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. 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).