Have 
they discussed that with you? And he said, no. He said, I guess 
I will have to inquire about that when I get back.
    There was an excessively technocratic economic approach 
which was blind to these other factors. I think to a great 
extent we have gone much further now in recognizing that 
development is an integrated whole and you cannot isolate the 
political.
    Just let me say in conclusion that the best antidote to 
corruption in a society are the institutions of political 
democracy: a competitive political party system, a free press, 
independent trade unions, and independent judiciary. And the 
case that illustrates that most graphically is Argentina 
because Argentina in the decade of the 1990s was acclaimed as 
one of the star performers. It was implementing a neo-liberal 
economic agenda of the World Bank and the IMF and the U.S. 
Treasury at the time.
    But the corruption was endemic in the Menem government. 
There are other reasons why the Menem government failed, the 
failure of the economic program, divisions within the majority 
party, but every informed observer would tell you that 
corruption was a major consequence of the fall of the Menem 
government and his inability to get his term extended and his 
inability to mount a comeback.
    The system worked. It flushed out the corrupt political 
leadership and corruption became a defining issue in the 
Argentine political context. Now, is that not what we should 
want, that the system, not the external agents, the World Bank, 
the IMF, et cetera, and Transparency International and the U.S. 
Government flush it out, but that the system itself of the 
country? And the best antidote is the institutions of political 
democracy.
    Thank you.
    [The prepared statement of Dr. Levinson follows:]

           Prepared Statement of Professor Jerome I. Levinson

    Thank you for giving me this opportunity to address this important 
issue. As Chief Counsel to the Subcommittee on Multinational 
Corporations of this Committee (1972-1977, General Counsel of the 
Inter-American Development Bank (1977-1989), and, more recently, as a 
Democratic appointee to the International Financial Institution 
Advisory Commission of the Congress, popularly known as the Meltzer 
Commission, I have had some experience in dealing with the multiple 
facets of corruption in international financial transactions and the 
issues faced by the MFIs.
    As I see it, there are three aspects to the problem. First, in 
projects and programs directly financed by the institutions, how do the 
institutions assure that the decisions with respect to the awarding of 
contracts are made on the basis of transparency and the merits of the 
proposals, free of any taint of corruption? Second, where the 
institutions have conditioned their financing upon certain reforms 
being enacted and implemented by the government but the MFI financing 
is not directly connected to the reforms, how does the MFI ensure that 
the funds disbursed are properly used? What responsibility do the 
institutions have to ensure that the reforms that they have publicly 
endorsed are implemented in a transparent manner free of corrupt 
practices? Finally, what responsibility, if any, do the MFIs have for 
assessing the level of corrupt practices in a particular country and 
calling attention to such practices as an obstacle to development?

                          A. DIRECT FINANCING
    How do the institutions ensure that their own officials are not 
bought off by contractors or recipient governments in decisions such as 
the approval of projects and the award of contracts? I believe that 
this is a minimal risk. The internal project approval process is 
surrounded by checks and balances that virtually guarantee that such 
wrongdoing cannot take place. First, a project team is formed to 
evaluate the economic, financial and technical feasibility of a 
proposed project. In the IDB, with which I am most familiar, that team 
will have as a minimum, a lawyer, and, depending upon the nature of the 
project being financed, such additional technical staff as is 
necessary.
    Before the formation of a project team, the proposal in preliminary 
form must be approved by an upper management committee, which is 
chaired by the President of the Bank, and includes senior operational 
members of the IDB staff the most senior members of the staff of the 
IDB. The final analysis by the Project Committee of the feasibility of 
the project in all of it facets must be submitted for, at the staff 
level, final approval to a Loan Committee, chaired by the Executive 
Vice-President of the IDB. Each project must be approved Final by the 
Board of Executive Directors. A similar process, although different in 
some details, is followed in the World Bank.
    At each stage of the process of analysis and approval there are so 
many individuals involved and checks and balances built into the 
system, that no one individual can control the decision. Hence, I think 
that the risk of individuals within the institutions making corrupt 
decisions which determine the project approval is minimal. However, in 
particular where there is purchase of goods and services, there are 
almost invariably disputes over the award of contracts. Where the 
purchase of such goods and services is being financed with MFI 
resources, except in extraordinary and specified circumstances, all 
contracts are awarded by a process of competitive bidding. That process 
administered by the borrower following agreed MFI procurement 
guidelines. In larger contracts where international competitive bidding 
is used, a two-envelope system is used. At the first stage, the bidders 
must submit technical qualifications in which price does not figure. 
Only after the first stage of technical pre-qualification has been 
approved, does the second envelope of price come into play. All bids 
must be opened in a public session. The process and the final award 
must receive the non-objection of MFI officials.
    Ideally, the process if properly administered, should be open and 
transparent and thus insulated from the possibility of corruption in 
the award of the contracts. Inevitably, though, there will be 
challenges to the process and the final result. The losing bidders will 
complain that they lost by virtue of a flawed process, corruption in 
the award, or any number of other reasons. Very often, they will seek 
the intervention of their governments which will direct their Executive 
Directors in the institution to seek redress for their complaints.
    The venue in the IDB for hearing appeals is the Procurement 
Committee, which is chaired by the Manager for the Regional Operations 
Department of the particular country where procurement is taking place 
and other senior managers of the Bank. The Procurement Committee makes 
its own investigation of the validity of the complaints and reports in 
writing its conclusion to the Executive Vice-President of the IDB, who 
can endorse or overturn the report. The World Bank internal appeal 
process traditionally has been more informal. (Procurement issues are 
not within the purview of the World Bank(s Inspection Panels). On that 
part of a project directly financed by an MFI, I think that the award 
of contracts is fairly transparent and insulated from corruption.
    The problems arise, I believe, on that part of a huge construction 
project where the financing is independent of the MFIs. There may be an 
issue with the borrower country and entity in charge of the project 
about whether the MFI procurement guidelines ought to apply to the 
entire project, including that part not being financed and supervised 
by the MFI. This is particularly sensitive where supplier credits are a 
part of the financing. What role, if any does the MFI have in approval 
of the process and final award of such credits? Can it really insulate 
itself from possible abuses where its financing is not directly 
involved? I think not.
    American companies may be at a particular disadvantage. They are 
subject to the Foreign Corrupt Practices Act, which makes it a felony 
for the company through its officials or agents to make corrupt 
payments to foreign government officials in connection with procurement 
decisions by that government. Many European governments have 
traditionally treated such corrupt payments as ordinary business 
expenses, deductible for tax purposes. The OECD Convention on Bribery 
urges member governments to end such tax treatment, but it is dependent 
upon the action of individual governments, many of which have been slow 
to act. American companies are consequently particularly dependent upon 
the MFIs to effectively assure the integrity of the project.
    A recent project in Lesotho, Africa illustrates the issue. The 
Director of the Lesotho Highland Water Authority was convicted in the 
courts of that country of corruption in the award of contracts in 
connection with the project. Part of the project was financed by the 
World Bank. There is no allegation of corruption in the award of 
contracts on that part of the project financed by the World Bank. The 
Lesotho authorities then convicted as well two international 
contractors who had paid the bribes. The World Bank, potentially, has 
an effective, if draconian, remedy. It could place the international 
contractors on a proscribed list barring them from bidding on any 
future World Bank financed projects anywhere in the world. Usually, the 
project is financed or administered through a subsidiary of the parent 
company organized for the individual project; once the project is 
completed, the subsidiary is dissolved. In order to be effective the 
sanction must pass through the subsidiary to the parent company, 
usually an internationally recognized company.
    A more difficult case is the huge multipurpose dam project, 
Yacyreta, a tripartite project among Argentina/Brazil/Paraguay, which 
has been financed in part by both the World Bank and the IDB. I should 
note that at the time of the original loans from the World Bank and 
IDB, I was the General Counsel of the IDB. From its inception, the 
project was complicated if for no other reason than three countries 
were involved but the most controversial issue involved the relocation 
of thousands of Paraguayan families, for which the government of 
Paraguay had neither the financial resources, nor the administrative 
competence or the political willingness to effectively follow-through 
on the relocation plan which was an integral part of the project.
    The international institutions can provide the financial resources 
but not the administrative competence or political will. The 
Paraguayans were masters at playing off the two larger neighboring 
countries to maximize the financial benefits for a small clique 
surrounding the then Paraguayan strong-man Stroessner. The form this 
financial extortion took was ensuring that Paraguayan companies 
controlled by Stroessner's cronies were included in the larger country 
construction consortia. Yet, it was also difficult to oppose the 
inclusion of such companies which were justified in the interest of 
technical capacity-building in Paraguay.
    In fairness, I should note that at the time (1979-80), Argentina 
and Brazil were determined to proceed with the project and were willing 
to pay whatever the price demanded by the Paraguayans. Both countries 
were oil-import dependent and had been highly traumatized by the oil 
price revolution of 1973/74. Deep water oil discoveries in Brazil and 
Argentine on-land oil discoveries had not yet been proved. Hydro power 
was an attractive alternative for both of the larger countries. The 
MFIs, it was thought at the time, could ensure the integrity of the 
bidding process for very large international contracts and an adequate 
relocation program. On the first part, the integrity of the bidding 
process, I think they were relatively successful. On the second part, 
the relocation issue, they were less successful. And, as a recent 
report by the World Bank Inspection Panel notes, the relocation issue 
continues to plague the project.
    The Lesotho case may be the easy one. One has a local court 
proceeding and finding of criminal conduct by the local project manager 
and consulting companies. If the World Bank placed the offending 
companies on the proscribed list, it is difficult to see how the 
regional development banks could sanction awarding contracts to the 
same companies on projects financed by them. The potential sanction is 
thus truly draconian. The World Bank and the Asian Development Bank 
have sanctions proceedings in place which provide for investigation, 
and a hearing for any company proposed to be subject to the sanctions. 
The IDB has a similar process now under consideration.
    How many other countries are as zealous as that of Lesotho in 
pursuing the matter within their own judicial systems? And if they 
don't do so, what is the responsibility of the MFIs? It is unlikely 
that they can pursue such an investigation where the government shows 
no disposition on its own to investigate allegations of corruption on 
that part of a project not financed by an MFI and which is not subject 
to the procurement guidelines of the MFI. If we are serious about 
addressing the cancer of corruption in projects even partially financed 
with public international funding, I think that it is reasonable to 
insist upon the entire project being subject to procurement guidelines 
that assure transparency in the award of international contracts and 
thus minimize the risk of corrupt payments in connection with such 
contracts.
    More recently, attention has focused on getting the national export 
credit financing agencies of the creditor countries to address the 
issue of padding the supplier credits with corrupt payments in the 
award of the contracts. Given the intense competition in this segment 
of the international economy, I am not optimistic that any time soon 
this issue will be effectively addressed.

                  B. STRUCTURAL REFORM CONDITIONALITY
    In the late 1980s and during the decade of the 90s, increasingly, 
the MFIs conditioned a substantial part of their lending upon borrowing 
countries undertaking major structural reforms such as privatization of 
state owned enterprises. The major vehicle of financing for these 
reforms were structural adjustment or sector adjustment loans. What 
distinguishes these loans from more conventional project financing is 
that the use of funds is not necessarily related to the structural 
reforms upon which the loans are conditioned. Typically, a loan is 
authorized conditioned upon the country, for example, privatizing the 
banking sector or the state owned electricity companies. Loan funds go 
to the Central Bank and need not be expended for purposes related to 
the privatization which is the condition for the loan. The funds can be 
used for purposes that are not specifically prohibited: paying 
creditors, held in the currency reserves of the country, or for general 
imports. A first ``tranche'' of the funds is usually disbursed to the 
Central Bank upon signing of the loan contract. After six months, a 
review is conducted to determine whether the country has implemented 
the agreed reforms. If performance by the borrower in implementing the 
agreed reforms is satisfactory, the remainder of the loan is disbursed 
to the borrower.
    The MFIs must also ensure that disbursed funds for non-specific 
purposes are not used for corrupt purposes. This is usually 
accomplished by a post-audit of the use of the disbursed funds. 
Realistically, however, this is the weakest link in the system. Money 
is fungible. It is extremely difficult, if not impossible to trace the 
MFI disbursed funds. You basically are relying on the probity of the 
Central bank officials.
    As the importance of the structural adjustment lending has over the 
years grown in importance and magnitude for the MFIs another equally 
important issue arises: what responsibility do the MFIs have to assure 
that the reform process they are endorsing, particularly where 
privatization of state-owned assets is involved, is transparent and 
free from corruption? By endorsing the privatization reforms, the MFIs, 
particularly the World Bank, place the imprimatur of international 
approval upon the process.
    Yet, in many instances, that process is so flawed and marred by 
corruption that it discredits the agreed reform. No country has been 
more acclaimed for its structural reforms than Mexico. This is the way 
that Andres Oppenheimer, the chief Latin American correspondent for the 
Miami Herald, in his book, ``Bordering on Chaos'', described 
privatization in that country: ``In his bid to increase capital 
inflows, Salinas had put state banks on the block at three times their 
book value and often more . . . But in exchange for high prices, 
Salinas offered their buyers sweet regulatory deals and long term 
promises of fabulous riches through NAFTA, which would soon allow some 
of the new private owners to sell their monopolies to multinational 
corporations at record profits . . . Through a policy of `directed' 
deregulation or selective liberalization, Salinas paved the way for the 
formation of more than a dozen monopolies that would control industries 
such as copper mining and telecommunications.''
    After the Mexican devaluation of December 1994, the World Bank and 
the IDB poured billions of dollars into the Mexican banking industry to 
``bail out'' the banks from their profligate lending, designed to 
recuperate the exaggerated prices they had paid for the state owned 
banking assets that were privatized. Mexico is not an isolated case. 
The same pattern has been noted in Russia and Argentina, both 
countries, which were at the time acclaimed for their reforms, 
particularly the privatization of state owned assets. Subsequently, the 
process, the lack of transparency, the massive corruption that 
accompanied the process, became in both countries major political 
issues.
    I think it is unreasonable to expect that the World Bank, and or 
the regional development bank, can by themselves ensure the integrity 
of the process. The political and financial interests, and the stake of 
the government in the policy are too great. The process will be driven 
by domestic considerations and the domestic balance of power. What I 
think is reasonable however is to expect that where the corruption that 
has accompanied the process is as notorious as it was in Mexico, 
Argentina and Russia, the international financial community, through 
the MFIs, not give its stamp of approval, as was done in all three 
cases, to such a flawed process by extravagant praise of the 
``reforms.''
    What then is the remedy? Political democracy. Argentina is the 
country which best illustrates the point. The government of President 
Carlos Saul Menem by the end of the decade of the 90s was thoroughly 
discredited. Menem failed in his initiatives to amend the constitution 
to permit him to succeed himself as President and then to mount a 
political comeback. The reasons are complex, rooted in part in the 
failure of the government's economic plan and the rivalries within his 
own political party. But all informed observers agree that the 
perception and the reality of massive corruption in the government, and 
particularly the privatization of state owned enterprises, played a 
major role in the demise of Menem's political career.
    A competitive political party system, an aggressive free press, and 
a previously discredited judiciary all played crucial roles in ensuring 
that the corruption issue was a central part of the Argentine political 
decision-making. The system worked the way we should hope it would. And 
that is why I remain skeptical of the role of outside entities in 
addressing corruption in any particular society. The best and most 
effective remedy is the existence of the institutions of political 
democracy--a competitive political party system, a free press, free 
trade unions, an independent judicial system.
    Too often, that objective has been sacrificed to an excessively 
technocratic economic outlook within the MFIs. The most egregious 
example is that of Indonesia under the government of Suharto. Indonesia 
was acclaimed by the World Bank as a ``star'' of the system because of 
its economic performance and alleged reduction in absolute poverty. And 
there were gains, both in economic management and in the reduction of 
those living in abject poverty. But in a remarkably detailed report the 
Wall Street Journal (Brauchili, 6/14/98), observed that ``World Bank 
officials knew corruption in bank-funded projects was common'' and 
``went along with government estimates that showed epic improvements in 
living standards, despite indications the numbers were inflated.'' The 
Journal notes that the World Bank lent Indonesia more than $25 billion 
over three decades and quotes James Wolfensohn, the President of the 
World Bank, explaining that ``We were caught up in the enthusiasm of 
Indonesia.'' Hopefully, we are now beyond the excessively economic 
technocratic thinking that led World Bank officials to overlook and 
justify the seamier side of development in the Suharto era.

    The Chairman. Well, thank you very much, Professor 
Levinson. I appreciate the historical background which each of 
you bring to the discussion.
    Frequently in the body politic, the whole situation of term 
limits is mentioned, and the thought is that it would be 
useful, for people in our calling in the Senate or the House, 
or what have you, after a certain amount of time, to yield and 
let others take our place. There may be some virtue in 
refreshment of the system in that respect.
    One advantage of the current system, however, is 
institutional memory. A few people are here for a long time. 
Professor Levinson, you have been around for a long time, and 
your memory is helpful in this. Professor Winters talked about 
15 years of research in this. Ms. Boswell has talked about the 
evolution of the interest in this subject in the World Bank, 
and in particular the lack of interest which really may have 
led to the foundation of the group that you represent today.
    I remember, as a junior Senator, in 1977, serving on the 
Banking Committee. Senator Proxmire was then the chairman, and 
we were discussing the issue of the deductibility of bribes. 
This was a serious issue then. This was 27 years ago. American 
businesses were coming to us and saying, what about this? We 
are trying to do more exporting. We are trying to do deals, and 
our competitors literally have tax systems that either overtly 
or covertly lead to severe disadvantage for us. The American 
Government even then tried to institute various policies that 
would discourage this. As you pointed out, the OECD situation 
is one which we are still attempting to perfect, to move the 
ball ahead.
    The dilemma we are talking about today is that of the many 
nations that assert their sovereignty. These nations sometimes 
go so far as to contend that, corrupt or not, the problem is 
theirs, and they do not brook tolerance by us folks with all of 
our moralism and fastidiousness. They seek to run their own 
affairs in an entirely understandable spirit of independence.
    On the other hand, serious issues arise, in terms of equity 
for poor people around the world, quite apart from the general 
morality of politics. I can recall the Indonesian experience 
and President Suharto, on my first visit to that country, which 
came fairly shortly after observation of the Philippine 
elections involving Ferdinand Marcos and Corazon Aquino. The 
degree of corruption in the Marcos regime was fairly obvious, 
but this runs up against another problem and that is the sense 
of real politics at the time, whether Marcos was our friend, 
our ally in the cold war, leaving aside whatever might be 
happening with regard to international loans or anybody else's 
money. There is still some of that. You have problems of 
governments that somehow or other, regardless of which war or 
which period we are in, there is a good bit of overlooking of 
all this. This runs up against another problem; that is the 
politics of the time. Was Marcos our friend, our ally in the 
cold war, regardless of the administration of international 
loans? We are still faced with that sort of problem today.
    This committee has the temerity to have a hearing of this 
sort. We hope to do this periodically, as opposed to having one 
go at it, and hoping you all do well. We are attempting to 
illuminate what sort of progress we are making. I sense that 
the American people--and I think this is true of the citizens 
of many countries--have little tolerance for political 
corruption, and the misuse of money. You must have found, in 
your reforming efforts, constituents who really believe 
somebody ought to be doing this kind of work, and doing so 
comprehensively.
    Now, having said that, doing it is tough going, as you have 
illustrated, although some of you have been optimistic about 
how we proceed in these things.
    There are a good number of people who do not like the 
international lending institutions. They have felt that 
America's support for these was a dubious prospect. They listen 
to hearings such as this one, in which it is suggested that 
millions, maybe billions historically, have been 
misappropriated and misspent. This leads to further 
justification, in their own mind's eye.
    Fortunately all of you have approached that angle. This is 
clearly true of our first witnesses. These institutions are 
critically important. Anyone approaching this from a 
humanitarian standpoint is not looking at the corruption 
investigation as a way of winding it all up, and saying we 
ought to quit this sort of thing, and just get out of the 
business. It is very important, I think, for us to emphasize 
the reason we are in this business. We are having the hearing 
because we believe that strengthened confidence in all of this 
is imperative. The world is more transparent generally. The 
press has become better in following these stories. So have 
political parties in some affected nations. So I appreciate the 
spirit with which you have approached this.
    I asked the first panel about these large loans to 
government. I think, Professor Levinson, that you were right on 
the mark in trying to give us an illustration of this. Let us 
say to the ministry of agriculture or the ministry of 
education, maybe you could take a look and see if there are 
some educational results, such as schools coming up, and so 
forth. Is there accountability? We had testimony earlier on 
that some would say, well, by golly, some schools got built and 
all things considered, thank goodness. Even if only 70 percent 
of the money got there, something happened.
    Governments themselves say, we are sovereign. We really 
resist people coming in and taking a look at our situations. 
Now, you could say, if you were a bank, OK, you do not get any 
money. That is that. But some of these people who are in these 
positions may not be that interested in the poor. We may be 
more interested in their poor people than they are, as a matter 
of fact. That is our humanitarian dilemma. How in the world, 
given systemic failure of this variety, do you get the money to 
the poor people?
    Where are we getting more leverage with the governments? 
How can we do better in the Congress, and in the 
administration? Yes, Professor Levinson.
    Dr. Levinson. I was a Democratic appointee to the Meltzer 
Commission on International Financial Institutions. There were 
constant allusions to the fact that schools were built without 
teachers, et cetera. Frankly, what I saw and through the years 
have seen, is that there has been a tremendous evolution. 
Nobody is just interested in building schools anymore. You have 
to show as part of that project you are going to have teachers, 
that the teachers are going to be trained, that there is going 
to be a post-construction evaluation process. Sometimes it is 
done jointly with the government and the institution. The IDB 
has an evaluations office which does post facto evaluations of 
programs and projects and then tries to build in what they 
found into future lending.
    I think that we have to make a distinction between projects 
where the institution can demand that the procedures are 
transparent and visible and competitive. It is another thing 
when you provide money--take your example of money to an 
education ministry. Sometimes the education ministries are very 
weak politically and administratively. So the question is, how 
do you assure that the money that is going to go through the 
ministry is going to, in fact, build the schools without--I 
think 30 percent would be an extraordinarily high percentage 
being siphoned off, frankly. I think it would be outrageous and 
I think if it was discovered, the institution would have to 
stop the program and stop future lending to that institution 
and maybe to the government because I do not think that is 
acceptable and I do not think it is acceptable in the 
institutions.
    So I think that you have to approach it from two points of 
view. One, you are trying to build capacity in the education 
ministry because when you eventually leave, you want to leave 
that ministry better capable of carrying on on its own than 
when you started with them. You are not only providing money 
for construction, you are providing money for institutional 
betterment with respect to processes and you are demanding that 
as a part of your financing. Once you stop lending to that 
institution, you lose whatever leverage you may have had.
    But in my experience, the institutions now look at the 
totality of what they are financing. They do not just look at 
building schools. They want to know the schools are going to be 
staffed. They are then looking at what is the output in terms 
of literacy. They then conduct joint evaluations to see what 
went wrong, what went right. They demand, in some cases that I 
used to know of, that the bidding process be subject to 
approval, which elicited enormous resistance because that is 
the way in which you took care of your friends.
    As you point out, there is a tension between the 
sovereignty of the institution and of the country and the 
demand of the international financier, that if we are putting 
up the money, we want to be sure the money is going for the 
purpose that we claim. I think you have to see it as a whole.
    The Chairman. Dr. Winters.
    Dr. Winters. Yes. With regard to sovereignty issue, no 
country in the world has a right to multilateral development 
funds, and there is a fundamental difference between public 
sector lending and commercial lending. A commercial lender will 
look at loan conditions on the front side. It will assess 
ability to repay and whatever you do with money is up to you. 
It is very different with the case of a multilateral 
development bank. Because the money is in part coming from 
taxpayers, your responsibility as a representative of those 
taxpayers is to safeguard that money. And you are quite right 
that there is a lot of anger associated with it being stolen.
    I think we also need to understand that the corruption 
issue is not an on/off switch. It is a dimmer switch issue. 
Those of us who live in the city of Chicago know this very 
well, a famously corrupt city, and we struggle very hard to 
make sure that our public money is watched.
    I think the reason I differ somewhat with some of the 
comments that others have made here, especially about the 
relationship between governance at the broader societal level 
and specifically how these resources by public sector lenders 
are handled is because I am actually much more modest in my 
objectives. I believe a modest, but solid foundation needs to 
be laid for the resources that flow through this particular 
channel, and while accepting that we are probably talking about 
a multi-decade process of getting the governance institutions 
in place, controlling excessively powerful people and getting 
them to submit to rule of law in their own countries, this is a 
very long-term process. And I do not think that the operations 
of the MDBs should wait multiple decades in order to safeguard, 
as a best practices element within a broader context of theft, 
to basically have a hands-off policy on these particular 
resources.
    I differ also slightly with the idea of the fungibility 
problem. When we do make payments directly into the Treasury 
for broad support, it is not unreasonable to ask that those 
funds be earmarked for specific projects and that followup be 
done to make sure that funds are spent for the ways that they 
were intended to be spent. It is possible actually to track and 
trace money, and if the government wants to steal the rest of 
the money from its treasury, if officials want to do that, 
fine, they can, but make sure that money that is allocated for 
specific purposes gets used for it.
    Finally, on the question of what I am calling criminal debt 
and the scale of it. I stand behind the figures of $100 billion 
for the World Bank and $200 billion for all the MDBs, and it is 
because the problem is not in the bidding process on the front 
side. The problem is in how the funds are actually used on the 
back side, and that is an auditing and supervisory issue. I can 
give you a concrete example.
    The bidding may be for a $300 million toll road to be 
built. Roads have been built for thousands of years. The 
technology of building roads has not changed much. One can put 
in a $200 million road with substandard sand, cement, 
materials, rocks, and when you are all done, it is going to 
look like a nice road. It cost $200 million instead of $300 
million and $100 million was lost in the process. There is 
nothing about the front side bidding process that would ever 
detect this or catch it, and the problem is within 3 years that 
substandard road now needs a second World Bank reconstruction 
loan because it has deteriorated rapidly. And this kind of 
thing goes on over and over and over.
    I conclude by saying we cannot ask the World Bank and we 
cannot expect the multilateral development banks to self-report 
and to self-monitor entirely. We need an independent 
multilateral agency that has the right to go into every country 
and on a spot basis audit projects as a condition for accepting 
multilateral loans. If you do not want MDB money, go to the 
commercial market.
    The Chairman. Mr. Bapna.
    Mr. Bapna. I would like to touch upon two of the issues 
that have been raised recently. The first one has to do with 
this concern about infringing national sovereignty, which I 
think is a very important question to ask and something to be 
very clear about.
    I think that what these institutions have and can do 
appropriately is to set clear, open, and transparent 
international standards that are consistent with their own 
missions on how they lend their funds. This is how I think one 
tries to ensure that one does not get into the World Bank 
forcing or coercing national governments on issues that are 
oftentimes considered sovereignty or within kind of a domestic 
context.
    This is similar to the environmental and social standards 
that the institutions have put in place where there is 
oftentimes a higher standard or a difference of opinion on, for 
example, how to resettle individuals that are affected by a 
particular investment project. The World Bank has a 
resettlement policy that is at least superior than other 
countries in terms of dealing with this, and I think similarly 
for corruption, the idea of setting some open transparent 
standards that reflect the international communities approach 
to dealing with this issue can help address this issue.
    The second point has to do with respect to adjustment 
lending. Adjustment lending is an increasing percentage of the 
total portfolio of these institutions. Since 1998, it is 
approximately 35 percent of World Bank total lending, and in 
one year I think it actually was 53 percent. So this is an 
important type of operation for conveying development aid.
    Often, though not always, these resources are attached to a 
particular policy framework that sets out specific policy goals 
and triggers that need to be achieved in order for subsequent 
tranches of the operation to be released.
    The rationale for adjustment lending is in part the 
recognition that investment projects can only go so far in 
addressing some of the underlying development challenges facing 
countries today, that one needs to put in place an appropriate 
policy and institutional framework. Moreover, questions of 
country ownership, questions of sustainability also have led 
organizations to recognize the importance of budgetary support.
    What perhaps I find more controversial are the actually 
policy conditionalities that the institutions are putting in 
place. The type of operation itself I am a little less 
concerned about because perhaps from a slightly different point 
of view, I do believe resources are fungible. I do believe that 
the institutions can do some on their own through internal 
controls to address corruption, but if one really wants to look 
at addressing corruption in a more systemic way--and granted, 
this is a bit more of an ambitious goal--I think one needs to 
deal with corruption throughout the country and that really 
calls upon the international donor community to focus on 
supporting good governance.
    The Chairman. Ms. Boswell, do you have a contribution to 
this round?
    Ms. Boswell. Well, I would only ask the fundamental 
question why so much money is being shifted toward this budget 
support area if it is so controversial and so difficult. I 
think it is something that should be looked at. I think the 
amounts, as I understand it, are over what they were supposed 
to be at the bank. I do not have more specific figures, but I 
think it ought to be something we look into.
    I wanted to go back to some of the comments you made 
earlier about the temerity of the committee in looking at this. 
From the perspective of the various chapter representatives I 
talked to in preparing for today, they welcome this inquiry. 
They welcome visits by congressional delegations to their 
country because it sheds light and it gives them information 
that they otherwise might not have. So it is an open invitation 
to continue.
    I would like to comment that governments have already made 
commitments to take a lot of these steps that we are talking 
about today. They are signatories to anti-corruption 
conventions. If the bank takes up those commitments and makes 
sure that they are actually acted upon, then I think the issue 
of sovereignty may be less of an obstacle.
    Finally, I think business attitudes are shifting as well. 
You go back to 1977, when the FCPA was enacted. Certainly for 
the last 25 years it has been terribly difficult to get laws on 
the books outside the United States. We now have 35 signatories 
where those laws are on the books. It is now a crime to pay a 
bribe to a foreign official to get a deal. Those payments are 
no longer deductible. However, we do not have any cases to 
point to. We simply have to make progress on that. The 
monitoring process at the OECD is terribly important to make 
sure that cases are brought.
    The bidder requirement that the banks could impose can go a 
long way toward helping those companies that really want to do 
the right thing. And we have companies not just in the United 
States now but in Europe. We have been working in construction 
and energy and other problematic sectors. There are companies 
that would like to operate with integrity, but they need a 
level playing field, and I think a bidder requirement could 
help do that.
    The Chairman. Let me ask a question. This is in an entirely 
different field, but there may be some transference of 
situations. At the time the Soviet Union collapsed, Russian 
officials came to some of us and said, we have got a mutual 
problem; namely, our nuclear weapons and our chemical weapons 
and what have you, might be at risk of misappropriation, 
proliferation, people stealing them or cashing in and so forth. 
So we think this ought to be of interest to you. It is of 
interest to us in terms of our own security. Nuclear accidents 
might occur in Russia, quite apart from missiles being shot 
inappropriately.
    We came up with the Nunn-Lugar Act, a cooperative threat 
reduction program. But this was not to be budget support. The 
Russians said we have no money. We can sign the Chemical 
Weapons Convention, and we did, but there is no way we can 
destroy the 40,000 metric tons of chemicals we have because we 
have no money. Our budget is very small.
    The Nunn-Lugar money came in the form essentially of paying 
American contractors, when it comes down to it, 85 percent of 
it, to go to Russia and to work with Russians there, at very 
modest sums, to get the job done.
    Now, this is an extreme case. Obviously, it is 
counterintuitive. A great power enlists another power to disarm 
itself.
    The fungibility question always came up, in this case, in a 
defense context. If you give money to the budget of Russia, how 
do you know what the money might be spent for? Granted, 85 
percent or 90 percent goes to American contractors. How about 
the other 10 percent? Is it being spent developing new missile 
or submarines or what have you? The indications are that it has 
not been, but this is still a valid question. It is important 
to address the fungibility problem, if you are dealing 
government to government.
    Some of the issues we are talking about today do not 
involve nuclear weapons or chemical destruction, but many 
countries are involved in some very vital activities.
    I think you make a very good point. Why do the banks go 
into so much budget support? Why do we not have criteria for 
looking for roads or schools or various development situations, 
in which you define what this is all about, as opposed to what 
seems to be almost a propping up of somebody's failed economic 
system, or one that is on the tenterhooks of disaster?
    Yes, Professor Levinson.
    Dr. Levinson. The structural adjustment and sector 
adjustment lending, you are quite right, were designed to deal 
with emergency financial situations. You will recall after the 
Mexican devaluation in 1994 when Secretary Rubin and the IMF 
put together that major bailout, which really was not of Mexico 
but was of the creditors that had loaned the short-term----
    The Chairman. Money for the worldwide financial system.
    Dr. Levinson. Right. So what did they do? If you will 
recall, Rubin came to the Congress. The leadership said, yes, 
this is important, but the majority of both parties in the 
Congress said, hey, wait a minute. We are not going to 
appropriate $20 billion to pay off the creditors who bought 
these short-term bonds from Mexico.
    So what did they do? They turned to these multilateral 
financial institutions, probably the only source of immediate 
liquidity at the time, and they invented this whole structural 
adjustment/sector adjustment lending. So that became part of 
the program.
    Now, Professor Winters says, well, that money should be 
used for specific purposes. That would defeat the whole purpose 
for which they invaded the funds of these institutions which 
was to provide liquidity to enable the country to use the funds 
for any purpose. That was linked to reform, to an overall 
austerity reform program, as it is in every case.
    But the fact of the matter is your question is perfectly 
valid as to whether or not it is desirable to continue this 
form of lending. I think if you look at it in perspective, you 
will find that the great majority of it was a response to the 
debt crisis of the 1980s, post 1985, and the successive 
financial crises of the 1990s. The question now is so many of 
the countries have gotten, if you will, addicted to this free 
use of money, that they do not want to go back to financing 
infrastructure and specific programs and projects where the 
money is used for identifiable purposes.
    There is a tension that is going on right now. At the last 
IDB annual meeting, this was a central issue. Some of the 
larger countries said, just give us the money, which is what 
you did during the decade of the 1990s. Well, you know, 
politically that is not viable.
    When I made a trip to Brazil, I would say show me the debt. 
I want to see the debt. They would say, OK, we will pick you up 
in the morning in a carryall. And they would take me out to see 
a steel mill or transmission lines or a road. This is what we 
borrowed for. This is what we used it for.
    I asked the same question in Argentina, and they thought I 
was out of my mind because the money all went for current 
consumption. There was nothing to show for it. It just went 
into the central bank and then went out the back door of the 
central bank.
    I think Ms. Boswell raises a very legitimate question. Does 
it make sense any longer to go on with this type of lending? 
And if these institutions are to be politically viable over the 
long term, I suspect that it does not make any sense.
    The Chairman. Ms. Boswell.
    Ms. Boswell. I would just like to take advantage of your 
posing this question to raise something that may be a little 
bit delicate, but you mention situations with the nuclear 
weapons and the urgency justifying the support at the time. We 
have a situation in Iraq with great urgency. We have raised the 
question of whether or not time is being taken to build the 
kinds of institutions and leaders that after handover, will 
have the mind set of accountability and transparency and 
responsibility for the resources that will flow through them. 
So I just put that on the screen as an issue that I do not 
think we really have an answer to yet.
    The Chairman. Well, we do not. I would say in an ideal 
world we might have a better one, but in the real world in 
which we are operating presently, it would appear that 
sovereignty is going to be transferred to people that are non-
elected, although they will fashion some elections, some 
legitimacy. In this kind of an atmosphere, the kinds of 
standards that we are talking about today just do not exist. 
People who have become the Iraqi statespersons understand that 
you cannot be totally irresponsible. They may fashion some 
institutions, but clearly, I think, it is going to be an 
incremental, day-by-day experience for them. The negotiating 
skills of Ambassador Negroponte on behalf of the thousand 
Americans and 15 agencies that will be working to help in those 
situations will be tested. It is a very good question, and it 
probably is not the last time that it may be raised.
    We had the hearing on Afghanistan yesterday, for example. 
Now, there a finance minister and others have fashioned very 
responsible activities in which they are asking the world 
community for aid, and the world community has responded with a 
certain amount of pledges. The money has not come yet. There is 
a certain slowness of payment and the cash-flow and what have 
you. But at least the institutional aspects look a lot more 
solid in terms of a transition state which still is trying to 
have its elections, still having road-building, just so people 
can get around to register the voters.
    These are valid questions. We have been talking about a 
world of the 1980s and this is would be bad enough for even the 
1990s, let alone our current decade. We face a whole new train 
of situations involving transitional states and failed states.
    Did you want to talk, Mr. Bapna?
    Mr. Bapna. Sure. Just to perhaps touch upon this issue in a 
little bit more detail on adjustment lending and corruption. As 
has been acknowledged it is becoming an increasing percentage 
of the portfolios of these institutions, but I think it is 
important to recognize adjustment lending is almost a term that 
is a catchall for many different types of lending. There is 
emergency lending at the country level. There is macroeconomic 
adjustment lending at the country level. There is sector 
adjustment lending. There is programmatic lending. All these 
different types of lendings are being kind of classified under 
this catchall of adjustment operations or budgetary support.
    The Chairman. Good point.
    Mr. Bapna. It is important to recognize the nuances between 
these different types of lending.
    For some of the lending, the rationale for adjustment 
lending is premised upon a recognize that focusing solely on 
physical investments in investment lending did not produce the 
impact and the sustainability of development objectives that 
people had initially hoped for. This is based on a fair amount 
of literature back in the 1980s and 1990s on these experiences 
that recognized that policy institutional reforms are critical 
to underpin the sustainability of the particular objectives 
that are being set forth.
    Therefore, I have a slightly more nuanced perhaps 
interpretation of budgetary support. I think at times when the 
wrong policy framework is imposed, it can have disastrous 
consequences. However, if in certain cases the policy 
institutional framework which has cost to it, which is why 
adjustment operations are provided to help provide ministries 
with the cause to make such an adjustment, is complemented with 
useful investment projects, that that is the most effective way 
to ensure positive development impact and to ensure local 
ownership and sustainability of that impact. So I would like to 
make that point clearly.
    Thank you.
    The Chairman. A very good point.
    Dr. Winters.
    Dr. Winters. I think your question on the adjustment 
lending gets to a more fundamental question which is what first 
were these institutions designed to be, what have they become, 
and what ought they be. One of the reasons we entitled our book 
``Reinventing the World Bank'' rather than ``reforming'' the 
World Bank is because we feel we are looking at a blue screen 
and it is time to reboot. A second Bretton-Woods would be a 
very good idea.
    The computer analogy is one that is used intentionally. The 
World Bank and the other multilateral development banks have 
responded to criticisms over the decades and they have 
responded also to political pressures by adding to what they 
do. They have expanded out into all kinds of things which are 
not necessarily their core competence. The World Bank should 
not be the leader on environmental change in the world. The 
World Bank is not a knowledge bank. A good deal of its research 
is not cutting edge and so on and so on. The World Bank should 
not be promoting participation around the world. This is not 
what the World Bank in our view is good at.
    What the World Bank should be doing is lending for purposes 
of direct development projects, things that they can watch 
funds. So I am actually against adjustment lending. I think the 
vast majority of adjustment lending has not produced very good 
results.
    So one of the things we have to grapple with ultimately, 
quite apart from the technical aspects of how to watch money 
and what specific recommendations should be put forward, is the 
much broader question which is can we rethink and can we 
reinvent these institutions. I certainly hope, given the needs 
that have been expressed here today and the question of 
reducing poverty and so on, that that can be undertaken.
    The Chairman. This is a different objective but an 
important one. As you say, perhaps we need to take a look at 
the sorts of institutions we have and, what is required, given 
the problems in the world.
    I suspect something will come along again like the Mexican 
crisis, which I remember very well. I remember Secretary Rubin 
coming over here, and Alan Greenspan, hand in hand, as part of 
a small group of people meeting over in Senator Dole's office. 
It appeared as though the world was collapsing. We were getting 
communications from Asia and elsewhere of funds being 
transferred wildly. It was a crisis situation that in fact was 
met with the very obscure reserve fund of our government, 
leaving aside the banks, from nowhere. Some funds were found 
from readjustment from World War II, as I recall. 
Pragmatically, statesmen do this sort of thing in order to sort 
of save the world.
    At the time of the long-term capital management situation, 
when things were unraveling as people tried to get their 
positions right, a meltdown appeared to be occurring in various 
ways. There were a lot of tense people. In that particular 
case, there was not a great deal of multinational lending from 
these institutions, as I recall, but on the other hand, there 
were suggestions there might be.
    I am not certain what we will anticipate next. Last year 
there was a concern with China. Is there a bubble being created 
here? Is there something that is so big, given the enormity of 
the impact on all the surrounding nations, quite apart from our 
own debt structure, with the Chinese buying all the bonds from 
us and supporting our currency in these ways? A crisis has not 
happened, and we are not experiencing borrowing problems.
    A hearing of this variety is important. First of all, we 
have encouraged transparency, a better sense of governance, a 
better sense of confidence. You have served as very 
constructive critics of the situation. When these crises do 
occur, there might be confidence on the part of the American 
people and their elected representatives in the institutions, 
as well as faith in the ability to form new ones, to have some 
sense of what sort of charters are really required given the 
financial requirements of an interdependent world.
    We promised the hearing would come to an end at noon. The 
rollcall vote mercifully had been postponed until 12:10. I can 
do my duty and go vote. I appreciate your spending time both on 
the statements, which are helpful for our record, and also on 
your very forthcoming responses.
    The hearing is adjourned.
    [Whereupon, at 12:03 p.m., the committee adjourned, to 
reconvene subject to the call of the Chair.]
                              ----------                              

                 Additional Submissions for the Record

                                    The World Bank,
                                     Washington, DC, 20433,
                                            U.S.A., April 28, 2004.

The Honorable Richard G. Lugar,
United States Senate,
Chairman, Committee on Foreign Relations,
306 Hart Senate Office Building,
Washington, DC 20510-1401.

    Dear Chairman Lugar:

    I am writing in response to the request from you, as Chairman of 
the U.S. Senate Foreign Relations Committee, to testify and provide the 
Committee with a status report on efforts to address corruption related 
to World Bank projects. I regret to advise you that I will not be able 
to testify, as further explained below. Nonetheless we are very 
enthusiastic about your enquiry and will use every other possible means 
to provide you and your colleagues with information to allow your 
enquiries to be complete and fully informed.
    The World Bank, as an international organization, is accountable to 
all of its 184 member countries, through its internal governance 
structure in which all members participate. Consequently, the Bank and 
its officials provide information about the Bank's activities to each 
of its shareholding member governments, using channels agreed upon with 
the representatives of that government. The Bank recognizes the 
importance of parliamentary and Congressional processes in its member 
countries, and indeed, provides support to help strengthen these 
processes as part of its development work. As you are aware, the Bank 
regularly provides briefings to U.S. Congressional staff on topics of 
mutual interest.
    Bank officials cannot provide information, however, through 
testimony before the legislatures of the Bank's shareholders. This 
long-standing policy respects the requirements under the Bank's charter 
to preserve the international character of the Bank, to avoid 
involvement in domestic political affairs, and to ensure that local 
legal processes are not inappropriately applied to the Bank.
    Consistent with these policy and legal requirements, I am not able 
to accept the request to testify before the Committee. Yet, combating 
corruption is a topic of keen importance to the Bank and to me, so I 
have asked Suzanne Rich Folsom, Counselor to the President, to be in 
touch with Keith W. Luse and your staff shortly to arrange for our Bank 
experts to provide a full briefing and exchange of information on this 
topic.

            Sincerely yours,
                                       James D. Wolfensohn,
                                                         President.

                                 ______
                                 

                   Inter-American Development Bank,
                                  1300 New York Ave., N.W.,
                                 Washington, DC 20577, May 4, 2004.

The Honorable Richard G. Lugar,
Chairman, Committee on Foreign Relations,
United States Senate,
Washington, DC 20510.

    Dear Mr. Chairman,

    Thank you for your letter of April 22, 2004, in which you invite me 
to testify at the hearing on ``Combating Corruption in the Multilateral 
Development Banks'', to be held on Thursday, May 13, 2004.
    I want to commend you for this initiative and assure you of our 
fullest cooperation. You may be aware, however, that due to the 
policies governing international organizations such as the Inter-
American Development Bank, Bank officials are unable to provide 
testimony to the parliaments of any of the member countries of the 
institution.
    Nevertheless, I hope that we will have the opportunity to inform 
about our longstanding commitment to help fight corruption in the Latin 
American and Caribbean region and of efforts to greatly improve our 
institution's own internal and external controls. To this effect, 
senior staff of the Bank dealing with these matters would be available, 
preferably before the scheduled hearing, to provide all necessary 
information. I also will be only too willing to meet with you at a 
later date to discuss this and other issues of interest to you and the 
Committee.

            Yours sincerely,
                                        Enrique V. Iglesias
                                                         President.

            IDB EXPANDS INFORMATION DISCLOSURE, TRANSPARENCY

  BANK AT FOREFRONT OF PROVIDING GREATER ACCESS TO DOCUMENTS, POLICY 
                                PROCESS
    The Inter-American Development Bank's new Information Disclosure 
Policy, which entered into effect on Jan. 1, 2004, places the 
institution at the forefront of action by multilateral institutions to 
provide greater and more timely access to documents and information.
    For the first time the policy includes not only operations-related 
information, but also financial statistics and legal documents. 
Approved by the Board of Executive Directors in late 2003, the new 
policy is the first for a multilateral institution to include access to 
minutes of the deliberations of the Board.
    In the realm of projects, the extent of information published under 
the new policy has been expanded considerably. Information on 
operations is first provided when a project has newly entered the 
Bank's pipeline. As the proposed operation becomes more complex and 
detailed, a project concept document is posted on the IDB Web Site, 
which is later complemented by the full-text publication of the loan 
proposal, the document used by the Board in its deliberations as to 
whether or not to approve a financing package sent forward to it by the 
management of the Bank.
    In another new development for 2004, the public now has access to 
information on the status of disbursements for all projects. The 
Statement of Approved Loans, updated monthly on the Web Site, contains 
a rundown of all loans approved in more than 44 years of Bank 
operations, including information on repayments. Coordinated by the 
Bank's Office of External Relations, the IDB Web Site also provides 
access to two other operations-related products: the Country 
Strategies, which lay out in broad terms the rationale for the Bank's 
collaboration with borrowing member countries in Latin America and the 
Caribbean and Country Program Evaluations, prepared by the IDB's Office 
of Evaluation and Oversight, which reviews both Bank and country 
performance in comparison with the programs as originally mapped out. 
Individual Bank-financed operations with significant environmental and 
social implications are required to publicly document those impacts--
and the Bank and borrowers' proposed remedial actions--in a timely 
manner. All documents considered by the Board are available in both 
English and Spanish. Documents in Portuguese are available for 
operations for Brazil, and French language documents are available for 
those in Haiti.

                     ZERO TOLERANCE FOR CORRUPTION
    The IDB's adoption of a progressive new information disclosure 
policy fits alongside a number of other significant steps taken by the 
institution to raise questions of governance--both In Bank operations 
and among member countries. Dating back to the Bank's Annual Meeting in 
Milan, Italy, in March 2003, IDB President Enrique V. Iglesias 
emphasized the need to maintain a policy of ``zero tolerance'' for 
fraud and corruption. To that end, late in 2003, the Bank assembled a 
number of its most important investigative functions under the umbrella 
of a new Office of Institutional Integrity. The secretariat of the 
Bank's Oversight Committee on Fraud and Corruption resides in the new 
office, as do investigators charged with looking into alleged 
violations of the Bank's Code of Ethics and matters related to conduct 
in the workplace.
    Within the past year, the Bank has implemented a new staff rule on 
protection for whistleblowers. A policy providing for the debarment of 
firms accused of improper actions related to Bank-financed procurement 
is in the final stages of clearance by the Bank's management. In the 
area of procurement more generally, the Bank hired two leading firms to 
conduct top-to-bottom reviews of the Bank's procurement policies and 
procedures--both for purchases made in connection with projects in 
borrowing member countries (operational procurement) and for the 
acquisition of goods, services and works directly by the Bank 
(corporate procurement).
    In addition, a Corporate Governance Committee was established and 
submitted recommendations, for implementation by the Board of Executive 
Directors and management, on enhancing auditing, internal controls, 
institutional reporting and rules consistent with the procedures of the 
Sarbanes-Oxley Act of 2002 adopted in the United States and similar 
international initiatives.
    These recommendations include the realignment and enhancement of 
the Audit Committee's responsibilities, enhanced disclosure mechanisms 
and procedures, tighter rules against conflict of interest and measures 
to ensure greater independence and effectiveness of the Bank's external 
auditor.

                                 ______
                                 

            African Development Bank Group,        
                                13 Avenue du Ghana,
      Angle Av. Hedi Nouira et Pierre de Coubertin,
                               BP.323--1002Tunis Belvedere,
                                             Tunisia, May 11, 2004.

The Honorable Richard G. Lugar,
United States Senate,
Committee on Foreign Relations,
Washington, DC, 20510-6225.
United States of America

    Dear Senator Lugar,

    I am pleased to acknowledge receipt of your letter dated 22 April 
2004, wherein, in your capacity as Chairman of the United States Senate 
Foreign Relations Committee, you have invited me to testify on 13 May 
2004, and provide information to your Committee on the efforts of the 
African Development Bank to address corruption in the Bank's projects.
    Regrettably, I will be unable to testify. However, I would like to 
express appreciation for your letter of invitation. The Bank would, of 
course, through other possible means be able to provide you information 
on the subject of the Committee's interest. We have been informed that 
the Committee hearing on 13 May 2004, is expected to discuss in 
particular, with respect to Africa, the Lesotho Highlands Water project 
in Southern Africa. If this information is correct, you will please 
note that the African Development Bank did not participate in financing 
that project.
    The African Development Bank is an International Institution 
governed by the Agreement Establishing the Bank (the Bank Agreement) 
and is accountable, through its internal governance structure, to its 
member countries. The Bank, therefore, provides information about its 
activities to each of its member countries through the Board of 
Governors and the Board of Directors of the Bank, on which Boards all 
member countries are represented. The Bank also maintains a public 
information center, through which, and consistent with the Bank's 
policy of transparency and information disclosure, information about 
the Bank's activities are made available. Officials of the Bank do not 
testify before the national legislatures of its member countries. 
Nevertheless, the Bank fully recognizes and supports parliamentary 
inquiries by its member countries as evidence of good governance within 
the member countries. The inability of Bank officials to testify before 
the legislatures of its shareholders stems from the Bank Agreement 
that, among other things, requires officials of the Bank to preserve 
the international character of the Bank, avoid involvement in domestic 
political affairs of member countries and ensure that the Bank is not 
subjected to the national legal processes of its member countries or 
have these processes inappropriately applied to the Bank.
    Consistent with these policies, and legal requirements, I am unable 
to respond favorably to the invitation of your Committee. I would, 
however, like to assure you and members of your esteemed Committee that 
the Bank is keenly interested in weeding out corruption from Bank 
projects and has worked towards that end. Please have your staff 
contact the General Counsel of the Bank, Mr. Adesegun Akin-Olugbade, 
who could furnish available information for the benefit of your 
Committee.
                                               Omar Kabbaj,
                                                         President.

                                 ______
                                 

           Prepared Statement of Ambassador Cynthia S. Perry

  ANTI-CORRUPTION EFFORTS OF THE MULTILATERAL DEVELOPMENT BANKS (MDBS)
                 AFRICAN DEVELOPMENT BANK GROUP (AFDB)
    Mr. Chairman, Members of the Committee, I welcome your invitation 
to discuss the efforts of the African Development Bank Group (AfDB or 
``the Bank'') to address corruption.
    Fueled by poor governance, corruption in much of Africa remains 
widespread and pervasive. Far-reaching change will be necessary to 
reduce it dramatically. The African Development Bank is keenly aware of 
the challenges involved, and has placed itself at the forefront of 
efforts to promote good governance and combat corruption on the 
continent.
    The Bank's anti-corruption efforts aim to mitigate the risk of 
corruption in its operations and increase the level and quality of 
assistance to its borrowing member countries in support of good 
governance. By virtue of its African character and the priority it has 
placed on promoting good governance, I believe the African Development 
Bank is well placed to continue to enhance its leadership role in the 
area of governance and in the fight against corruption.
    The Office of the U.S. Executive Director at the AfDB has advocated 
strongly for greater transparency and improved governance at all levels 
of the AfDB's operations, and will continue to do so. While the Bank 
has made significant progress in terms of institutional accountability, 
transparency, and operational control, further efforts are needed. My 
remarks today will focus on the AfDB's efforts to combat corruption and 
strengthen governance on three fronts: at the institutional level, the 
project level, and the country level. The Bank is also actively 
promoting good governance through a number of partnerships with 
regional and international organizations.
Institutional Efforts
    The AfDB's 1999 Policy on Good Governance emphasizes combating 
corruption as one of the pillars of the Bank's mandate to promote good 
governance in member countries. The Bank's Strategic Plan for 2003-2007 
also underscores the linkages between good governance, including 
combating corruption, and the Bank's poverty reduction mandate. To 
strengthen these linkages, the Bank has put in place effective internal 
controls and procedures intended to deter, detect and punish corrupt 
practices.
    Most notably, in the past year, the Bank developed a Code of 
Conduct for Bank staff, Guidelines for Preventing and Combating 
Corruption, and an Information Disclosure Policy. The AfDB maintains 
strict recruitment procedures and is strengthening internal capacity to 
combat corruption and promote good governance through staff training 
programs.
    The Code of Conduct for staff is a statement of basic ethical 
principles to guide Bank staff in fulfillment of their duties. Failure 
to abide by the Code of Conduct results in sanctions, as specified in 
the Bank Staff Rules. During the past year, the Bank has disciplined, 
in some instances terminated, the services of staff after determining 
their involvement in corrupt or unethical practices related to Bank 
operations.
    Building on the Bank's good governance policy, the Guidelines for 
Preventing and Combating Corruption outline where and how corruption 
and fraud may occur in the Bank's operations, modalities for its 
prevention, and procedures on how Bank staff should respond to 
incidents of corruption and fraud in Bank operations.
    One of the key features of the Guidelines is the Bank's zero 
tolerance position with regard to fraud and corruption. In line with 
the Code of Conduct for staff, the zero tolerance position means that 
staff proven to have engaged in corrupt or fraudulent practice in 
fulfillment of their duties will be disciplined in accordance with Bank 
Staff Rules.
    With regard to transparency, the Board of Directors recently 
approved a new Information Disclosure Policy, which will significantly 
enhance the transparency of the Bank's operations by making a wide 
range of Bank documents publicly available. The Office of the U.S. 
Executive Director has been the strongest advocate in the Board for 
greater transparency, and will continue to lead this effort in order to 
achieve the goals specified in Section 581 of the FY2004 Consolidated 
Appropriations Act that are germane to the AfDB.
    In the area of recruitment, the Bank's procedures explicitly forbid 
nepotism or favoritism on the basis of nationality or group 
identification. Staff members who fail to comply with these rules are 
subject to reprimand, dismissal, or legal sanction.
    The Bank continues to take steps to build its institutional and 
human capacity. Internal staff training has been organized to promote 
the Bank's good governance policy and to familiarize operations staff 
with new diagnostic assessments such as the Country Governance Profile. 
Enforcement of the Bank's zero tolerance position will require 
strengthening the Bank's institutional capacity to deter, investigate 
and sanction corrupt activities. The Bank intends to increase the 
number of staff experts assigned to anti-corruption activities, and 
enhance the technical skills of Bank staff through specialized training 
in areas such as forensic auditing, detection of money laundering and 
financial investigation techniques. In the Board of Directors and in 
dialogue with AfDB management, I will continue to stress the need for 
strengthening the capacity of staff working on governance and anti-
corruption activities in the Bank.
Project-Level Efforts
    The African Development Bank has instituted a range of controls to 
mitigate the risk of corruption in its projects. These controls include 
auditing, supervision, the use of special accounts for higher risk 
lending, due diligence on private sector borrowers and co-financers, 
strict procurement procedures and a soon to be established inspection 
mechanism. The AfDB requires annual audits of its projects and enforces 
contractual audit provisions in its loan and grant agreements. My 
office is active in the review by the Board's Audit and Finance 
Committee of internal audit reports dealing with the results of audits 
of the implementation of Bank projects.
    The Bank's Internal Audit department safeguards the Bank's assets, 
certifies compliance with its policies, and ensures auditing standards 
are met. The Internal Audit department also assesses the strength of 
internal controls and institutional arrangements in borrowing member 
countries and assists national audit institutions with outsourcing 
audit functions until adequate national audit capacity can be 
developed. The AfDB's Operations and Internal Audit departments 
evaluate the quality of independent audits of Bank projects, and fully 
enforce the Bank's audit policy, which may include suspension of 
disbursements to some projects. While no disbursements have been 
suspended in the last three years due to fraud or corruption, at least 
two projects are currently being investigated for fraud and corruption. 
Preliminary assessments have revealed some improvements in the 
submission of annual audit reports of Bank funded projects, but the 
Bank needs to remain vigilant in its oversight to ensure project audit 
reports are completed consistently across projects in a timely manner.
    Supervision missions focus on good financial management of projects 
as a way to eliminate opportunities for corruption. When compliance 
with financial management standards is not adhered to, the Bank 
proposes corrective measures and may impose sanctions. The Bank's 
ability to conduct supervision missions was significantly impaired by 
the temporary relocation of the Bank's operations to Tunis in 2003. The 
Bank is now fully operational at the temporary relocation site and 
supervision missions have resumed.
    The AfDB's procurement regulations have been modified to be more 
explicit in their treatment of corruption. As a result, the Bank will 
now cancel at least part if not the entire loan or grant if the 
procurement process was tainted by acts of fraud or corruption. Firms 
proven to engage in corrupt or fraudulent practices can be declared 
ineligible from participating in future Bank funded activities 
indefinitely or for a period determined by the Bank. Over the past few 
years, about thirty tenders have been canceled, companies sanctioned, 
and together with their affiliates, barred from participating in Bank 
projects. The Bank maintains a list of sanctioned or blacklisted firms 
and shares the information with other MDBs.
    The Bank's Procurement Review Committee of senior managers 
appointed by the President receives and investigates complaints from 
bidders who are not satisfied that their bid was handled in accordance 
with Bank Rules of Procedure for Procurement of Goods and Works. The 
committee is an independent body whose decisions, which can include 
cancellation of a procurement process, are final and binding.
    The experiences of other MDBs show that efforts to prevent, detect, 
investigate and sanction fraud and corruption in MDB operations is most 
effective and credible where a high-level single oversight body is 
designated as a focal point for managing all matters relating to 
corruption and fraudulent practices. As such, the Bank plans to 
establish a high-level Oversight Committee on Corruption & Fraud. The 
Bank is also working to develop a formal whistleblower protection 
program designed to protect the identity of those disclosing 
information or allegations concerning fraud or corruption.
    To address issues of corporate governance, particularly in private 
sector projects, the Bank is finalizing a Strategy and Plan of Action 
on Corporate Governance. The Bank conducts due diligence assessments on 
potential borrowers to ensure full compliance with corporate governance 
principles for Bank-supported projects. The Bank also provides direct 
assistance to private sector investors to endorse and implement 
corporate governance principles as a pre-condition for Bank financing.
    Within the overall framework of promoting good governance, the Bank 
has proposed the creation of an Inspection Function, a combined 
compliance and problem-solving mechanism. The proposal was posted on 
the Bank's website for several months to invite comments from 
interested stakeholders. Bank management will submit a final proposal 
to the Board of Directors in June 2004. My office has been at the 
forefront of the effort to establish an inspection mechanism at the 
AfDB, which will reinforce the Bank's accountability for the impact of 
its project operations.
Country-Level Efforts
    The African Development Bank provides financial and technical 
assistance to regional member countries in their fight against 
corruption. Requests for assistance are determined on a case-by-case 
basis and subject to a clear and credible demonstration of commitment 
to principles of good governance and combating corruption.
    Since 2001, the AfDB has approved $925 million in loans and grants 
for governance-related activities for 25 member countries. Following 
the 10th replenishment of the African Development Fund (ADF), the 
number of Bank-financed governance projects is expected to increase 
significantly.
    Good governance is a key factor in determining the ceilings on 
allocations of ADF resources for eligible ADF borrowing countries 
during a given replenishment cycle. The Country Performance and 
Institutional Assessment (CPIA) and Country Risk Assessments are based 
on formulas that place a 40% weight upon the quality of governance in 
ADF-eligible borrowers.
    The policy-based loan for governance (PBLG) is a key instrument 
that the Bank will use to support institutional reforms to consolidate 
macroeconomic stability and a favorable environment for sustained 
growth in its borrowing member countries. PBLGs will be used to support 
governance-related reforms in areas such as judicial and legal 
frameworks, trade policy, public finance, fiscal and monetary policy, 
public sector management, financial sector policy, and competition 
policy. The Office of the U.S. Executive Director provided substantial 
input into the PBLG Guidelines that were recently approved by the 
AfDB's Board of Directors. Going forward, my office will monitor the 
Bank's use of this instrument very closely.
    The AfDB collaborates closely with the World Bank in conducting 
various diagnostic assessments of public financial management systems 
and recommends actions for implementation. To date, this collaboration 
has produced eleven Country Financial Accountability Assessments 
(CFAAs) in Burkina Faso, Chad, Gambia, Malawi, Mali, Madagascar, 
Mauritania, Senegal, Tanzania, Uganda and Zanzibar. Since 2002, the 
AfDB has also collaborated with the World Bank to carry out six Country 
Procurement Assessment Reviews (CPARs) in Benin, Senegal, Cote 
d'Ivoire, Angola, Togo, and Guinea.
    The Bank also conducts its own Financial Management Review of its 
projects. The Financial Management Review is an AfDB innovation 
designed to improve the financial management and audit functions of 
specific projects. The Bank has successfully carried out Financial 
Management Reviews in five countries (Cameroon, Madagascar, Malawi, 
Uganda, and Zambia), covering four key sectors (agriculture, transport, 
public utilities, and the social sector).
    Another important and innovative diagnostic tool employed by the 
Bank since 2002 is the Country Governance Profile. Country Governance 
Profiles are used to identify key governance issues in borrowing member 
countries, including corruption, and to develop a common understanding 
of the strengths and weaknesses of country governance arrangements. 
These profiles allow the Bank to better assess risks to Bank funds and 
to develop governance reform and capacity building programs with its 
borrowing member countries. The Country Governance Profile is the key 
instrument for mainstreaming governance priorities into Bank 
operations. The new cycle of Country Strategy Papers for 2005-2007 will 
address governance issues based on the governance profiles. Currently 
five Country Governance Profiles have been completed (in Nigeria, 
Ghana, Mauritania, Malawi, and Zambia) and an additional 10 Country 
Governance Profiles are scheduled for completion in 2004.
    Borrower institutional capacity is critical for effectively 
combating corruption and compliance with the anti-corruption safeguards 
in the loan agreements with the Bank. For countries ranked low in the 
CPIA governance factors and where the risk for corruption is deemed 
high, the Bank will undertake more rigorous assessments through Country 
Governance Profiles, CFAAs, and CPARs, and propose corrective measures. 
Government officials will benefit from selective and specialized 
governance- and corruption-related training organized through the Joint 
Africa Institute housed at the AfDB. Such training will be country 
specific and based on areas of weakness identified through assessments.
Partnerships
    The AfDB is actively engaged in partnership with a number of 
institutions to combat corruption on the continent. The Bank is an 
active member of the MDB Harmonization Working Group on Financial 
Management, Procurement, and Environment. The Bank is also 
collaborating on good governance promotion activities with the Economic 
Commission for Africa, and has conducted a series of workshops on 
developing national strategies and action plans for combating 
corruption in collaboration with Transparency International, the World 
Bank Institute, and the Global Coalition for Africa.
    The Bank was the lead institution involved in developing the 
standards and benchmarks for banking, financial regulations, and 
corporate governance for the New Partnership for Africa's Development 
(NEPAD) initiative and is providing technical assistance to the African 
Peer Review Mechanism component of the NEPAD. The AfDB was also a key 
partner of the African Union in finalizing the Africa Convention on 
Combating Corruption.
    Responding to the call to tighten anti-money laundering controls 
after the September 11, 2001, the Bank is actively supporting existing 
institutions such as the Financial Action Task Force (FATF), Africa 
regional FATF-style bodies and specialized sub-regional anti-money 
laundering taskforces. In addition, an internal Bank working group is 
exploring how the AfDB can help member countries develop appropriate 
legal and regulatory systems and regimes to address the problem.
Conclusion
    Despite these significant and ongoing efforts to combat corruption 
and improve governance at the institutional, project, and country 
levels, the African Development Bank itself recognizes that additional 
efforts are required, particularly with regard to implementation and 
enforcement of existing policies and procedures, and strengthening the 
Bank's internal capacity. As the Bank works to build the appropriate 
skills mix to carry out its good governance promotion initiatives, I 
will continue to press the Bank to periodically review its 
organizational arrangement, procedures, and policies to ensure an 
appropriate enabling environment and strategy for combating corruption.
    The Office of the U.S. Executive Director will continue to 
challenge and support the Bank to further strengthen its anti-
corruption efforts, enhance the transparency of its operations, and 
realize its objective of becoming the lead institution on good 
governance in Africa.
    Thank you.

                                 ______
                                 

                  Prepared Statement of Patricia Adams

    I appreciate the opportunity to submit this written statement to 
the Senate Committee on Foreign Relations regarding its investigation 
of corruption in multilateral development bank (MDB) projects. As an 
economist and the executive director of Probe International, a Canadian 
non-profit research group, I have researched the environmental, 
financial, and social effects of MDB projects over the past 20 years. 
In 1991, I published a book, ``Odious Debts: Loose Lending, Corruption, 
and the Third World's Environmental Legacy,'' which exposes how 
corruption led to unrepayable debts, environmental harm, and the demise 
of democracy throughout the Third World. I submit a copy for your 
reference.
    I have followed the case of corruption in the Lesotho Highlands 
Water Project, and especially the trial of Acres International--the 
first corporation to be convicted--since before the indictments were 
issued in 1999. I have read many of the court documents and my 
organization makes these widely available to the public and press 
around the world by posting them on our Web site .
    I first wish to correct the record regarding testimony you received 
on May 13, 2004 from Professor Jerome I. Levinson of the Washington 
College of Law at the American University. He is incorrect in stating 
that corruption did not occur in the award of a World Bank Lesotho 
Highlands Water Project contract.
    In his statement to the Committee on Foreign Relations, Professor 
Levinson states:

        A recent project in Lesotho, Africa illustrates the issue. The 
        Director of the Lesotho Highland Water Authority was convicted 
        in the courts of that country of corruption in the award of 
        contracts in connection with the project. Part of the project 
        was financed by the World Bank. There is no allegation of 
        corruption in the award of contracts on that part of the 
        project financed by the World Bank. (Emphasis added)

    The Lesotho High Court transcripts, which are available at /
www.odiousdebts.org/odiousdebts/index.cfm?DSP=subcontent&AreaID=12> and 
the World Bank's own ``Notice of Debarment Proceedings,'' dated March 
21, 2001, which is available at /www.odiousdebts.org/
odiousdebts/publications/DebarmentProceedings.pdf>, show Professor 
Levinson to be mistaken. These documents show that Acres International 
was convicted in the Lesotho High Court (later upheld by the Appeal 
Court) for bribery payments to the former head of the Lesotho Highlands 
Development Authority in order to secure Contract 65, a World Bank 
contract signed in 1991 with a base value of CAD$16,986,413.
    This conviction regarding the award of a Bank contract is important 
because, according to the World Bank's self-defined guidelines, only 
those who have committed fraud or corruption in the procurement or 
execution of Bank-financed contracts will be subject to the Bank's 
debarment proceedings. Indeed, the World Bank acknowledged that Acres' 
crime did involve a World Bank contract when it reopened its debarment 
proceedings against Acres International in March, 2004.
    Under World Bank anti-corruption guidelines, a contractor that 
commits fraud or corruption in the procurement or execution of Bank-
financed contracts will be barred from receiving future World Bank 
contracts. World Bank contracts are the bread and butter of many 
multinationals. As the world's largest development agency, and the 
standard setter for the world's other agencies, a World Bank 
blacklisting could be the death knell for a corrupt company. No more 
effective deterrent exists to corruption in international development 
projects than a World Bank debarment.
    I understand this principle drives the sanctions against bribery 
under the U.S. Foreign Corrupt Practices Act which includes, among 
other sanctions, fines, imprisonment, and being ``barred from doing 
business with the Federal government.'' Indeed, according to the U.S. 
Department of Justice's Web site, ``Indictment alone can lead to 
suspension of the right to do business with the government.'' The 
Foreign Corrupt Practices Act, which has been in place since 1977, 
``was intended to have and has had an enormous impact on the way 
American firms do business,'' says the Justice Department. This is 
consistent with my own anecdotal experience: Relative to firms in other 
countries, American companies are acutely alert to the serious 
consequences of a conviction for corruption. This may explain why, of 
the 19 individuals and firms from nearly a dozen countries that were 
indicted in the Lesotho Highlands Water Project corruption scandal 
(many of them Organisation for Economic Co-operation and Development 
members), none of them was from the United States.
    Jeremy Pope from Transparency International described the 
importance of tough consequences for corrupt acts when he said, ``If 
executives see they can be prosecuted, humiliated and jailed, their 
firms barred from work and their names damaged, they will conclude 
bribery is not worth it.'' \1\
---------------------------------------------------------------------------
    \1\ ``The end of swag?'' by Rich Thomas and Stefan Theil, Newsweek, 
July 1/2002.
---------------------------------------------------------------------------
    If the World Bank does not debar those companies convicted of 
corrupt acts in the Lesotho Highlands Water Project trials, 
corporations will get the message that a bribery conviction is an 
affordable irritant, and that they can counter bad press with promises 
to adopt new internal corporate anti-corruption management systems. In 
the absence of meaningful deterrents, bribery will continue to pay and 
firms will have an incentive to look for more devilishly inscrutable 
ways to hide their crime.
    Also, if the World Bank does not debar those companies convicted of 
corrupt acts, Third World governments will learn that the OECD 
convention against bribery \2\ is meaningless, and that those who 
repeatedly lecture them on the need to adopt good governance and the 
rule of law--OECD member governments and the World Bank alike--are 
hypocrites.
---------------------------------------------------------------------------
    \2\ OECD Convention on Combating Bribery of Foreign Public 
Officials in International Business Transactions available at /
www.oecd.org/document/21/0,2340,en_2649_34855_2017813_1_1_1_1,00.html>
---------------------------------------------------------------------------
    The Lesotho bribery trials, involving over a dozen of the world's 
most prominent engineering firms, is the most important case of 
corruption in the history of international development. For the first 
time, multinational firms have been brought to trial by a Third World 
government. Two of the firms have been convicted and one has been fined 
after pleading guilty to bribery in connection with their contracts on 
the $8 billion Lesotho Highlands Water Project dam-building scheme. In 
the international development business, this case is being closely 
watched by engineering companies around the world, as well as by 
companies in other sectors, as a bellwether that will indicate the 
World Bank's tolerance of corruption.
    Lesotho and other Third World countries that are confronting 
corruption deserve western government support and respect for 
courageously tackling this cancer. And they deserve to have western 
governments follow up their extraordinary, precedent setting trials 
with action, not business as usual. As Lesotho's Attorney General Fine 
Maema said, ``The attitude has always been that Africans are corrupt. 
But it takes two to tango, and we want rich world corporations and 
countries to acknowledge their role.'' \3\ It is time for western 
governments and all the international funding institutions, such as the 
MDBs, to stop awarding contracts to individuals and corporations that 
engage in corrupt acts.
---------------------------------------------------------------------------
    \3\ ``The end of swag?'' by Rich Thomas and Stefan Theil, Newsweek, 
July 1/2002.
---------------------------------------------------------------------------

  THE U.S. CONGRESS'S INVESTIGATIONS INTO THIS MATTER ARE ESPECIALLY 
                               IMPORTANT
    To my knowledge, apart from the U.S. Congress, no northern 
governments or legislatures have worked to make the World Bank crack 
down on corruption. Indeed in Canada, in contrast to the U.S. 
Congress's attempt to root out corruption and expose it to the light of 
day, the Canadian government has been lobbying the World Bank not to 
debar Acres. A Canadian official in our Executive Director's office at 
the World Bank, for example, has told me that the Canadian government 
would resist Acres' debarment because ``there is corruption with courts 
in the Third World.'' \4\ Other Canadian government agencies have also 
disparaged, without any evidence, the judicial process in Lesotho. A 
spokesman from Export Development Canada, Canada's counterpart to the 
Export-Import Bank of the United States, stated: ``Had the case been 
heard in an Ottawa courtroom, there might have been a different 
outcome.'' \5\ Indeed, EDC and other Canadian agencies recently 
announced that they will continue to favour Acres with taxpayer-funded 
programs. \6\
---------------------------------------------------------------------------
    \4\ June, 2003 meeting with Francois Page, Senior Advisor to 
Canadian Executive Director. Subsequently reported in the press, 
including in ``Acres' partners in crime,'' Financial Post, August 23, 
2003.
    \5\ ``Groups fear Canadian funding for Romanian mine,'' by Stephen 
Leahy, Inter Press Service News Agency, November 16/2003.
    \6\ For example, Patti Robson in the Media Relations Office of the 
Canadian International Development Agency stated in a February 6, 2004 
email to me that, ``We have reviewed the issue carefully and we have 
discussed it with a number of key stakeholders including international 
institutions and donor countries. Acres has agreed to pay the fine, and 
we are satisfied that Acres has implemented an Integrity Management 
System designed to protect itself and its clients from future risks. 
This was one of the determining factors in our decision. We will 
continue to fulfil existing contractual agreements with Acres and will 
consider new proposals when submitted.''
---------------------------------------------------------------------------
    Also disturbing, Acres agent in Lesotho, the person who arranged 
Acres bribery payments for which it was later convicted, was a Canadian 
federal cabinet appointee. The person in question was Mr. Zalisiwonga 
Bam, Canada's Honorary Consul to Lesotho.
    Bribery is a ``corrupt and ugly offence, striking cancerously at 
the roots of justice and integrity,'' quoted the Court of Appeal in 
Lesotho in its judgment confirming the lower court's finding of guilt. 
Acres' ``cynical exploitation'' of Africa's largest international 
development project ``motivated as it was by greed, is the more 
reprehensible.''
    Countries that are working against the odds to rid their countries 
of corruption, as is Lesotho, deserve honesty and integrity from those 
of us in the West. Many of Probe International's supporters have 
written compelling and principled letters to Mr. Wolfensohn, urging him 
to resist pressure from the Canadian government. They ask him not to 
``derail the course of justice'' and to follow through on Bank policy 
to debar Acres and any other company that is convicted of bribing a 
Third World official.
    The developed countries have long lectured Third World nations to 
clean up their corruption. In Lesotho, we have a little country that 
has found the courage and fortitude to do just that. Now it is the 
western countries and western institutions like the World Bank, long on 
lip-service to corruption but short on action, that must muster their 
courage. We appreciate the efforts of the U.S. Congress to make that 
case to the World Bank.
    Thank you.

                                 ______
                                 

                  Prepared Statement of Bruce M. Rich

                            I. INTRODUCTION
    Environmental Defense is a national environmental organization with 
over 300,000 members and supporters nationwide. The International 
Program of Environmental Defense has been involved in research and 
advocacy concerning the environmental and social impacts of 
Multilateral Development Bank (MDB) lending for twenty years, and has 
made numerous submissions to Congressional authorization and 
appropriations committees regarding these institutions. Our concern 
regarding the quality of MDB lending led us a number of years ago to 
examine the issue of institutional incentives and controls in these 
institutions, particularly in the World Bank.
    This submission examines the institutional issues concerning 
massive corruption in World Bank lending over the past thirteen years, 
as documented in internal World Bank memoranda and reports. Based on 
this record, we question the adequacy of current World Bank management 
efforts to address major management and institutional problems that are 
conducive to corruption.
    We would first like to comment on why organizations such as 
Environmental Defense, which are primarily focused on promoting 
environmentally sustainable lending policies at the international 
financial institutions, are so concerned about corruption. The 
``culture of loan approval'' and ``pressure to lend'' that has been 
documented in the World Bank and other MDBs for more than a decade has 
often meant that policies designed to mitigate adverse environmental 
and social impacts of MDB lending are not implemented. Our research has 
led us to World Bank internal documents that state clearly that the 
culture of loan approval has also undermined the implementation of 
basic financial auditing and reporting requirements. These findings 
themselves are rather astounding for any public international financial 
institution, let alone one like the World Bank, which proclaims itself 
to be a leader. Nevertheless, the excerpts and conclusions from 
internal World Bank documents speak for themselves.
    We believe that the same measures that would address the 
institutional problems relating to corruption in the MDBs would also go 
a long way towards improving overall project quality with respect to 
environmental and social impacts. For this reason we wish to submit 
additional information for the record to supplement the information 
presented in the testimony of the witnesses on May 13th, particularly 
the statements of Mr. Manish Bapna of the Bank Information Center (to 
which we contributed) and the statement of Dr. Jeffrey Winters.

    Our major concern is that the statement of the U.S. Executive 
Director Carole Brookins and the announced anti-corruption measures of 
the World Bank do not credibly address the most serious, endemic 
problem embedded in MDB lending operations; namely, the systematic, 
across-the-board diversion of MDB lending by whole governments or 
government ministries in the Bank's borrowing countries.

    As was noted in Mr. Bapna's statement, World Bank anti-corruption 
actions have focused on specific procurement, bribery and kickback 
abuses, as well as selected general governance programs, rather than on 
the much larger and more serious public sector, country-wide level of 
corruption of Bank loans. This latter problem is at the root, however, 
of by far the largest portion of corruption in MDB lending.

    II. EXTENT OF CORRUPTION IN WORLD BANK OPERATIONS: LESSONS AND 
                   IMPLICATIONS OF THE INDONESIA CASE
    The World Bank has claimed that there is ``no supporting evidence'' 
and ``no credible evidence and/or foundation'' for Senator Lugar's 
statement (based on the testimony, inter alia, of Dr. Winters) that 
between 5% and 25% of the $525 billion the World Bank has lent since 
1946 has been diverted and misused, the equivalent of between $26 
billion to $130 billion.
    Yet the Bank itself cannot provide any credible estimate of how 
much--or even a range of how much--is currently being stolen and 
diverted from Bank lending operations.
    In the case of one major Bank borrower, Indonesia, Bank staff did 
prepare precisely such an estimate, with a detailed breakdown of how 
the money was being stolen from World Bank lending, including estimates 
of the extent of graft for each government ministry.
    In the Indonesia case, American political economist Jeffrey Winters 
alleged in a July 1997 Jakarta press conference that shoddy accounting 
practices by the World Bank had allowed corrupt Indonesian officials to 
steal as much as 30% of Bank loans over a thirty-year period--a mind-
boggling total approaching $10 billion.\1\ At about the same time, 
Environmental Defense obtained a copy of an internal study of 
corruption in World Bank lending programs to Indonesia commissioned by 
the Bank's Jakarta Office. For well over a year, the findings and 
recommendations of the study--which confirmed many of Winters' 
charges--were not acted on by World Bank senior management, and World 
Bank President Wolfensohn learned of the existence of the report only 
in July 1998, a year after its completion.\2\ This was nearly two years 
after Wolfensohn's 1996 declaration of ``no tolerance'' for corruption 
and the announcement that the Bank was ``taking steps'' ``to ensure 
that [its] own activities continue to meet the highest standards of 
probity.'' \3\
---------------------------------------------------------------------------
    \1\ Jeffrey A. Winters, ``Down With the World Bank,'' Far Eastern 
Economic Review, 13 February, 1997, p. 29; Keith Loveard, ``The Dark 
Side of Prosperity: A World Bank critic alleges waste and graft,'' Asia 
Week, 15 August 1997.
    \2\ Personal communication, member of World Bank management (must 
remain anonymous), September 17, 1998.
    \3\ ``Let's not mince words we need to deal with cancer of 
corruption . . . Let me emphasize that the Bank Group will not tolerate 
corruption in the programs we support, and we are taking steps to 
ensure that our own activities continue to meet the highest standards 
of probity.'' World Bank President James Wolfensohn, 1996. See: http://
web.worldbank.org/WBSITE/EXTERNAL/NEWS/0,,contentMDK:20190202-
menuPK:34457-pagePK:34370-piPK:34424-theSitePK:4607,00.html
---------------------------------------------------------------------------
    The internal Bank report, known as the ``Dice Memorandum'' \4\ 
(after the Bank staffer who authored it) directly contradicted the 
assertions of the Bank's Vice President for East Asia, Jean Michel 
Severino, who, in response to Winters' charges, stated that ``this 
[systematic corruption in World Bank lending to Indonesia] is 
demonstrably untrue. We know exactly where our money is going.'' \5\
---------------------------------------------------------------------------
    \4\ Glenn R. Simpson, ``World Bank Memo Depicts Diverted Funds, 
Corruption in Jakarta; Report Contrasts with '97 Denials,'' The Wall 
Street Journal, August 19, 1998, A14.
    \5\ World Bank New Release No. 98/1426/EAP, ``Indonesia and the 
World Bank,'' July 28, 1997.
---------------------------------------------------------------------------
    The Dice Memorandum is a critical document, for it provides an 
alarming blueprint--drafted by Bank in-country staff deeply familiar 
with the situation--of a problem which is likely endemic in other major 
MDB borrowers such as Russia, Bangladesh, Mexico, and most of sub-
Saharan Africa. It notes the following:

          1. ``Documentation of procurement, implementation, 
        disbursement and audits for Bank-financed projects are 
        generally complete and conform to all Bank requirements; we 
        have moved to resolve each and every irregularity for which we 
        have documents (as well as many cases of preventive action and 
        informal corrections of problems).''

          2. ``Bank staff members have not been implicated in any form 
        of misconduct; the Bank is widely regarded as one of the few 
        `uncorruptable' institutions in the Indonesian development 
        process. . . .''

    What follows indicates that even when ``documentation of 
procurement, implementation, disbursements and audits are generally 
complete and conform to all Bank requirements,'' these requirements do 
not address massive problems of corruption and diversion of Bank loans.
    Dice goes on to note that ``In aggregate we estimate that at least 
20-30% of GOI [Government of Indonesia] development budget funds are 
diverted through informal payments to GOI staff and politicians, and 
there is no basis to claim a smaller `leakage' for Bank projects as our 
controls have little practical effect on the methods generally used.'' 
(emphasis added)
    Dice notes ``one of the difficulties in attempting an analysis of 
the nature and magnitude of such diversions is the wide range of 
variations in operational methods among GOI organizations.'' 
Nonetheless, the memorandum goes on to give detailed estimates of 
percentage diversions of specific Bank funds, such as: ``Pre-Project 
expenses (5-10% of project budget);'' ``Land Acquisition and 
Resettlement Costs--numerous reports of diversion of 50-80% of funds. . 
. .;'' (emphasis in original); ``Contract Procurement and Award Process 
(extremely variable, 5-35%;'' etc. Most remarkable is a list of 
estimated corruption and diversion of funds for each Indonesian 
Government Ministry, ranging from ``relatively low (less than 15%)'' at 
the Ministry of Health, for example, to a ``high (more than 25%)'' at 
the Ministries of Home Affairs, Transmigration, Cooperatives and SMEs, 
and Forestry. Below, in italics, is the chart of estimated corruption 
directly taken from the Memorandum:

    Dice notes ``one of the difficulties in attempting an analysis of 
the nature and magnitude of such diversions is the wide range of 
variations in operational methods among GOI organizations.'' 
Nonetheless, the memorandum goes on to give detailed estimates of 
percentage diversions of specific Bank funds, such as: ``Pre-Project 
expenses (5-10% of project budget);'' ``Land Acquisition and 
Resettlement Costs--numerous reports of diversion of 50-80% of funds. . 
. .;'' (emphasis in original); ``Contract Procurement and Award Process 
(extremely variable, 5-35%;'' etc. Most remarkable is a list of 
estimated corruption and diversion of funds for each Indonesian 
Government Ministry, ranging from ``relatively low (less than 15%)'' at 
the Ministry of Health, for example, to a ``high (more than 25%)'' at 
the Ministries of Home Affairs, Transmigration, Cooperatives and SMEs, 
and Forestry. Below, in italics, is the chart of estimated corruption 
directly taken from the Memorandum:

``Classification of GOI Implementing Units by Estimated Magnitude of 
Development Budget Diversion

Estimated Diversions Agency/Ministry

----------------------------------------

Relatively Low (less than 15%)
* Relatively small percentages of very large numbers
* Major problems with firms owned/related to senior GOI officials

                PLN
                PGN
                Telecoms
                Jasa Marga
                Min. of Health ?
                Min. of Mines and Energy

----------------------------------------

Moderate (15-25%)
                Min. of Public Works
                Min. of Education
                Min. of Agriculture
                Min. of Housing/Perumnas
                Min. of Environment
                Min. of Communications ?
                Min. of Religous Affairs ?
                Min. of Tourism, Post & Tel. ?

----------------------------------------

High (more than 25%)
                Min. of Home Affairs, including all provincial and 
                local gov'ts.
                Min. of Transmigration
                Min. of Cooperatives & SMEs
                Min. of Forestry''

    In the fifteen months subsequent to the Dice Memorandum, the Bank 
committed and disbursed over $1.3 billion more to Indonesia without any 
effective measures to contain the ``leakage'' detailed in the memo. In 
October 1998, with plans to commit and disburse an additional $2 
billion over the next nine months, a second Bank mission, headed by 
Jane Loos, recorded the following:

        Our mission confirms earlier reports on corruption in 
        Indonesia: that it is pervasive, institutionalized, and a 
        significant deterrent to overall growth of the economy and 
        effectiveness of the Bank's assistance. . . . We cannot rely on 
        probity of audits both from BPKP (Government internal audit 
        agency) and local associates of international audit firms. . . 
        . Despite apparent compliance with World Bank guidelines and 
        documentation requirements for procurement, disbursement, 
        supervision and audits, there is significant leakage from Bank 
        funds. . . . Bank procedures/standards are not being applied 
        uniformly . . . The [World Bank] auditing requirements have 
        been allowed to deteriorate into a superficial exercise; even 
        an agency with overdue audits was not excluded from receiving 
        new loans.\6\
---------------------------------------------------------------------------
    \6\ Jane Loos, Regional Manager, EAPCO, World Bank Office 
Memorandum to Mr. Jean-Michel Severino, Vice President, EAP, ``Options 
to Reduce Negative Impact from Corruption on Bank-Financed 
Activities,'' October 19, 1998.

    The full consequences of the inability to root out the ``culture of 
approval'' were spelled out in an unusually candid reevaluation of the 
entire thirty-year record of the Bank in Indonesia conducted by the 
Bank's Operations Evaluation Department (OED) and circulated internally 
(and leaked to the press) in February 1999.\7\ The OED ``Indonesia 
Country Assistance Note'' of February 4, 1999 presents a major revision 
of the Bank's evaluation of development effectiveness in Indonesia over 
the past three decades.\8\ For years the Bank had touted Indonesia as 
one of its great success stories, ``widely perceived within the Bank to 
be a miracle and a symbol of the Bank's success.'' However, the OED 
report concludes that reluctance to offend a major borrower, a refusal 
to address corruption, and a dysfunctional internal Bank culture that 
punishes staff for identifying problems that could slow down lending, 
all contributed to the propagation of what the original draft of the 
OED report called the ``myth of the Indonesian miracle.'' (The final 
report omitted this phrase in response to the objection of the 
Indonesian Government.) \9\ The OED report rates the Bank and the 
Indonesian government as only ``marginally satisfactory'' for the past 
three decades, contradicting numerous previous evaluations of Bank 
involvement in Indonesia as a leading example, at least relatively, of 
development effectiveness.\10\
---------------------------------------------------------------------------
    \7\ Association France-Presse, ``World Bank Rates Its Indonesia 
Performance as `Marginal,' '' February 10, 1999 (wire service story); 
David E. Sanger, ``World Bank Beats Breast for Failures in Indonesia,'' 
New York Times, February 11, 1999.
    \8\ World Bank Operations Evaluation Department, Indonesia Country 
Assistance Note, February 4, 1998.
    \9\ Association France-Presse, February 10, 1999.
    \10\ OED, Indonesia Country Assistance Note, February 4, 1999, 25.
---------------------------------------------------------------------------
    One of the more revealing analyses in the report describes how the 
culture of approval and perverse Bank career incentives led to 
disastrous consequences in lending for the financial sector. As the 
Indonesian meltdown was brewing, supervision reports indicated the 
Bank's single biggest financial sector project, the Financial Sector 
Development Project, was riddled with problems. Then,

        A thorough supervision effort in August 1996 not only found the 
        project outcome to be unsatisfactory on all counts, but 
        concluded that Indonesia's State Banking Sector was in 
        disarray, riddled with insolvency. . . . the Bank downplayed 
        the evidence presented in the supervision report and rejected 
        the proposed cancellation of the loan for several months 
        (cancellation was postponed until a new Banking Reform 
        Assistance project was approved in November, 1997), arguing 
        that such action would do serious damage to the Bank-Government 
        relationship. This process also triggered perceptions of 
        unjustified penalties to career prospects of some Bank staff 
        who had brought the issues to light. The staff proposals for 
        in-depth [financial] sector work were shelved. . . . The Bank's 
        readiness to address the subsequent financial crisis in 
        Indonesia was seriously impaired.\11\
---------------------------------------------------------------------------
    \11\ Ibid., 20.

    The World Bank 1999 OED Country Assistance Note also recounts how 
the 1997 reorganization of the Bank under Wolfensohn--through which 
Bank management claims that anti-corruption measures became a 
priority--further undermined the ability of the Bank to respond to the 
---------------------------------------------------------------------------
Indonesian crisis in 1997-98:

        An unfortunate combination of staff turnover, some of it the 
        result of policy disagreements, and the 1997 reorganization 
        complicated the ability of the Bank to respond to the crisis. . 
        . . The far-reaching 1997 reorganization detracted attention 
        from economic development issues.\12\
---------------------------------------------------------------------------
    \12\ Ibid., 9.

    The major recommendations of the February, 1999 OED Indonesia study 
echo the conclusions of countless past reports, particularly the 1992 
Morse Commission and Wapenhans reports. It argues that if country 
monitoring is to be effective, there must be ``major changes in the 
---------------------------------------------------------------------------
Bank's internal culture.'' Once again,

        warning signals were either ignored or played down by senior 
        managers in their effort to maintain the country relationship. 
        Some staff feared the potential negative impact on their 
        opportunities that might result from challenging mainstream 
        Regional thinking.\13\
---------------------------------------------------------------------------
    \13\ Ibid., 26.

    One of the biggest obstacles to improved development effectiveness, 
and a major factor in the culture of loan approval flagged in the 
Wapenhans report, is the chronic ``clientitis'' of the Bank--the desire 
to keep lending to maintain the ``country relationship,'' often to the 
direct detriment of the poor the Bank purports to be trying to help. 
The 1999 OED Indonesia report makes clear that in many cases a choice 
has to be made: ``Bank strategy should look at the importance of the 
issues to the country's development, and not whether the country 
relationship may be jeopardized.'' \14\
---------------------------------------------------------------------------
    \14\ Ibid.
---------------------------------------------------------------------------
    It is worth summarizing the Indonesia case since it relates to the 
overall management and institutional culture of the Bank, and has major 
implications for all of the Bank's country lending programs. In the 
late 1990s in Indonesia, we had a ``smoking gun;'' namely, a number of 
internal World Bank memoranda and reports that document \15\ the past, 
ongoing, and continuing diversion of an estimated 20-30% of Bank 
lending by one of its major borrowers. After the first alarm was 
sounded by the Dice Memorandum in 1997, nothing was done and another 
$1.3 billion was disbursed. The 1998 Loos Memorandum repeated the same 
findings regarding the systematic diversion of funds in even more 
alarming terms. Then the 1999 OED country note linked the pressures to 
keep disbursing funds to Indonesia and the associated corruption to a 
long-documented, Bank-wide institutional problem: the culture of loan 
approval that pressures staff to keep lending despite abuses.
---------------------------------------------------------------------------
    \15\ ``Document'' is perhaps not the accurate term, since the 
memoranda and reports make educated speculations on the degree of 
corruption, since the Bank has no precise, reliable documentation of 
how much is actually being stolen--if it did, that would be a big step 
towards addressing the problem.
---------------------------------------------------------------------------
    Since 1999, the Bank claims that it has mounted an anti-corruption 
program in Indonesia, and has reduced lending levels to approximately 
$400 million annually. But the problems documented in Indonesia are 
endemic within many of the Bank's major borrowers that rank low on the 
Transparency International Corruption Perception Index. For example, in 
most of sub-Saharan Africa many estimate that the diversion of 
international loans by corrupt government practices occurs on an even 
more serious scale than in Indonesia. It is hardly idle speculation to 
ask whether in Russia, Bangladesh, and in much of Latin America the 
systematic diversion of World Bank loans is also on the scale 
documented in the Dice Memorandum.
    For example, in the summer of 1997, Business Week alleged that ``at 
least $100 million'' from a $500 million Russian Coal Sector loan was 
either misspent or could not be accounted for. Noting that the Bank was 
preparing a new $500 million loan for the Russian coal sector, Business 
Week observed that ``World Bank officials seem surprisingly unperturbed 
by the misspending. They contend offering loans to spur change is 
better than micromanaging expenditures.'' \16\ A little over a year 
later, the Financial Times estimated the amount stolen in the coal 
sector loan to be much higher, as much as $250 million.\17\
---------------------------------------------------------------------------
    \16\ Carol Matlack, ``What Happened to the Coal Miners' Dollars? At 
least $100 million from a World Bank loan is lost,'' Business Week, 8 
September 1997, 52, 54.
    \17\ John Lloyd, ``A Country Where the Awful has Already 
Happened,'' Financial Times, Weekend October 24-October 25 1998, XXVI.

    We have no evidence from the Bank's public statements of any 
systematic inquiries or estimates of diversion of World Bank lending in 
other major borrowers taking place, nor of the elaboration of measures 
to address the systematic problem of country diversion and corruption 
of whole lending programs.

   III. THE CULTURE OF CORRUPTION: ISSUES OF FINANCIAL REPORTING AND 
                                AUDITING
    Apart from the Indonesia case, in the 1990s there was also alarming 
documentation of the long-standing failure of internal World Bank 
financial auditing and reporting, as well as the systematic non-
enforcement of financial reporting and management loan conditions. This 
failure was again linked to the culture of loan approval. While we do 
not have recent documentation, the findings are so alarming--yet 
seemingly neglected--that one can only wonder how much has changed.
    One of the most astounding aspects of the 1992 Wapenhans Report was 
the finding that the Bank's auditing and accounting system was in 
shambles. Indeed, Wapenhans reported that nearly 78% of the financial 
conditions in World Bank loans were not adhered to, a figure he 
characterized as ``startlingly low.'' \18\
---------------------------------------------------------------------------
    \18\ Wapenhans et al., ``Report of the Portfolio Management Task 
Force,'' ii.
---------------------------------------------------------------------------
    Then, in late 1993 a World Bank ``Financial Reporting and Auditing 
Task Force'' reported that ``less than 40% of audited financial 
information is received by its due date, making it inconsequential for 
project management purposes.'' \19\ It found that the format of the 
financial information that is received often does not allow for ``1) 
comparison with information in the staff appraisal report and 2) 
linkage of physical achievements with project expenditures and 
reconciliation with Bank disbursement records.'' Moreover, ``financial 
statements and reports rarely address specific requirements of the loan 
agreements and rarely make reference to accounting principles and 
auditing standards applied.'' Finally, the report found that the Bank 
``rarely 1) reviews the borrower country's reviewing and auditing 
standards and 2) reviews the auditors' independence and capabilities. 
Financial statements received by the World Bank frequently are not 
reviewed by Bank staff or are reviewed by staff without the necessary 
skills to identify significant problems and initiate appropriate 
action.'' \20\ One reads with amazement the major conclusion of the 
report, coming as it does from the largest public international 
financial institution: ``As a general principle the World Bank should 
promote the concept that accounting is the foundation of financial 
management.'' So as the Bank approached its 50th anniversary, and, at 
the time, $170 billion in outstanding loans, it had learned the 
following: ``Without efficient accounting and financial auditing 
arrangements project management itself is not under control.'' \21\
---------------------------------------------------------------------------
    \19\ World Bank, Central and Operational Accounting Division, 
``Financial Reporting and Auditing Task Force'' (internal report World 
Bank, Central and Operational Accounting Division, Financial Reporting 
and Auditing), October 8, 1993, 1.
    \20\ Ibid.
    \21\ Ibid., 2.
---------------------------------------------------------------------------
    One of the accountants (a former director of the World Bank 
Auditing and Anti-Corruption Unit) who had worked on a the 1993 
``Financial Reporting and Auditing Task Force'' publicly stated that 
Bank auditors prepared an earlier financial reporting and auditing 
report in the 1980s that documented the same systemic problems. The 
original draft of the 1993 report referred to the fact that the 
recommendations of the earlier report had been ignored. Bank management 
had simply removed the reference to the earlier report's existence and 
its findings--a convenient enough way of preventing accountability, 
since the average tenure of an Executive Director on the World Bank's 
Board is two to three years.\22\
---------------------------------------------------------------------------
    \22\ Public Statement by James Wesberry, Former Director, Auditing 
and Anti-Corruption Unit, World Bank, at Northwestern University 
Conference, ``Reinventing the World Bank,'' May 14-16, 1999.
---------------------------------------------------------------------------
    Like the Wapenhans Report, the ``Financial Reporting and Auditing 
Task Force'' report disappeared in the bowels of the Bank bureaucracy 
with no effective follow-up.\23\ (``It is perhaps noteworthy,'' 
Mr.Wapenhans wrote in 1994, ``that the Bank's management response to 
the Wapenhans report does not yet address the recommendation concerning 
accountability. The `cultural change' required is, however, unlikely to 
occur unless the performance criteria change.'' \24\)
---------------------------------------------------------------------------
    \23\ The follow-up was, in 1993, an 87 step ``action plan'' 
entitled ``Next Steps'' which Bank management proclaimed within a year 
was ``92 percent either . . . completed or at an advanced stage of 
completion.'' World Bank, ``Progress Report on Next Steps,'' Report No. 
R94-154 (Washington, D.C.: World Bank, 26 July 1994), ii.
    \24\ Willi A. Wapenhans, ``Efficiency and Effectiveness: is the 
World Bank Group Prepared for the Task Ahead,'' in Bretton Woods 
Commission, ``Bretton Woods: Looking to the Future'' (Washington, D.C.: 
July, 1994), note 22, p. C-304.
---------------------------------------------------------------------------
    The questions of financial auditing and reporting on the ultimate 
end use of Bank loans are critical in examining the World Bank's 
efforts to address corruption. The specific, comprehensive questions 
and issues set forth in the 1993 ``Financial Reporting and Auditing 
Task Force'' report are ones that should be systematically reviewed by 
each MDB on a regular basis. However, we have do not have answers to 
these questions from any of the MDBs. While the World Bank has divulged 
the most information about its anti-corruption efforts, an examination 
of its most recent public descriptions reveal that the issues of 
systematic diversion of World Bank resources by its borrowers, of the 
kind documented in the Dice Memorandum, as well as of the need for 
effective, rigorous financial auditing and reporting systems for its 
own loans, have not been adequately addressed.

              IV. ``HOW THE WORLD BANK FIGHTS CORRUPTION''
    An examination of the most recent public document outlining the 
Bank's anti-corruption efforts leaves more questions open than it 
answers. The document, the most recent brief of the Bank's External 
Relations Department, which was also distributed internally to World 
Bank staff in response to the May 13, 2004 hearing of the Senate 
Foreign Relations Committee, is entitled ``How the World Bank Fights 
Corruption'' (web link: http://web.worldbank.org/WBSITE/EXTERNAL/NEWS/
0,,contentMDK:20040922-menuPK:34480-pagePK:34370-
theSitePK:4607,00.html). It claims, among other things, that the Bank 
is ``making anti-corruption efforts a key focus of the Bank's analysis 
and lending decisions for a country'' and is ``striving to prevent 
fraud in Bank-financed projects.'' However, many of the Bank anti-
corruption initiatives listed do not get to the heart of the problems 
and questions outlined above from the Indonesia case and with financial 
auditing and reporting. For example, the Bank highlights that ``in 
recent years [it] has lent an average of $5 billion a year to help 
countries build efficient and accountable public sector institutions'' 
and that ``more than 40% or the Bank's lending operations now include 
public sector governance components.'' The ``How the World Bank Fights 
Corruption'' summary goes on to note that ``the Bank runs a global 24-
hour a day anti-corruption hotline: 1-800-831-0463,'' that ``the Bank 
has strengthened its financial disclosure rules for its senior managers 
and Executive Directors of the Board,'' and that ``the Bank is an 
active supporter of the United Nations Convention Against Corruption.''

    But can the Bank give any estimate of how much money continues to 
be diverted through corruption in its own lending operations? Has it 
made any serious effort, apart from the example of the Dice and Loos 
memoranda in Indonesia in the late 90s, to undertake such an effort for 
individual countries or across the board?

    To the extent we find a public answer to these questions, it is the 
following: ``To deliver real results in fighting corruption, the Bank 
relies on upon the Department of Institutional Integrity to investigate 
claims of fraud and corruption--inside and outside the institution--and 
a Sanctions Committee to adjudicate cases and assess penalties.''
    The Department of Institutional Integrity has some 50 staff, and 
``so far more than 180 companies and individuals have been debarred 
from doing business with the Bank, and their names and sanctions posted 
on the Bank's external web site.'' Moreover, ``between July 2003 and 
March 2004, the Bank referred 18 cases of fraud or corruption to 
national justice authorities.''
    However, while these measures are a step forward, the Bank's 
record, and the record of the Department of Institutional Integrity so 
far is not especially encouraging. The 180 ``companies and 
individuals'' debarred from future Bank business are all relatively 
minor players, almost entirely smaller developing country companies and 
some international consultants. In the case of procurement corruption 
in the Lesotho Highlands Water Project, the Bank's corruption 
investigation has been unsatisfactory despite the high level of 
international publicity and attention that it has received. The Lesotho 
courts have already convicted the following companies for paying bribes 
to win contracts on the World Bank-financed multi-billion dollar 
project: Acres International Ltd., Canada; Lahmeyer International GmbH; 
Germany; Spie Batignolles (Schneider Electric SA), France. Acres and 
Lahmeyer have already lost their cases in the Lesotho Appeals Court. 
Concerning Acres, the World Bank commissioned a report from the 
prominent Washington law firm Arnold & Porter which found sufficient 
evidence to indicate that Acres had engaged in corrupt practice. 
However, none of these major international companies has so far been 
debarred from doing business with the Bank.
    While the Lesotho investigations have been ongoing for more than 
five years, the Bank says its investigative unit is still studying the 
Acres case and will later transfer it to its Sanctions Committee.

                   V. CONCLUSION AND RECOMMENDATIONS
    The initiatives of the Bank's anti-corruption unit are inadequate 
to address the scale, extent, and profoundly rooted institutional 
problems and internal culture of the World Bank described in the leaked 
internal reports and memos discussed earlier.
    The Bank's most basic fiduciary duty is to ensure its funds are not 
misappropriated from their intended uses. If the Bank is serious about 
knowing--and changing--how its money is really used, much more is 
needed than Bank initiatives to date.
    Therefore, we would suggest that the Committee pose the following 
questions:

          1. Has the Bank undertaken, is it or will it undertake, 
        country-wide surveys and reviews, along the lines of the Dice 
        and Loos Memoranda in Indonesia, to begin to estimate how much 
        ``leakage'' may be occurring from its lending programs in other 
        major borrowers where problems of corruption and diversion of 
        foreign loans and funds are well-known?

          2. If the Bank disputes the estimate of Senator Lugar, based 
        on the testimony of Dr. Winters and others, of as much as $100 
        billion or more having been diverted and stolen from World Bank 
        lending, can it provide another figure or estimate? Surely the 
        Bank would not deny that some amount of its funds are being 
        diverted and stolen. The Dice and Loos Memoranda leave us to 
        conclude that $8 to $10 billion was diverted from the World 
        Bank's lending to Indonesia alone. Does the Bank dispute these 
        estimates?

          3. Given that no one disputes that some proportion of World 
        Bank and MDB loans are diverted through corrupt means, the 
        burden of proof should be on the Bank and other MDBs not only 
        to come up with their own estimates but to explain how they 
        plan to work with governments to recover the stolen amounts. If 
        there is no systematic effort to recover the stolen amounts, 
        then the people of borrower countries and the taxpayers of 
        donor countries ultimately bear the costs while the MDBs let 
        the thieves not only succeed but continue. The people of the 
        borrowing nations end up directly and indirectly subsidizing 
        the repayment the stolen portions of MDB loans; the taxpayers 
        of the donor nations directly (through soft-loan windows like 
        IDA), or indirectly (through the callable capital of hard loan 
        windows like the IBRD) support and/or guarantee MDB lending.

          4. To what extent is World Bank management ready to implement 
        the recommendations set out in the testimony of Mr. Manish 
        Bapna, on behalf the Bank Information Center, Environmental 
        Defense, the Government Accountability Project, and Public 
        Services International? The recommendations would go a long way 
        towards addressing some of these issues.

    The World Bank's current statements regarding its anti-corruption 
measures also do not adequately answer all the questions and issues 
raised in the 1993 ``Financial Reporting and Auditing Task Force'' 
report. We do not have access to later reports, but former Bank 
accountants and Task Managers who have been involved in the more recent 
Wolfensohn era anti-corruption initiatives allege that the problems 
persist. There are basic questions relating to financial reporting and 
auditing that should be posed to all the MDBs since it is likely that 
whatever the problems with World Bank financial management and 
auditing, the situation in some of the regional development banks, for 
example the Inter-American Development Bank and the Asian Development 
Bank, may be more serious.

          1. At the World Bank, as well as at the other MDBs, how often 
        are detailed, Bank-wide financial auditing and reporting 
        surveys, that examine the reporting, auditing, and use of funds 
        linked to project disbursements, conducted?

          2. What percentage of World Bank and other MDB financial 
        covenants are now being complied with?

          3. What percentage of audited financial information for World 
        Bank and other MDB loans is received by due dates?

          4. To what extent and degree (percentage estimates) does: a) 
        financial and audit information received by the World Bank and 
        other MDBs from borrowers allow for comparison with information 
        in Staff Appraisal Reports; b) information from MDB projects 
        transparently and clearly link discrete physical construction 
        and specific physical improvements with project expenditures 
        and MDB disbursement records?

          5. To what extent and how often do the World Bank and the 
        other MDBs: a) review each borrower's auditing standards; b) 
        review borrowing country auditors' independence and 
        capabilities?

          6. To what extent are financial statements and reports 
        received by the World Bank and other MDBs actually reviewed by 
        staff? In cases where staff reviews financial statements, how 
        often do they possess or lack appropriate accounting and 
        financial management skills to identify significant problems?

                                 ______
                                 

  Karachaganak Field, Kazakhstan: The World Bank Contributes to Poor 
       Environmental Health and Supports Corrupt Local Officials

    The World Bank's mission, as chiseled in the entryway of its 
headquarters in Washington, DC, is to create a world without poverty. 
Loans provided by the World Bank's private lending arm, the 
International Finance Corporation (IFC), are bound by the same mission, 
and should, ``promote sustainable private sector investment in 
developing countries, helping to reduce poverty and improve people's 
lives.''
    In 2002, the IFC provided $150 million in loans to LUKoil, a member 
of Karachaganak Petroleum Operating BV (KPO), the consortium working at 
the Karachaganak oil and gas condensate field in western Kazakhstan. 
Karachaganak is one of the largest petroleum fields in the Caspian 
region, and is operated by British Gas, ENI/Agip, Chevron Texaco and 
LUKoil. Karachaganak is estimated to hold over 1200 million tons of oil 
and condensate and 1.3 billion cubic meters of gas. Not only is oil and 
condensate extracted from the field, but also refined on-site. The 
condensate is transported from the field through pipelines to Orenburg, 
Russia; the oil is piped to Aktau, Kazakhstan where it joins the 
Caspian Pipeline Consortium pipeline and is then carried thousands of 
miles to Novorossisk, Russia to be shipped by tanker to the west.
    The village of Berezovka, which is home to 1,286 residents, is 
located 5 kilometers from the Karachaganak field. A former collective 
farm, the village is now home to many of the construction workers 
building the refinery and other parts of the facility at Karachaganak. 
According to Kazakhstani law, which stipulates a five-kilometer 
``sanitary protection zone,'' the villagers should be eligible for 
relocation from the site near Karachaganak because of exposure to toxic 
chemicals produced at the field. However, KPO has decreased the 
sanitary protection zone to 3 kilometers, effectively barring the 
Berezovka villagers from relocation, because of the consortium's claim 
of ``superior technology'' at the field.
    Although independent testing shows that Berezovka suffers from 
dangerously high levels of lead, cadmium and vanadium, the IFC and KPO 
have failed to provide local residents with environmental monitoring 
data taken in the village. Villagers allege that the local police 
threaten individuals who speak out against the Karachaganak project. 
Svetlana Anosova, the leader of an initiative group in the village 
working to achieve relocation, was threatened by local police when she 
returned from Washington, DC last summer, where she met with World Bank 
and IFC officials about the plight of her village. Rather than 
receiving support from the Bank, Ms. Anosova was told by one executive 
director, ``there are winners and there are losers in this world, and 
you ladies are losers.'' Repeated requests for additional environmental 
health information have been denied and the village doctor who gathered 
data about increasing medical problems in the community was fired after 
speaking with US environmental activists who traveled to the village in 
the winter of 2002. When questioned by Berezovka activists about their 
decision to lend $150 million to the project, IFC officials replied 
that they had not considered the effect on the village when they did 
their initial study of the environmental risks at Karachaganak.
    An independent environmental health survey conducted by the 
villagers, indicates that almost 50 percent of the village population 
is chronically ill. The health study revealed that 688 members of the 
adult population suffer from headaches and memory loss. Five hundred 
and ninety-nine have muscular-skeletal problems, 423 suffer from 
significant hair loss and are losing their teeth; 413 suffer from 
vision loss; 401 have cardio-vascular difficulties; 375 have serious 
gastroenterological problems; 308 have upper respiratory illness; and 
260 suffer from skin ailments.
    The villagers, led by Ms. Anosova, also conducted a survey of 100 
high school students in the village and discovered that 95 of them 
suffer from overall weakness, 83 regularly experience severe headaches, 
77 suffer from memory loss and have frequent fainting spells, 67 have 
skin ailments, 49 experience feelings of aggression and 34 suffer from 
regular nose bleeds. Among 80 middle school children (ages 7 to 10) 
whom Ms. Anosova surveyed, 45 have frequent headaches, 38 suffer from 
frequent stomach aches and weakness, 29 have skin ailments, 24 suffer 
from memory loss, and 21 suffer from regular chest pains.
    According to US environmental health specialists Linda Price King 
and Dr. Janette Sherman, many of the villagers' health problems are 
consistent with exposure to toxic chemicals, including hydrogen 
sulfide, carbon monoxide, carbonyl sulfide and other by-products of 
petroleum extraction and processing. Villagers who have sought 
treatment for their ailments report that when they leave the village, 
many of their symptoms decrease dramatically or disappear altogether, 
making diagnosis and treatment difficult. However, when they return to 
the village, their symptoms immediately recur.
    Denial of access to the environmental data the villagers request 
from the World Bank, KPO and the Kazakhstani government is a violation 
of the Aarhus Convention, to which Kazakhstan is a signatory, and of 
the World Bank's own regulations requiring disclosure of 
environmentally relevant documents to the public. Corruption among 
local officials, including the village mayor, who is also on the 
payroll of KPO, has been ignored by both KPO and the World Bank. The 
World Bank should not provide public funds to governments and 
corporations engaged in activities that do not comply with World Bank 
standards and whose activities contribute to poverty and illness in 
local communities. The Extractive Industries Review has demonstrated 
time and again that World Bank financial support of oil, gas and mining 
only contributes to poverty, environmental degradation and increased 
corruption. Such is the case at the Karachaganak field.
    For more information about the Karachaganak case, contact: Kate 
Watters, Executive Director, Crude Accountability, P.O. Box 2345, 
Alexandria, VA 22301. www.crudeaccountability.org

                                 
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