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Institute for Policy Studies

Report Info

  • Released May 21, 2009
Foreign Policy In Focus » Report

World Bank Corruption

The Bank's management tried to stifle an internal report that found that its funds are vulnerable to theft and diversion.

Editor's note: Click here to read the full report.

The International Development Association (IDA), the arm of the World Bank that makes grants and interest-free, long-term loans to poor countries around the world, lacks effective safeguards against corruption, according to a report by the Bank's own Independent Evaluation Group (IEG). The report concluded that IDA, which currently lends and grants about $10 billion annually to governments in Africa, Asia, Latin America, and Eastern Europe, doesn't protect its funds adequately from theft and diversion.

This damning report couldn't come at a more awkward time. The G20 in early April called on the World Bank to step up its lending to cope with the global economic crisis, and the acceleration has already begun. With such streamlining of loan and grant approval, there's an even greater chance of corruption escaping detection.

The IEG report was released with little fanfare in mid-April, buried deep in the World Bank website. The crucial section about failure on anti-corruption measures was buried deeper still in Volume II, Annex D (click here to see Vol. II).

Material Weakness

The document revealed that the lack of safeguards at IDA rises to the level of a "material weakness," the most serious of financial accounting failings. The finding, reached by the IEG together with an international advisory panel that included independent auditors from Australia, Norway, and India, was released to the public only after a pitched and protracted battle with the Bank's management — which fought mightily to avoid disclosure.

Still, the facts of the matter were clear: After 13 years of rhetoric deploring fraud and corruption, the World Bank's management hasn't even minimally equipped its staff to protect IDA funds. For example, according to the IEG review: The Country Assistance Strategy (the Bank's three-year business plan for each nation in which it sets priorities) and strategy papers on priorities for economic sectors "have not systematically and seriously addressed fraud and corruption risk at the country level."

Moreover, most of the Bank's anti-corruption efforts have been confined to high-level speeches and analytical studies. James Wolfensohn, the World Bank's president from 1995 to 2005, kicked off the campaign with his "Cancer of Corruption" speech in 1996. Paul Wolfowitz, the next president followed suit, announcing a "three-pronged plan" to achieve five objectives in the fight against corruption. To date, according to the IEG review, project designs don't address the risk of fraud, nor do guidelines for project supervision, financial management or procurement. And although the Bank's lending to bridge the gaps in national budgets requires assessments of fraud and corruption, real safeguards are lacking. In other words, there's a program on paper but very little in practice.

Vietnam and India

Since its establishment in 1960, IDA's loans and grants have totaled over $193 billion, and indications are that the global financial crisis will provide a rationale for increasing annual lending. During the Bank's last fiscal year, Vietnam and India were the two top beneficiaries of IDA funds: Vietnam borrowed nearly $1.2 billion and India received over $800 million, although both countries had been previously assessed in separate reviews as running projects with a high probability of corruption.

The World Bank assessed India's health care projects for corruption risk in 2006 and found that five of five projects were spectacularly vulnerable to fraud. In a "Detailed Implementation Review" (DIR) (a World Bank process for assessing fraud and corruption), the Bank found:

  •  Procurement deficiencies, including collusion, bid rigging, bribery and manipulation of records.
  • Implementation deficiencies, such as deficient work certified as complete, broken, damaged equipment certified as compliant, under-delivery of services.
  • Oversight deficiencies, including inadequate financial, audit and internal controls both by GOI [Government of India] and [the]Bank.

A similar review of two of Vietnam's infrastructure projects found "a proliferation of indicators of collusion, fraud, misrepresentation and preferential treatment in the procurement and award of contracts. The DIR also found vulnerabilities to irregularities in the projects' financial management activities and control environment. Lastly, a large number of the project sites visited by the DIR team showed design and construction irregularities in works."

In the wake of these reports, India's Ministry of Health, the counterpart of the projects identified with a high likelihood of corruption, received another $521 million credit, while the Bank's Board of Directors approved an additional $322 million for infrastructure and roads projects in Vietnam.

Typically, the Bank's management reacts to findings of shortcomings and ineffectiveness in ways designed to obscure the message. In this case, the communications team developed a hair-splitting explanation that conveys the wrong impression unless read carefully. After it released the Vietnam corruption report, Martin Rama, the Bank's acting director in Hanoi, told a news conference: "The DIR found no evidence supporting allegations of fraud and corruption against the PMU (Project Management Unit) 18 officials." In a strict sense, the statement is true, but the fact is that the DIR found no such evidence because it is not designed to look for any. As the Bank's website explains: "A DIR assesses the likelihood of fraud, corruption and mismanagement in Bank-financed projects" while "An investigation determines whether an allegation is substantiated, unsubstantiated or unfounded." In other words, the DIR only makes the allegations; in order to find evidence supporting them, the Bank would have had to follow up with an investigation.

In the Indian case, both the government of India and Bank management attacked those who carried out the DIR as well as their message, claiming, among other things, that one internationally recognized reviewer was incompetent and mistaken and that irregularities identified had already been addressed when they had not.

Aftermath

In short, the depth and breadth of the accountability weaknesses exposed at IDA are alarming.

Yet, the Bank's management claimed that the accountability flaws the report about IDA flagged are now being addressed on three fronts. First, the recommendations of the Volcker Panel, which reviewed the performance of the Bank's investigative unit in 2007, have been implemented. Second, the Bank's Board approved a whistleblower protection policy in June, 2008. Finally, implementation of the Governance and Anti-Corruption Strategy (GAC) began in January 2008 and has been progressively integrated into lending and projects.

None of these claims, however, withstands scrutiny. The Volcker Panel, for example, insisted that corruption be effectively addressed through a "fully coordinated approach across the entire World Bank Group, ending past ambivalence about the importance of combating corruption." Yet the IEG report itself shows that this is precisely what management has not done:

  • Basic project and lending documents don't include a requirement to assess the risks of fraud and corruption;
  • Safeguards against corruption don't exist for budget support loans, perhaps the most vulnerable of IDA funds;
  • Staff members haven't been adequately trained to recognize signs of corruption in projects; performance appraisals include incentives to report corruption;
  • Management routinely fails to take timely actions to follow up on audit, investigatory, and evaluation findings of impropriety.

Nor is the whistleblower protection policy effective. Would-be whistleblowers informed IEG that they fear they are risking their careers at the Bank if they report fraud. Further, staff members in the Department of Institutional Integrity (INT), the unit specifically responsible for investigating corruption, reported more than the staff of any other unit that: "[S]eeking out [fraud and corruption] issues in projects and reporting on observed improprieties may lead to reprisals from their managers, and managerial signals and behavior are not always consistent with these messages. Overall, mixed messages and ambivalence are still considered prevalent."

Further, a close reading of the whistleblower policy shows that it incorporates coverage loopholes, unrealistic caps on compensation for vindicated whistleblowers, and unjustifiable reporting restrictions. As a result, nearly one year after the Board approved the protection policy, there are virtually no whistleblower cases under investigation at the Bank, despite reports of both widespread corruption and retaliation.

The third World Bank effort mentioned prominently in the IEG report as providing future protection for IDA funds is the Governance and Anti-Corruption Strategy (GAC). But the GAC's own implementation report, released in December 2008, revealed that management lacked an institutional commitment to the strategy: "Senior Bank leadership should overcome current problems within the Bank of ad hoc responses and ambivalence about the GAC mission…with clear statements about institutional and individual responsibility and accountability." The implementation report concluded that the GAC strategy was not integrated effectively into Bank operations

Who Can You Call?

Although the IEG didn't signal it, an additional procedural weakness makes IDA funds, and in fact all Bank funds, vulnerable to corruption. Criminal conduct, such as theft, bribery and fraud, isn't prosecutable by the Bank. INT investigates criminal allegations for the purpose of debarring corrupt firms or individuals from future Bank work. The likelihood of recovering funds is extremely remote, and national authorities are dependent on information from the World Bank and from INT if they are to prosecute. Recent allegations of criminal misconduct involving Bank funds indicate that the Bank has no uniform procedures for referring cases to national authorities. If such procedures do exist, Bank management is unwilling to divulge them and the public has no right to information about them.

In effect, then, IDA funds are vulnerable to fraud and corruption from all directions. First, safeguards aren't in place at either the country or the project level. IDA funds aren't protected with preventive measures that systematically flag signs of improprieties. Next, Bank staff members working on vulnerable projects are intimidated and hesitant to allege fraud and corruption even when they suspect it. If project staff simply keep the disbursements moving, there are no questions asked. If they slow or suspend disbursements when suspicions of corruption arise, they must respond to an avalanche of paperwork and pressure. Third, investigators, when alerted to possible wrongdoing, are reluctant to find it for fear of reprisal. Finally, the Bank doesn't appear to cooperate systematically with national law enforcement agencies.

The IEG has made it clear that the Bank isn't equipped to ensure that its billions in IDA aid don't wind up in the wrong bank accounts. After more than a decade of posturing and preaching about the corrosive effect of corruption on development, Bank management should focus on the practicalities of actually addressing it.

Moving Forward

To begin, there are clear, low-cost and no-cost steps that management could take:

  • Build anti-corruption safeguards into project design, supervision, and procurement.
  • Train project staff to recognize signs of corruption in Bank projects.
  • Protect whistleblowers from reprisal when they come forward and discipline retaliators.
  • Ensure that investigators, particularly, are shielded from retaliation when they pursue allegations of fraud and that they are empowered to cooperate with their national counterparts when criminal investigations are warranted.

But the World Bank's management doesn't need outside advice on how to handle corruption. Managers there know much more about it than almost anyone else. And, in most cases, bid-rigging, collusion, and bribery aren't that hard to spot. The real problem at the Bank is a failure of will at the top. The Government Accountability Project (where I work), for example, found that Wolfensohn — while flogging anti-corruption measures on the one hand — silenced staff members who tried to warn investors that an international criminal was hijacking a privatization scheme in Azerbaijan. And Wolfowitz, while touring Africa preaching anti-corruption, was feathering his girlfriend's nest and quietly suppressing an INT report that showed Joseph Kabila, President of the Democratic Republic of Congo, allowing his girlfriend to feather hers with the World Bank's money. Not incidentally, the funds she took were intended to finance airlifts to transfer Congolese children from war zones.

The Bank has been very adept at promoting the impression that corruption is a problem now being addressed. This is, quite simply, not the case. Fundamentally, nothing has changed since the talk began. Bureaucratic layers of "review" have been added and the speeches continue. There are implementation strategies and disclosure consultations. But there isn't any discipline, no real deterrent, and no penalty for criminal conduct. Even more notable, for the most part, the IEG report exposing this has gotten very little attention from those who could do something about it.