Anti-Corruption Standards of the International Financial Institutions
Released: 2004-07-07T00:00:00

Corruption and the IFIs

Corruption is broadly defined as the abuse of public or private office for personal gain. Thisincludes, but is not limited to, taking bribes, granting a contract or choosing a project in order tomake a profit or to allow someone else to make a profit, or coercing someone else to act in a corruptmanner. Most of the multilateral development banks (MDBs) define corruption and state theirpolicies relating to it in their codes of conduct for staff, procurement guidelines, and other publicdocuments.

This report is based on information provided by the international financial institutions themselves, through publicly available information on their websites and correspondence withmembers of their staff. It compares, on a side-by-side basis, the international financial institutions'(IFIs') procedures and policies for preventing and punishing corruption in their operations. It doesnot attempt to evaluate the extent to which the IFIs adhere to these standards and guidelines. (1)

The anti-corruption measures at the MDBs are new, and in some cases (notably in the African Development Bank) are still being implemented. The need for anti-corruption policies becameevident in the late 1990s, when scandals involving corruption became public and the activities of theMDBs were more closely scrutinized. Development specialists recognized the importance ofcombating corruption to achieve economic development, and in response the MDBs began to providetechnical assistance in corruption prevention and governance to member countries. They recognizedthat improving the anti-corruption mechanisms within their own organizations would complementgovernance activities in developing countries and increase development effectiveness, as well asimprove their own credibility on governance issues.

The United States and the international community have been influential in the increased attention to anti-corruption standards. The G-8 Finance Ministers and Central Bankers issued astatement at their meeting in Rome in July 2001 that recognized the recent improvements in theinternal governance of the MDBs, but added that further improvements were still needed. At theJune 2004 G-8 Summit at Sea Island, Georgia, the G-8 issued a statement on fighting corruption indeveloping countries, announcing that the IMF agreed to publish its program documents andsurveillance reports effective July 2004. The Inter-American Development Bank (IDB) also agreedto an improved disclosure policy at the summit. Furthermore, the G-8 pledged to encouragedeveloping countries to meet the high disclosure standards set by the IFIs. The G-8 recognizes thatcorruption is detrimental to economic development, and fighting corruption requires cooperationbetween the IFIs and member countries on transparency and disclosure policies. (2)

In 2003, Congress instructed the U.S. Executive Directors to seek changes in each of the MDBs that would make their procedures for controlling corruption clearer and more transparent. (3) (Forprocedural reasons, the IMF was not included within the scope of the act.) Congress specified thatthey shall use the voice and vote of the United States in each MDB to ensure that by June 30, 2005,each institution (1) posts an annual report on its website containing statistical summaries and casestudies of the fraud and corruption cases pursued by its investigations unit; (2) establishes a plan forconducting regular independent audits of internal management controls including fraud preventionand making reports publicly available; and (3) establishes an effective procedure for the receipt,retention, and treatment of complaints received by the bank regarding fraud and other matters ofinternal control. The Secretary of the Treasury is required to report to Congress by September 1,2004, on the actions taken by each MDB to achieve these goals.

Experts say measures for countering corruption at the MDBs must be implemented on many levels to be effective. These include bank lending and operations; procurement of goods andservices; staff conduct; independent internal reporting mechanisms to address allegations ofmisconduct; oversight and management of bank operations; and educating staff on policies andprocedures.

The establishment of effective internal controls is presumptively a deterrent, reducing the number of corruption cases that the system handles. Internal controls that aim to ensure theefficiency of the organization as a whole -- such as internal audit procedures to ascertain thatorganizational policies and procedures are being followed -- complement explicit anti-corruptionprocedures. A high level of transparency and accountability in all operations helps to combatcorruption, in addition to specific anti-corruption measures taken.

Table 1. IFI Anti-Corruption Features at aGlance

Source: Compiled from IFI websites and correspondence with IFI staff.

Notes:

a. IFAD: International Fund for Agricultural Development

b. EBRD: European Bank for Reconstruction and Development

c. IDB: Inter-American Development Bank

d. IFAD does not have a unit dedicated to anti-corruption activities; however, the Office of InternalAudit (OA) is independent and has anti-corruption responsibilities in addition to other audit andinvestigation responsibilities.

Sanctions are an important aspect of internal control, but they are only as effective as the mechanisms for detecting and investigating corrupt behavior. Each of the IFIs consider similarsanctions for misbehavior, such as demotions and dismissals of staff members, blacklisting firms,and the cancellation of loans for borrowers.

Despite the efforts by the MDBs to implement internal controls and prevent corruption, it is impossible to completely eliminate the possibility that MDB resources will be used toward corruptends. It is possible for MDBs to ensure that the actual loans are used legitimately, but in a corruptcountry they may be used to free up resources for less legitimate purposes. Furthermore, there is adistinction between the operations of the MDB management and the decisions made by the executiveboard. The executive board is composed of representatives of member countries with politicalinterests, and it is these board members who make the decisions about whether to make a loan orgrant, the conditionality for that assistance, and whether borrowers have sufficiently met theconditionality requirements. Anti-corruption efforts are focused on the activities of management,not the decisions of the executive board. In the most airtight organization, it may still be possiblefor corruption to occur. However, the consistent implementation of internal controls can send a clearmessage that corruption is not tolerated within the organization, and this could have a positiveimpact on the organization's experience with corruption.

The World Bank took the lead among the international financial institutions (IFIs) in implementing its anti-corruption system in 1997. The regional MDBs have moved since to set upbasically similar systems, with organizational variations. The MDBs have made substantial changesin their internal controls over the last five years, which are aimed at bolstering their effectiveness. However, there are still concerns about inadequate effectiveness and insufficient independence ofthese controls.

The MDBs communicate with each other on issues of transparency and accountability through the Evaluation Cooperation Group (ECG), an organization of evaluation departments of MDBs. Allof the institutions listed below are members of the ECG, with the exception of the International Fundfor Agricultural Development (IFAD). The European Investment Bank (EIB), a component of theEuropean Union (EU), is also a member of the ECG. The United States is not a member of the EIB.

Anti-Corruption Measures in the MDBs

The World Bank

The World Bank's Internal Audit Department (IAD) began working in anti-corruption issues in 1997. A special unit, the Department of Institutional Integrity (INT) was created in 1998, hiringspecialists from outside the bank as well as employees from within IAD. (4) In May 1998 the bankestablished the Oversight Committee on Fraud and Corruption (OCFC) to oversee the bank'santi-corruption system. The OCFC is composed of high level bank officials from administrativeoffices at the World Bank. In addition, the bank established a Sanctions Committee to reviewfindings of investigations related to fraud and corruption by contractors. Further, the bank establisheda 24-hour free telephone hotline and a post office box hotline to receive allegations of fraud andcorruption, available for use by bank staff and the public. The hotline is managed by an outside firmand observes strict confidentiality. Users of the hotline may remain anonymous.

Reports of fraud or corruption from the hotline are sent to the OCFC. After an initial review, the OCFC determines whether the allegations warrant an investigation, and whether the investigationwill be carried out by the Investigations Unit of IAD, the Office of Professional Ethics, or byexternal, specialized investigative resources. At the completion of the investigation, the OCFCreviews the case and refers the case either to senior management or the Sanctions Committee forfurther action, or to the appropriate authorities for criminal prosecution or civil action.

The World Bank's efforts to fight corruption also encompass the procurement process. The bank disburses billions of dollars annually to finance purchases necessary for the implementationof projects. The bank has standards and guidelines aimed at ensuring that procurement funds arespent on their intended uses, and that no staff members or contractors abuse the procurement process. One difficulty is that the borrower, not the bank, has control over the procurement process. However, the bank has taken steps to monitor compliance. Over the last two years, the bank hashired independent firms to audit more than 50 bank-funded projects. They found instances ofmisprocurement in 40 contracts out of about 45,000 that were included in the audit. (5) The SanctionsCommittee may blacklist contractors and consultants who are found to be involved in corruptactivities, either for a stated period of time or indefinitely. The bank maintains a list of such firmsineligible for bank contracts on its public website. The audits are also used to develop plans withthe borrower to build capacity to avoid future fraud and corruption.

Separate from specific anti-corruption efforts, the World Bank Group has an Operations Evaluations Department (OED). An independent evaluation unit which reports directly to theexecutive directors, the OED rates the performance and development impact of bank lendingoperations. It also evaluates the effectiveness of the bank's general policies and procedures. Itsmandate is not directly related to anti-corruption, but it adds to accountability at the bank, and thuscomplements anti-corruption efforts.

The bank also as an independent Inspection Panel, which also reports directly to the executive board. Composed of three outside experts, plus a small secretariat, the panel receives complaintsfrom the public and assesses whether the bank has complied with its own rules and proceduralguidelines in the design and implementation of bank-funded projects or programs. Again, this is nota specific control against financial corruption but it is a measure to insure that the bank's operationalrules or policies are not inappropriately breached.

The International Monetary Fund

The IMF is different from the MDBs in that it does not fund projects. Rather, it provides balance of payments finance that typically involves boosting the reserves of the central bank. Asmoney in the central bank can be fungible, it is difficult to track specific uses of IMF resources. Nonetheless, the IMF has instituted a 'safeguards' framework that aims to verify that the central bankhas the proper control and auditing systems in place to manage its resources, including funddisbursements. A key element is a requirement that countries publish annual central bank financialstatements that are independently audited in accordance with internationally-accepted standards.

The centerpiece of the IMF's internal controls is its Code of Conduct for Staff, which is supported by financial disclosure requirements for senior staff (to prevent financial conflicts ofinterest) and an ethics officer. The ethics officer position was established inFebruary 2000 toinvestigate alleged violations of the Code of Conduct, and of other IMF rules and regulations. Theethics officer is appointed by the managing director, and is intended to be an impartial person havingno former employment with the IMF. However, there is no prohibition on future employment withthe fund, and the ethics officer's term may be extended by the managing director. The ethics officerconducts investigations at the direction of the managing director or the director of Human Resources(HRD), or he/she initiates investigations with the approval of the Oversight Committee (OC). TheOC is composed of three senior IMF officials, with the director of HRD as chair. The OC also rulesin the event of a staff appeal, and determines if an investigation should be begun as well as whetherone should be continued.

The Independent Evaluation Office (IEO) was established in July 2001 to support the board in institutional governance and oversight responsibilities. It reports directly to the executive board andits purpose is to evaluate IMF advice, operations, and policies. The IEO staff is hired from bothoutside and from within the IMF.

The IMF has made efforts in recent years to make its policies and operations more transparentand open to public scrutiny. The fund publishes all Article IV staff reports for the public as a matterof policy, unless an individual country does not consent to having its report published. Countrieshave a right under the Articles of Agreement to block any IFI disclosures about their internaleconomic conditions. Countries that block such disclosure can be readily identified, however, andpotential investors or lenders may note that there may be information about its internal economicsituation which the country does not wish to release to the public. The IMF also releases fundpolicy papers, the minutes of executive board meetings, details of loan programs, and annualevaluations.

International Fund for Agricultural Development

The International Fund for Agricultural Development (IFAD) is a specialized agency of the United Nations (U.N.). It seeks to prevent corruption by pre-screening potential recipients of grantfinancing, and through structured financial reporting and audit requirements for loan and grantrecipients. Grant recipients must follow procurement guidelines acceptable to IFAD to ensuretransparency. The procurement guidelines have recently been amended to specifically address fraudand corruption, and they were presented to the executive board in April 2004 for approval after theyare reviewed by the Audit Committee. IFAD is different than the other IFIs in that it is a specializedagency of the U.N., and it conducts investigations in a manner consistent with the rules of the UnitedNations.

IFAD set up its Oversight Committee (OC) in May 2000 to coordinate investigations into irregular practices, either within IFAD or in connection with operations and contracts financed byIFAD. The OC is similar to investigations units in the MDBs, but it operates on a higher level asit is composed of the vice president, the general counsel, and the chief of Internal Audit. It decideswhether an investigation is warranted, determines who should be involved in the investigation, andreports the facts emerging from the investigation to the president. If external agencies, such asnational authorities, are involved in an investigation, the OC determines IFAD's role in thatinvestigation. External agencies report the findings of their investigations to the OC, which thenreports to the president. The president makes decisions about sanctions independent of the OC.

The Office of Internal Audit (OA) reviews operations of IFAD for efficiency and integrity, and participates in investigations of fraud and corruption. It is an independent unit with only reviewresponsibilities and no involvement in sanctions. The head of OA reports to the president.

African Development Bank

As part of the bank's "zero tolerance policy," staff members of the African Development Bank (AFDB) are required to submit financial disclosures, and they are required to comply with the StaffCode of Conduct. In the recent past, allegations were investigated by the Internal Audit Department(IAD) or by an ad-hoc team, including the general counsel. The bank's Procurement ReviewCommittee (PRC) receives the findings and conclusions of investigations and decides on a plan ofaction; including sanctions, both against the borrower (cancellation of loans) or thecontractor/consultants who have been declared ineligible to participate in bank funded operationsfor a minimum period of five years.

The AFDB has established guidelines and procedures for preventing and combating fraud and corruption in Bank Group operations. Efforts are also underway to establish a specific unit withinthe existing Internal Audit Department (IAD) to conduct internal investigations and to provideprotection for whistle blowers, in the form of a hotline for complaints of misconduct. It is alsoconsidering a proposal for the establishment of a senior management oversight committee to combatfraud and corruption, much like the oversight committees at some of the other MDBs.

Additionally, the management of the bank has submitted final proposals to the AFDB for the establishment of an independent Compliance Review and Mediation Unit (CRMU). The CRMUwould focus on issues of noncompliance by the Bank Group with regard to operational policies andprocedures in the design, implementation or supervision of a Bank-financed project. Under this plan,third parties would be able to submit complaints of harm from bank activities to the CRMU. TheCRMU would not be directly involved in fraud or corruption investigations, but would complementthe anti-corruption activities of the bank by adding to accountability.

There are units within the bank that work in similar ways to the proposed CRMU. The IAD investigates compliance with bank rules, but it does not have the capacity to respond to complaintsfrom third parties. Meanwhile, the Operations Policy and Review Department (OPRD) reviews allbank projects and programs for compliance with AFDB operating policies and procedures as theyenter the financing pipeline.

The 2002 Presidential Directive on the Bank Operation Evaluation Department (OPEV) allows the department to carry out its functions independently. OPEV was established to provide acomprehensive and objective assessment of the development effectiveness of the Bank Group'sstrategies, policies, operations, processes and procedures. It undertakes, independently of the bank'soperational units, performance evaluation of completed and selected ongoing projects and examinestheir development impact. It reports directly to the board of directors, which supervises thedepartment's work through its Committee on Operations and Development Effectiveness (CODE). The reporting relationship of OPEV and its director is reportedly materially similar to that of theWorld Bank's Evaluation Department.

Asian Development Bank

At the Asian Development Bank (ADB), an Anti-corruption Unit (OAGA) within the Office of the Auditor General (OAG) is responsible for implementing the ADB's anti-corruption policies,with oversight from the Oversight Committee on Corruption. In addition to investigating allegationsof corruption, the OAGA provides training to ADB staff and member countries in anti-corruptionprocurement and investigative techniques. It provided extensive training to staff members on therevisions to the Code of Conduct involving corruption.

OAGA receives reports of corruption and screens them to determine whether they warrant further investigation. Its decisions are reviewed by the Oversight Committee on Anti-corruption,which is comprised of three voting members and three alternates who are nominated by the auditorgeneral and approved by the president. OAGA coordinates investigations, which it may conduct byitself or with the help of external auditors, investigators, or other experts selected by OAGA ordesignated by the Oversight Committee. At the conclusion of an investigation OAGA submits itsfindings to the Oversight Committee, which then determines whether the alleged violation tookplace, whether there is need for further inquiry, and ultimately, what sanction or remedial actionADB should impose. Appeals of Oversight Committee decisions are brought to the ReviewCommittee, which is composed of ADB vice presidents.

ADB may declare a firm or individual ineligible to participate in ADB-financed projects and activities for a specified time period or indefinitely. Firms declared ineligible are notified, and arelisted on the ADB website only if ADB is unable to contact them, or if they attempt to participatein an ADB activity during their period of ineligibility. If ADB consistently encounters problemswith a particular executing agency or sector, it has the flexibility to change its programming mix toavoid working in that area. Likewise ADB can focus its lending and technical assistance onstrengthening government institutions to facilitate greater transparency and accountability.

The Asian Bank has an Operations Evaluation Department whose head reports to the ADB executive board through the bank president. The ADB has established a new inspection mechanismto reinforce accountability and address in a fair and objective way the concerns of persons affectedby ADB-assisted projects. A special project facilitator will focus on informal problem-solving andan independent three-member Compliance Review Panel will investigate alleged violations of theADB's operational policies and procedures.

European Bank for Reconstruction and Development

At the European Bank for Reconstruction and Development (EBRD), the chief compliance officer (CCO) is responsible for ensuring professional integrity. The CCO identifies relevantstandards and best practices in this area and promotes them in the bank, enhances staff awarenessof the bank's commitment to such standards, conducts investigations of allegations in accordancewith the Procedures for Reporting and Investigating Suspected Misconduct (PRISM), and monitorsthe banks' hotline and follows up as appropriate. Complaints related to fraud or corruption aredirected by the CCO to the appropriate office within the bank. The CCO is independent of bankproject operations.

The hotline is reportedly available to report allegations of fraud or corruption from all countries, on the part of bank officials, employees, consultants, or bank-financed projects.

The bank's Procurement Policy states that all entities involved in bank projects must adhere to high ethical standards, and it defines corruption. The bank may reject a proposal, cancel financing,or blacklist a firm for reasons of corruption in bank-related activities. The bank will maintain a listof blacklisted firms on its website, although currently no firms are blacklisted from participating inbank-financed activities.

To prevent corruption through increased accountability and transparency, the EBRD has a Public Information Policy governing disclosure to the public, an Environmental Policy, and anIndependent Recourse Mechanism (IRM) to receive complaints from groups adversely affected bybank-financed projects. The IRM was approved by the board in April 2003, and was implementedshortly thereafter. Complaints to the IRM must not be related to fraud or corruption; those aredirected to the hotline and the CCO.

The EBRD has a Project Evaluation Department (PED) that reports to the president via the secretary general's office and is independent of banking operations. The PED evaluates bothprojects and technical assistance programs for compliance with the bank's mandate, by comparingactual with expected outcomes. It makes note of the lessons learned and disseminates them withinthe bank. The PED also conducts sector studies and has a pilot program to evaluate countrystrategies. This form of project review may add to accountability and transparency at the bank.

The broader or operational review functions are performed by the board of directors, or one of the three board committees. One such committee is the board's Audit Committee, which has theresponsibility to ensure that PED and other related functions (such as compliance and internal audit)are able to perform their duties independently. The Audit Committee also aims to ensure that thesefunctions are performing a needed role within the bank, have adequate resources and institutionalcapacity to perform their roles, and their performance meets expectations. The Audit Committeerecently recommended adopting an internal controls framework that aims to assure compliance withbank policies, and the board accepted this recommendation.

The Inter-American Development Bank

In June 2001, the Inter-American Development Bank (IDB) created an Oversight Committee on Fraud and Corruption (OCFC). The OCFC does not actually conduct investigations, but itoversees investigations of fraud and corruption that are conducted by the Office of InstitutionalIntegrity (OII). The OCFC may impose appropriate remedies, oversee their implementation, anddetermine when matters should be referred to national authorities. The OCFC is composed ofmembers of senior management of the bank and reports directly to the president.

The OII was created in October 2003, and it is an independent office that reports directly to thebank president. It is responsible for receiving allegations of fraud and corruption and it submitsreports of completed investigations to the OCFC for a final decision. Issues not involving fraud orcorruption are referred to the proper authority within the bank. OII also aims to prevent corruptionby promoting and disseminating the bank's policies on fraud and corruption to bank staff and byleveraging the results of investigations in order to improve preventative measures. The OII alsoreportedly serves as the secretariat to the OCFC, the Ethics Committee, and the Conduct ReviewCommittee.

Statistics on fraud and corruption cases at the IDB are available on its website. From its inception in April 2002 to April 2004, OCFC (and later OII) have received 183 allegations,averaging about 7 per month. The OCFC/OII have opened 92 investigations during the past twoyears, including investigations that have been concluded and those still in progress. Allegations canbe reported to the OII through a toll-free hotline number, secure email, fax, surface mail, in person,or via the bank's website. The IDB has also recently adopted a rule providing protection forwhistleblowers, strictly prohibiting retaliation against bank staff for reporting an allegation of fraudor corruption, or a violation of a law, rule or regulation of the bank.

The OCFC classifies allegations in accordance with the Operating Guidelines and regulations for the Oversight Committee. Allegations relating to fraud and corruption that appear to be credibleare sent to the Auditor General's Office (AGO), which determines whether an investigation shouldbe initiated. The AGO conducts the investigation if required, with OCFC oversight. The AGOsubmits the report of the completed investigation to the OCFC for a decision. Issues not involvingfraud or corruption are referred to the proper authority within the bank.

There are other mechanisms at the IDB that aim to enhance accountability and efficiency. The bank's Ethics Committee reviews allegations of unethical behavior on the part of bank staff asdescribed in the Code of Ethics. In 2003 the bank's board of executive directors adopted its ownCode of Ethics, which will regulate board members' own behavior, as distinct from the Code ofEthics for bank management. The bank requires external audits of financial statements for projectexecuting entities and the projects themselves throughout the execution period of the project, untilall funds have been disbursed. The bank's Procurement Committee oversees the bank's procurementpolicies. It resolves major procurement-related issues during project implementation, includingawards to bidders not evaluated as the lowest, and all protests by bidders submitted during theprocurement process. The Independent Investigation Mechanism (IIM) investigates formalcomplaints from groups alleging that they have been negatively affected by a bank-financed projectdue to the bank not having complied with its own operational policies.

The IDB's independent evaluation office is the Office of Evaluation and Oversight (OVE), which evaluates project performance and the effectiveness of IDB policy and programs. The OVEreports to the executive board, and it has an independent budget approved by the board. Its findingsare publicized through the new information disclosure policy.

Table 2. Comparison of the IFIs' Anti-Corruption Mechanisms