How the World Bank deals with fraud and corruption in its projects

21 July 2003 | Inside the institutions

“Let’s not mince words: we need to deal with the cancer of corruption . . . Let me emphasize that the Bank Group will not tolerate corruption in the programs that we support; and we are taking steps to ensure that our own activities continue to meet the highest standards of probity.” After this pronouncement in 1996, past World Bank President Jim Wolfensohn never missed an opportunity to remind audiences around the world how corruption had gone from an unspeakable c-word to top priority since he joined the Bank. The Bank’s previous approach to corruption was described by an ex-Bank staffer as the “three-monkey policy”: see nothing, hear nothing, say nothing. Despite progress questions remain about whether the Bank is really able to keep corruption at bay from its own projects.

Various departments and committees are in charge of anti-corruption policies and practices at the Bank. The Corporate Committee on Fraud and Corruption Policy is responsible for ensuring that the Bank develops anti-corruption policies and implementation strategies. It is chaired by a Bank Managing Director and includes representatives of the various departments that have a role in anti-corruption initiatives.

Among these is the Department of Institutional Integrity (INT). While the Poverty Reduction and Economic Management Department (PREM) analyses and conceptualizes ‘good governance’, INT investigates allegations of fraud and corruption in Bank operations and allegations of staff misconduct. It also assists in preventive efforts to protect Bank funds such as staff training.

The Director of INT is Suzanne Rich Folsom, a US national and former attorney who joined the Bank in 2003 as counsellor to the president. The staff include investigators and former prosecutors, forensic accountants and procurement specialists. They are divided in regional teams that mirror the Bank’s regions. One team is dedicated to staff misconduct cases.

Bank staff and the general public can report fraud and corruption in a variety of ways that allow them to remain anonymous. The Bank has established a toll free, 24 hour / 7 day a week hotline, which provides translation services. The Department of Institutional Integrity can also be contacted directly (see box). The Department conducts a preliminary inquiry of each allegation submitted, which includes an interview of the person submitting the allegation when possible, and at least a preliminary document review. Based on those elements it then decides whether to conduct a full investigation. Investigations can result in the withholding or cancellation of loans with countries sometimes having to repay loans affected. Possible reasons include contract irregularities and violations of the Bank’s procurement guidelines, bid rigging, collusion by bidders, fraudulent bids, fraudulent contracts, bribery, and misuse of Bank funds or positions.

Involvement of Bank staff in irregularities can lead to termination of their contract and legal actions. As for firms and external individuals involved in irregularities the Bank can debar them from future contracts it finances, for a stated or unlimited period of time. Currently about a hundred firms and individuals are on a public ‘blacklist’. Debarment decisions are made by the Bank’s Sanctions Committee, appointed by the President and composed of Bank senior staff, two managing directors and the Bank’s legal counsel, which reviews the findings of investigations. The Bank says information-sharing procedures with other international financial institutions are in place, which can lead to a Bank investigation if a company is under fire from another multilateral development bank, for example. However there is no rule or mechanism that would automatically trigger multiple debarments. Also, while OECD countries are very influential in the Bank decision-making structure, it is unclear whether the institution follows the letter or the spirit of the OECD convention on bribery.

The Bank does not only investigate solely on the basis of allegations made to it. The Department of Institutional Integrity says it is also developing a more pro-active investigative strategy that includes participating in so-called ‘fiduciary reviews’ carried out by regional vice-presidencies of the Bank and designed to reduce corruption and strengthen fiduciary controls in a country.

INT participated in a “successful” review of the Sulawesi Urban Development Project in 2002 in Indonesia. The report of the investigation states “Despite a severe problem of missing documentation, the review found evidence of collusion among bidders and common ownership of shell companies. The review also found inadequate project oversight by implementing agencies and consultants, which resulted in contract non-compliance, failure to complete work, and changes in contracts without appropriate approvals.” Subsequent investigations led to the debarment of 15 Indonesian firms for short periods.

According to Down To Earth, the International Campaign for Ecological Justice in Indonesia, news of the review was met with scepticism, even among Bank staff. John M. Miller, Team Leader from 1998 to 2002 of the Coordination Office for the Sulawesi project, categorised the Bank as a willing partner in the corrupt system in Indonesia. The Bank’s focus, said Miller, has always been on “pushing money” rather than on the quality of loan design and preparation.

The Bank’s review follows a dispute that erupted in 1997 following accusations that roughly 30 per cent of Bank funds in Indonesia were diverted for unintended purposes. Then Vice-President for the region Jean Michel Séverino and the country representative denied accusations angrily saying they were “demonstrably untrue” and that the Bank’s staff “know exactly” where all the loan money goes (see Jeffrey A. Winters in Reinventing the World Bank, Cornell p. 126).

However the figures were confirmed by a leaked Bank report which was being drafted at the same time. President Wolfensohn’s response to a NGO joint letter on the subject cast doubts on the seriousness of the Bank’s ‘crackdown’ on corruption. These doubts are reinforced by a lack of transparency on ongoing or even past investigations. Down To Earth, for example, criticises the fact that the Bank “does not disclose critical information, such as the time frame for reviewing a corruption allegation, number of cases received within a certain period of time, types of cases, actions taken on each case and how proven corruption cases are settled”.

Similar doubts were raised following a recent corruption scandal around the controversial Highland Waters Bank project in Lesotho. Two firms, including Canadian Acres International, have been convicted of bribing an official. While Acres have appealed the verdict, NGOs question why the firms have not been debarred yet. International Rivers Network commented that “the World Bank’s kid-glove treatment of companies convicted of bribery in Lesotho thus far is an insult to the Lesotho government’s courageous efforts to hold both bribe-takers and bribe-payers to account. Acres International continues to work on World Bank-funded projects in spite of its bribery conviction”. The Bank says it is “examining the court records of the criminal case… to determine if there is new evidence that should be brought to the attention of the Sanctions Committee.”

While the Bank has made major efforts to publicise its new emphasis on corruption, starting with its own operations, a recent survey of ‘opinion leaders’ commissioned by the Bank found that “reducing corruption stands alone as the one area where substantial minorities or majorities say the Bank is doing a poor job.”

How to report fraud, corruption and misconduct in Bank projects:

Hotline: 1-800-831-0463, can be accessed outside the US through an international AT&T operator

To contact investigation unit directly:
Telephone: +202-458-7677
Fax: +202-522-7140
Internet: click on online complaint form

Updated 05/04/06