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



                                                        S. Hrg. 108-734

COMBATING MULTILATERAL DEVELOPMENT BANK CORRUPTION: U.S. TREASURY ROLE 
                     AND INTERNAL EFFORTS [PART II]

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

                                HEARING



                               BEFORE THE



                     COMMITTEE ON FOREIGN RELATIONS
                          UNITED STATES SENATE



                      ONE HUNDRED EIGHTH CONGRESS



                             SECOND SESSION



                               __________

                             JULY 21, 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 D. 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

                               Witnesses

Elliott, Kimberly Ann, Research Fellow, The Institute for 
  International Economics........................................    44
    Prepared statement...........................................    46

Penzhorn, Guido, Advocate and Senior Counsel, Durban Bar, Durban, 
  South Africa...................................................    34
    Prepared statement...........................................    38

Taylor, Hon. John B., Under Secretary for International Affairs, 
  Department of the Treasury.....................................     4
    Prepared statement...........................................     7

Thornburgh, Hon. Richard, of Counsel, Kirkpatrick & Lockhart.....    17
    Prepared statement...........................................    23

                                Appendix

Responses to Additional Questions Submitted for the Record by the 
  Committee......................................................    57

    Responses to Questions for the Record Submitted to Secretary 
      Taylor by Chairman Richard Lugar...........................    57

    Responses to Additional Questions for the Record Submitted to 
      Secretary Taylor by Senator Joseph R. Biden, Jr............    59

Additional Information Submitted for the Record..................    60

    Statement Submitted by Thomas Devine, Legal Director, 
      Government Accountability Project..........................    60

    Statement Submitted by Nancy Alexander, Citizens' Network on 
      Essential Services.........................................    64

                                 (iii)

  

 
COMBATING MULTILATERAL DEVELOPMENT BANK CORRUPTION: U.S. TREASURY ROLE 
                     AND INTERNAL EFFORTS [PART II]

                              ----------                              


                        Wednesday, July 21, 2004

                               U.S. Senate,
                    Committee on Foreign Relations,
                                           Washington, D.C.
    The committee met, pursuant to notice, at 9:33 a.m. in SD-
219, Dirksen Senate Office Building, Hon. Richard Lugar, 
chairman of the committee, presiding.
    Present: Senator Lugar.

                STATEMENT OF HON. RICHARD LUGAR,
                   U.S. SENATOR FROM INDIANA

    The Chairman. This hearing of the Senate Foreign Relations 
Committee is called to order. Today the committee meets to 
review United States policy toward the multilateral development 
banks, which include the World Bank, the Inter-American 
Development Bank, the Asian Development Bank, the African 
Development Bank, and the European Bank for Reconstruction and 
Development.
    This is the second in our series of hearings examining ways 
in which the United States Congress and our government can 
contribute to anti-corruption and anti-fraud efforts at the 
multilateral development banks. Our committee is committed to 
continued oversight of the multilateral development banks 
through hearings, site visits, interviews, and document 
reviews.
    The United States has strong national security and 
humanitarian interests in alleviating poverty and promoting 
progress around the world. That is why the Congress funds 
foreign assistance programs and also why we fund multilateral 
development banks. The MDBs leverage our resources to promote 
poverty reduction and development around the world.
    For 2004, the United States provided the MDBs with $1.2 
billion, and the MDBs provided developing countries with more 
than $35 million in financing. In our May 13 hearing, we 
learned that MDBs have been taking steps to curb corruption, 
but that more needs to be done to ensure that bank funds are 
used properly.
    Today our hearing will focus on what the United States 
Treasury Department is doing to stem corruption at the MDBs. 
The Treasury Department is responsible for dealing with the 
MDBs on behalf of the United States. We also will discuss the 
World Bank's efforts to impede fraud and its response to 
prosecutions of corruption related to one of its projects.
    As one of its anti-corruption initiatives, the World Bank 
commissioned former Attorney General Richard Thornburgh to 
produce three reports analyzing World Bank operations. We will 
discuss these three reports, which make recommendations for 
improving the World Bank's mechanisms to address fraud and 
corruption, streamlining the process used to debar companies 
that fail to abide by World Bank policy and strengthening the 
Department of Institutional Integrity, the World Bank office 
responsible for investigating allegations of fraud and 
corruption.
    We also will discuss the Lesotho Government's ongoing 
campaign against corruption. Lesotho has made a significant 
effort to prosecute a number of companies for bribery related 
to a World Bank-financed project. The World Bank's response to 
Lesotho prosecutions is important, not only in that country, 
but to the perceptions of countries and companies around the 
world. How the World Bank deals with international corporations 
convicted in a court of law for corruption associated with 
World Bank projects will be a powerful indication of the 
seriousness of the World Bank's anti-corruption efforts.
    Finally, our hearing will examine the responsibilities and 
activities of the Treasury Department concerning investigative 
oversight of the multilateral development banks. Our initial 
inquiry into this topic suggests that there is confusion or 
some indecision within the Treasury Department about its 
oversight role. In February 2004, my staff forwarded a specific 
allegation of World Bank corruption to the Treasury Inspector 
General's office. We received a response stating, and I quote, 
``we are in the official phases of determining Treasury OIG's 
criminal investigative jurisdiction in matters like the one you 
have referred to this office. At this time, we anticipate no 
further action with this matter.'' A copy of the Inspector 
General's letter will be entered into the record.

    [The information referred to follows:]

                   Office of the Inspector General,
                           U.S. Department of the Treasury,
                                                 February 27, 2004.
Mr. Keith Luse,
Senior Professional Staff Member,
U.S. Senate Committee on Foreign Relations,
Washington, DC 20510-6225

    Dear Mr. Luse,
    Thank you for your correspondence forwarding the conspiracy 
allegation concerning [redacted] embezzling six million from a wire 
transfer to [redacted]. We note from the attached documents that 
[redacted] is represented to be [redacted] and, apparently, has a 
relationship with the World Bank.
    As you are aware, the Secretary of the Treasury serves as a World 
Bank Governor from the United States and, in 2003, the United States 
committed $25.8 billion in subscriptions and contributions. For fiscal 
year 2003, the President's budget for the Treasury International 
Accounts amounted to $1.47 billion, including funds for the 
multilateral development banks, debt forgiveness, and technical 
assistance. Further, the Department of the Treasury's Office of 
International Affairs oversees U.S. participation in the International 
Monetary Fund and the multilateral development banks, including the 
World Bank, the Inter-American Development Bank, the African 
Development Bank, the Asian Development Bank, and the European Bank for 
Reconstruction and Development.
    The Office of Investigations is in a rebuilding cycle brought on by 
Treasury resources being divested to the Department of Homeland 
Security. As such, we are refocusing our planning, business processes, 
investigative, and prevention efforts to better protect the 
Department's programs like those for which the Office of International 
Affairs has responsibility. We are in the initial phases of determining 
Treasury OIG's criminal investigative jurisdiction in matters like the 
one you have referred to this office. We note your correspondence with 
the World Bank and the Offices of Inspector General for the Department 
of State and the United States Agency for International Development 
with whom we are coordinating this matter. At this time, we anticipate 
no further action with this matter.
    We thank you for forwarding the aforementioned information to the 
attention of this office. If you have any questions concerning this 
matter, please feel free to call upon me at [redacted]. Staff questions 
and requests for support related to this matter should be directed to 
[redacted].
                                 Nick D. Swanstron,
            Assistant Inspector General for Investigations.

    The Chairman. I am perplexed that the Office of Inspector 
General of the Treasury Department remains unsure of its 
jurisdiction in multilateral development banks matters, because 
the Treasury Department has had the responsibility for MDB 
oversight since the creation of the World Bank in 1946. We 
invited the acting Inspector General of the Treasury 
Department, Dennis Schindel, to testify today, but he declined.
    His staff informed us in an e-mail that the Treasury 
Inspector General's office was not currently working on 
multilateral development bank corruption. It said, ``we are 
exploring bases for invoking jurisdiction to do work in this 
area, but have not reached any conclusions.'' They added that 
the Treasury Inspector General is, ``low on resources since our 
divestiture to Homeland Security.''
    Now, given the United States has provided more than $39 
billion in direct contributions to the MDBs since 1960, I am 
concerned that the Treasury Department is unable to dedicate 
sufficient resources to investigate the use of those funds. 
Congress needs to determine whether the Treasury Department 
Inspector General is suffering from a lack of resources. If we 
need to direct additional funds to ensure that the Office of 
the Inspector General can provide effective oversight, we 
should do so. If the Treasury Department Inspector General's 
office is not the best location for MDB oversight, then the 
administration and the Congress should work together to provide 
clear authority for this mission to another agency.

    [Additional information received by the committee from 
Dennis S. Schindel, Acting Inspector General, Department of the 
Treasury, follows:]

     Statement Submitted For The Record By Acting Inspector General
                           Dennis S. Schindel

      regarding treasury office of inspector general jurisdiction
            with respect to multi-lateral development banks

                                                   August 13, 2004.

    Thank you for the opportunity to discuss with the Committee the 
role and jurisdiction of the Treasury Office of Inspector General (OIG) 
to investigate and audit the activities of multi-lateral development 
banks (MDBs) that receive appropriated funds through the Department of 
the treasury.
    The Inspector General Act of 1978, as amended, 5 U.S.C. Appendix 3 
(IG Act), gives inspectors general the authority and responsibility to 
conduct and supervise audits and investigations relating to the 
programs and operations of their establishments, and to keep the 
establishment's head and Congress fully and currently informed about 
problems and deficiencies relating to the administration of those 
programs and operations.
    To carry out these responsibilities, the IG Act requires all 
offices and employees of the establishment to cooperate with OIG audits 
and investigations, and mandates that OIGs have access to ``all 
records, reports, audits, reviews, documents, papers, recommendations, 
or other material available to the applicable establishment which 
relate to the programs and operations with respect to which that 
Inspector General has responsibilities under this Act.'' 5 U.S.C. 
Appendix 3, Sec. 6(a)(1). OIGs additionally have authority to subpoena 
documentary evidence necessary to the performance of their duties under 
the IG Act. Id., Sec. 6(a) (4).
    While Inspectors General (IGs) can generally audit and investigate 
recipients of appropriated funds, such as contractors and grantees, and 
can demand and even subpoena necessary information to that end, these 
powers cannot be made to apply to the entities at issue here. The 
international agreements that establish MDBs, and the U.S. law that 
implements the agreements, makes clear that the MDBs possess an 
effective immunity to the OIG's authority.
    For example, the agreement establishing the World Bank specifically 
provides that the archives of the Bank ``shall be inviolable,'' and 
further states that all officers and employees of the Bank are immune 
from legal process for acts performed in their official capacities, 
except where the Bank waives such immunity. Article VII, Secs. 5,8. 
Federal law enforces this immunity: 22 U.S.C. Sec. 286h states that 
Secs. 5 and 8, among other provisions in the Bank agreement, ``shall 
have full force and effect in the United States and its Territories and 
possessions.''
    We therefore believe that current law effectively bars our ability 
to demand access to the MDBs in order to carry out audit and 
investigative operations with respect to their stewardship of the 
appropriated funds which are provided to them via the Department of the 
Treasury.
    Lastly, I must note that the resource limitations under which we 
operate since last year's divestiture of two thirds of our personnel 
would impose a serious obstacle to our ability to take on new audit and 
investigative work in any case. We hope that our FY 2005 appropriation 
will allow us to expand our audit and investigative staffing, and 
increase our oversight of the Treasury.
    I would be happy to provide further information to, and engage in 
discussion with, the Committee on this issue.

    The Chairman. Today, we have two panels to discuss 
corruption and the multilateral development banks. On our first 
panel, we are pleased to welcome Mr. John Taylor, Under 
Secretary for International Affairs at the United States 
Treasury Department. On our second panel we will hear from Mr. 
Richard Thornburgh, former U.S. Attorney General, and former 
Governor of Pennsylvania; Mr. Guido Penzhorn, advocate and 
senior counsel of the Durban Bar in South Africa and 
prosecuting attorney in corruption cases in Lesotho; and Ms. 
Kimberly Ann Elliott, a research fellow at the Institute for 
International Economics. At this time, I hear the fire alarm 
and so the hearing is temporarily recessed until we can 
reassemble.

    [Recess.]

    The Chairman. The hearing is resumed. It's now our 
privilege to hear from the Honorable John B. Taylor, Under 
Secretary for International Affairs, Department of the Treasury 
in Washington, D.C. Secretary Taylor, we thank you once again 
for coming to the committee and we look forward to your 
testimony.

     STATEMENT OF HON. JOHN B. TAYLOR, UNDER SECRETARY FOR 
       INTERNATIONAL AFFAIRS, DEPARTMENT OF THE TREASURY

    Mr. Taylor. Thank you very much, Mr. Chairman, and thanks 
for inviting me to discuss the U.S. efforts to fight corruption 
in the use of funds at the multilateral development banks. It's 
an issue we take very seriously. We're committed to every 
possibly effort to help prevent, detect, and punish corruption 
at the MDBs. Such corrupt acts are intolerable and we feel it's 
our obligation to help ensure that the multilateral development 
banks, all of them take the steps necessary to ensure an 
effective anti-corruption apparatus.
    My testimony today focuses on the five MDBs that you 
mentioned in your opening remarks, Mr. Chairman, the World 
Bank, the Inter-American Development Bank, the African 
Development Bank, the Asian Development Bank, and the European 
Bank for Reconstruction and Development. My written testimony 
describes the recent anti-corruption efforts that have been 
taken, the U.S. role in reforming the institutions and how it 
relates to those efforts. I'd like to summarize the statement 
briefly here and if possible enter the full testimony into the 
record.
    The Chairman. The full testimony will be published in the 
record.
    Mr. Taylor. Thank you very much. Let me emphasize at the 
outset, Mr. Chairman, that at all the institutions we're now 
pursuing a reform agenda that is an essential tool in the fight 
against corruption, and that agenda can be called a measurable 
results agenda. Through our efforts, the needs for rigorous 
results measurement has now been broadly accepted by the 
international community. All of the institutions have begun to 
mainstream mechanisms to measure and report the results of 
their projects. The new reforms emphasize measurable results 
with specific timelines to get things done. They provide 
incentives to the institutions, financial incentives, by tying 
increased financial support to the establishment of results 
measurement systems and the achievement of the measurable 
results.
    If the flow of money is tied to concrete measurable 
results, we feel the chance of diverting MDB resources for 
corrupt purposes will be lowered considerably. While more needs 
to be done certainly, we have built broad support among 
shareholders and management on the importance of measuring 
results and accountability, and we will continue to pursue this 
priority aggressively.
    We at the United States Treasury conduct our oversight of 
the corruption-related and other issues at the MDBs in many 
ways, Mr. Chairman. On a regular basis we work with our 
executive directors, we review all loans, grants, and policy 
proposals to make sure they include fiduciary safeguards and 
measurable results. We chair the Inter-Agency Working Group on 
Multilateral Assistance, which meets weekly to review all MDB 
loans and grants. We meet regularly with the NGO community and 
other interested parties.
    When we find problems with projects, our first effort is to 
work with management to point out the problems and see what can 
be done to deal with them. The ultimate voting decision on 
projects is the responsibility of the U.S. Government. The 
working group and input from the NGOs helps us gather expertise 
and perspective of different agencies in the private sector, 
informing our decisions.
    But let me describe a few of the actions that have been 
taken by the MDBs and there's more details in the written 
testimony. Recently, in November 2000, and importantly, the 
World Bank created this new Department for Institutional 
Integrity. So far, investigations by this new department have 
led to the Bank's imposing administrative sanctions on at least 
180 firms and individuals. The names of the firms and 
individuals that are sanctioned are made public, they're posted 
on the Web site. The Bank has a hotline for both bank employees 
and others to call if they believe there is any corruption 
going on. The complaints can be confidential and anonymous. 
This is good progress.
    Similar actions are being taken at the other MDBs, 
different names for the departments, different procedures, but 
they're all taking similar approaches at this point, as 
documented in my written testimony.
    Another broad area where the anti-corruption effort is 
underway is regarding specific projects. In this area, 
beginning with the World Bank again, the World Bank has in 
place procurement and consultant guidelines that govern the 
purchase of goods, civil works, consulting services that are 
financed in whole or in part from bank loans for investment 
projects. These guidelines certainly include anti-fraud and 
corruption provisions, and they provide for the Department an 
example of a sanction or other remedies if the Bank determines 
that firms have engaged in corrupt or fraudulent practices. 
We're advocating now similar actions at the other MDBs, as 
described in my testimony.
    Overall, Mr. Chairman, we're going to continue to push 
vigorously this strong measurable result framework for all 
projects. That is, for the specific projects, as they're being 
completed, as they're being put in place, that there will be 
these measurable timelines. On both the outputs and on the 
outcomes, what gets measured, gets done, so establishing a 
strong results-based program will sharply reduce the likelihood 
that monies will be diverted for corrupt purposes.
    At the country level, where there are still significant 
problems, is where the windows of the MDBs that are devoted to 
the poorest countries have or are currently establishing what 
is called performance-based allocation systems. I think these 
are very important. These systems provide more resources to 
those countries that improve governance and take steps to 
combat corruption, while those who do not take such efforts 
receive fewer resources.
    For example, under the most recent replenishment of the 
funds in IDA, 17 countries will have their resources 
allocations reduced because of poor performance on the country 
institutional assessment guidelines, the so-called CPA. In the 
recently concluded Asian Development Fund negotiations, our 
negotiators achieved an increase in the weight given in good 
governance to anti-corruption, increased the weight that good 
governments would be given, and good governance includes anti-
corruption in this performance-based allocation system. These 
systems provide incentives for countries to tackle the 
governance issues in order to receive greater resources. It's a 
financial incentive to improve.
    Mr. Chairman, I also want to mention the work that's 
underway that's related to Section 581. This is a central part 
of our efforts now. It's really implementing Section 581 of the 
fiscal year '04 Appropriations Act, as signed into law last 
January 23rd, passed by this committee, of course. And these 
issues in Section 581, the provisions, were the product of 
considerable consultation between the U.S. Treasury and the 
Congress. Section 581 aims to increase transparency and 
accountability, and this is an objective we all strongly 
support.
    On March 2nd of this year, I sent a memo to each of our 
executive directors at the institutions conveying the Section 
581 language along with the request that they use every effort 
to advance the goals in Section 581. We are continuing to work 
vigorously on these goals. I believe we're making good progress 
on getting them done.
    In conclusion, Mr. Chairman, let me reiterate that the Bush 
administration takes very seriously the threat that corruption 
poses to economic development and the effective use of MDB 
resources. I've tried to describe briefly here and more fully 
in my written testimony that the MDBs have taken important 
steps to combat corruption, that management of the MDBs are to 
be commended for these positive steps that they have taken in 
recent years to fight corruption.
    Clearly, more needs to be done. We are fully dedicated to 
the efforts and I look forward to continuing to consult with 
the Congress on our projects. Thank you.

    [The prepared statement of Mr. Taylor follows:]

                  Prepared Statement of John B. Taylor

    Chairman Lugar, Ranking Member Biden, Members of the Committee, I 
welcome the opportunity to discuss with you U.S. efforts to fight 
corruption in the use of funds by the Multilateral Development Banks 
(MDBs). It's an issue we take very seriously. We are committed to every 
possible effort to help prevent, detect, and punish corruption 
associated with development assistance provided by the MDBs. Such 
corrupt acts are intolerable and, as custodians of taxpayer dollars 
intended to stimulate economic growth aid alleviate global poverty, it 
is our obligation to help ensure that the MDBs take all the steps 
necessary to ensure an effective anti-corruption apparatus.
    My testimony today will focus on five MDBs: the World Bank, the 
Inter-American Development Bank (IDB), the African Development Bank 
(AfDB), the Asian Development Bank (AsDB), and the European Bank for 
Reconstruction and Development (EBRD). I will describe the recent anti-
corruption efforts and the U.S. role in reforming the institutions.
    Our efforts to strengthen anti-corruption efforts are focused on 
three levels. First, at the institutional level, we are focused on 
improving the functioning of MDB internal control processes for 
internal auditing, investigative mechanisms, whistleblower protections, 
and corporate procurement--and increasing the disclosure and 
accountability of MDB operations.
    Second, at the project level, we are focused on encouraging the 
MDBs to conduct analysis and design projects that help reduce 
opportunities for corruption, strengthen fiduciary standards, and help 
ensure that Bank funds will be well spent.
    Third, at the country level, we focus on enhancing the transparency 
and accountability of recipient countries' governance systems and 
disclosure in MDB operations and analysis, aid to channel MDBs 
resources toward countries that have good governance in place. Treasury 
reports annually to the Congress on the country specific anti-
corruption programs supported by each MDB, and actions taken by 
recipient countries.
    At all these banks we are pursuing a reform agenda that is an 
essential tool in the fight against corruption--measuring results. The 
need for rigorous results measurement has been broadly accepted 
internationally. All of the institutions have begun to mainstream 
mechanisms to measure and report the results of their projects. The new 
reforms emphasize measurable results with specific timelines. They 
provide incentives to the institution by tying increased financial 
support to the establishment of results measurement systems and results 
achieved in all operations; especially in the design of country 
assistance strategies and individual projects and during project 
implementation. If the flow of money is tied to concrete and measurable 
results, the chance of diverting IDB resources for corrupt purposes 
will be lowered considerably. While more needs to be done, we have 
built broad support among shareholders and management on the importance 
of measurable results and accountability and will continue to pursue 
this priority aggressively.
    We at the U.S. Treasury conduct our oversight of corruption-related 
and other issues at the MDBs through a variety of practices and 
processes. On a regular basis we work with the Executive Directors 
(USEDs) on their participation in Board policy discussions and with 
management of these institutions. In the case of corruption, this means 
urging the institutions to establish effective and accountable policies 
and mechanisms to reduce the opportunities for corruption and to detect 
and punish corruption when it occurs. Treasury reviews all loans, 
grants, and policy proposals to make sure they include fiduciary 
safeguards and measurable results. Treasury chairs the inter-agency 
Working Group on multilateral Assistance which meets weekly to review 
all MDB loans and grants coming up for approval. This group includes 
State, Commerce, and USAID. My staff meets regularly with the NGO 
community and other interested parties to solicit input on MDB policies 
and projects. When we find problem projects, our first effort is always 
to work with management to improve loans or grants which we believe do 
not meet our standards. The ultimate voting decision on projects is the 
responsibility of the U.S. government. This working group and input 
from NGOs helps us gather expertise and the perspective of different 
agencies and the private sector in forming our decisions.
    Let me now to describe the actions taken by the MDBs in the three 
levels described above.
Structural Changes Within the Institutions
    In the late 1990's the World Bank created what is now called the 
new Department of Institutional Integrity (INT). So far INT 
investigations have led to the Bank's imposing administrative sanctions 
on about 180 firms and individuals. The names of firms and individuals 
sanctioned are made public. The Bank has a hotline to which the public 
or staff can report incidents of corruption or other inappropriate 
practices. Complaints may be made confidentially or anonymously. We are 
working closely with management and other shareholders to provide the 
unit with the resources, both human and financial, and the authority it 
needs to do its job effectively on an ongoing basis. This includes 
implementation of the key recommendations of the report of former 
Attorney General Thornburgh on ways to strengthen the unit's 
capabilities, staffing and performance. The Bank's Executive Board 
reviewed and endorsed these recommendations yesterday, in fact, and we 
will be monitoring progress very attentively.
    Last year, the Inter-American Development Bank established its 
Office of Institutional integrity to enhance the scope of 
investigations previously undertaken by the Oversight Committee on 
Fraud and Corruption (OCFC). This office is now responsible for 
pursuing allegations of fraud and corruption by IDB staff or 
consultants, or in IDB-sponsored projects. The Oversight Committee of 
Fraud and Corruption (OCFC) now serves as the secretariat for the 
Office of Institutional Integrity, and trains officials in member 
countries on implementing anti-corruption programs. The OCFC also makes 
public a semi-annual report of its activities. Like the World Bank, the 
IDB has established a toll-free hotline and other mechanisms for 
reporting, on a confidential and anonymous basis, allegations of fraud 
and corruption with whistleblower protections. Last week, the IDB 
created a stand-alone Audit Committee of the Board.
    The African Development Bank's Board of Directors has recently 
approved the establishment of an Oversight Committee on Corruption and 
Fraud (OCCF) that will be responsible for receiving and handling 
allegations of fraud and corruption. The Bank will opt a formal 
whistleblower protection program once the OCCF becomes operational. The 
Bank has also modified its procurement regulations to be more explicit 
regarding corruption. Over the past few years, about 30 tenders have 
been canceled, companies sanctioned, and, together with their 
affiliates, barred from participating in Bank projects.
    The Asian Development Bank's Office of the Auditor General (OAG) is 
the point of contact for reports of allegations of fraud or corruption 
concerning AsDB-financed projects or its staff. In 2003, the OAG 
established an Anti-corruption Unit (OAGA) to handle all such reports. 
The Bank has established a variety of mechanisms through which 
allegations of fraud and corruption can be conveyed in a confidential 
and discrete manner.
    The European Bank for Reconstruction and Development just launched 
an inspection function, which will enable individuals to submit 
grievances about a project. The Chief compliance Officer (CCO) works 
with independent experts to determine whether banking operations were 
in full compliance with Bank policies, and, if necessary, the CCO 
undertakes problem-solving measures, which may include mediation and 
independent fact-finding. The EBRD has just hired a new CCO, an 
American with considerable experience working on anti-corruption 
issues. The new COO will coordinate the new inspection function and 
will also handle all matters related to fraud and corruption. The EBRD 
has a hotline through which individuals can anonymously report 
allegations of misconduct of Bank officials, employees, or consultants.
    At each of the institutions, our U.S. Executive Directors have 
spearheaded efforts to increase transparency through information 
disclosure policies that require the MDBs to release more documents, 
especially those relating to Board discussions, country performance, 
measurable results, and anti-corruption measures. The Boards of 
Directors of the EBRD, the AfDB, and the IDB have all approved 
improvements in disclosure policies in the past 18 months and our 
Executive Directors will work to ensure their effective implementation. 
We expect similar actions will be taken at the World Bank and the AsDB 
in the near future. We continue to work with the MDBs management and 
other member countries to institute additional improvements.
Projects
    The World Bank has in place 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 and the importance of transparency in the 
procurement process. They 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 funding.
    The IDB has recently authorized a comprehensive review by external 
consultants of its overall procurement practices. We are strongly 
advocating reforms that will adopt transparent and accountable 
procurement policies, and standard documents, fully harmonized with 
those of other MDBs.
    The AsDB has taken steps to improve the financial management and 
governance of projects by revising the guidelines that govern the 
financial management practices of executing agencies and by 
implementing an automated project rating system to improve consistency, 
standardize ratings, and reduce subjectivity. These procedures will 
enable better identification of financial irregularities in project 
implementation. In addition, corruption and fraud awareness workshops 
are held regularly for project staff.
    The AfDB conducts Financial Management Reviews (FMRs) of projects. 
The FMR is designed to assess financial management and audit functions 
of specific projects. The Bank has successfully carried out FMRs in 
five countries (Cameroon, Madagascar, Malawi, Uganda, and Zambia), 
covering four key sectors (agriculture, transport, public utilities, 
and the social sector). The AfDB's internal audit department evaluates 
the quality of independent audits of Bank projects. This department is 
investigating at least two projects for fraud and corruption.
    At the urging of the United States, the EBRD now includes a 
certification of compliance with integrity check procedures for each 
project with the documents presented to the Board of Directors. The 
Bank is instituting mandatory training for staff on this process of 
``integrity'' due diligence. In addition to due diligence, EBRD 
routinely incorporates improvements in accounting and corporate 
governance in the design of its projects.
    Overall, the United States continues to push vigorously in all the 
MDBs for strong result measurement frameworks for all projects, so that 
we can monitor and assess the outputs and outcomes. What gets measured 
gets done, so establishing a strong result-based program will sharply 
reduce the likelihood that monies will be diverted for corrupt or 
fraudulent purposes.
At the Country Level
    The windows of the MDBs that are devoted to the poorest countries 
have or are currently establishing performance-based allocation 
systems. These systems provide more resources to those countries that 
improve governance and take steps to combat corruption, while those who 
do not take such steps receive fewer resources. For example, under the 
most recent replenishment of funds in IDA, seventeen countries will 
have their resource allocations reduced. In the recently concluded AsDF 
negotiations, donors agreed to increase the weight given to good 
governance, which includes anti-corruption, in the performance 
allocation system for the AsDF. These systems provide incentive for 
countries to tackle these governance issues in order to receive greater 
resources.
    Also at U.S. urging, the MDBs are doing more diagnostic work on 
governance issues. Governance and corruption are routinely discussed in 
MDB country assistance strategies. The World Bank, in some cases 
working with the IMF and regional development banks, has taken the lead 
in preparing key diagnostic studies such as Country Financial 
Accountability Assessments, which looks at public financial management; 
Public Expenditure Reviews, which looks at the effectiveness of 
expenditures in terms of outputs and outcomes; and Country Procurement 
Assessment Reports, which looks at the contract management process and 
public procurement. The U.S. insisted on the expansion of these 
diagnostics as part of our Incentive Contribution to IDA, the targets 
for which IDA has met and exceeded.
    The MDBs have also provided substantial amounts of assistance to 
help build accountable public-sector institutions and develop national 
anti-corruption efforts. The World Bank is also a leader in fighting 
money laundering and the financing of terrorism. Also, the AsDB has 
issued an extensive manual on countering money laundering and the 
financing of terrorism.
    In 2003, the IDB approved $772 million, or 11 percent of total 
lending volume, for projects with the principal aim of improving 
governance at the country level. These include projects to modernize 
the Attorney General's Office in Colombia, strengthen tax 
administration in Peru and improve decentralization of administration 
in Uruguay.
    The AfDB has developed a new diagnostic tool, the Country 
Governance Profile. The profile's analysis helps a member country and 
the AIDB develop governance programs and capacity building programs to 
address identified weaknesses in governance. Profiles for Nigeria, 
Ghana, Mauritania, Malawi, and Zambia are completed, and those for 
another ten countries are underway.
    The AsDB approved a new policy enabling AsDB to increase its 
assistance to countries to counter terrorist financing and put in place 
anti-money laundering initiatives. The new policy has also enabled the 
AsDB to further strengthen its capability to protect internal funds 
from misuse. Further, the AsDB recently launched a Regional Trade and 
Financial Security Initiative. The $7 million initiative, which is 
supported by cash and in-kind contributions from the U.S., Australia 
and Japan, will finance anti-money laundering activities and port 
security in Asian developing countries. Finally, in 2003, the AsDB 
approved $458 million for projects to strengthen good governance in 
borrowing countries.
    The EBRD has less direct influence on recipient countries' 
governance than the other MDBs because it focuses primarily on 
investments in the private sector. However, it has undertaken efforts 
to improve governance and combat corruption, such as its input into 
Transparency International's work on business principles for countering 
bribery. Where feasible and appropriate, the EBRD also engages in 
policy dialogue with the host country, in the context of projects, to 
highlight where regulatory frameworks could be improved, thus reducing 
the opportunities for corruption. In addition, the EBRD periodically 
reviews the business environment of its countries of operations.
Transparency and Section 581
    A central part of our effort going now is the implementation of 
Section 581 in the FY 04 Appropriations Act signed into law on January 
23, 2004. This provision, which was the product of discussions between 
Treasury and Congress, aims to increase transparency and 
accountability. This is an objective we all strongly share.
    On March 2, 2004, I sent a memo to each of our U.S. Executive 
Directors in which I conveyed the Section 581 language along with a 
request that they use every appropriate opportunity to press for the 
goals set forth in that section. Working with the Executive Directors, 
we have already made considerable headway. For example,

   At the Inter-American Development Bank, the new information 
        disclosure policy includes a provision for release of the Board 
        minutes within 60 days of their approval, a first within the 
        MDB system.

   The new African Development Bank policy includes a 
        commitment to make country strategies and operation policies 
        public at least 50 days prior to formal Board discussion.

   The EBRD is implementing a Committee of Sponsoring 
        Organizations (COSO) system of internal controls over the 
        financial statements, the implementation of which will be 
        reflected in a letter from management and from the external 
        auditor in the EBRD's 2004 annual report.

   A new draft Asian Development Bank policy includes a large 
        number of the transparency provisions of Section 581, including 
        making public an annual report containing statistical summaries 
        of fraud and corruption cases pursued by their investigative 
        unit.

    For our part, the U.S. Treasury has begun posting a record of our 
votes on MDB projects on our website on a monthly basis as well as the 
U.S. position on inspection panel cases that we send to the Executive 
Directors.
    In my view, more needs to be done to build on this progress. We 
need to increase the use of public fiduciary and governance 
diagnostics. We need to create additional incentives for establishing 
and achieving measurable results, and improve governance in borrowing 
countries. The U.S. continues to urge further measures to maintain 
progress. Among the priorities we are currently pursuing are the 
following:

   As a key element of implementing our results agenda, we will 
        continue to advocate for the establishment of independent 
        evaluation functions where they do not currently exist, such as 
        at the AfDB and the EBRD, which functions would report directly 
        to the Boards of Directors with the heads of evaluation hired 
        by and accountable to the Board. Evaluation of results is both 
        critical to achieving results and to ensuring that funds are 
        used as intended by the governments that are the beneficiaries.

   The MDBs must also work towards achieving uniform best 
        practice procurement policies, procedures, and documents that 
        will be used by all the MDBs.

   At the IDB, the office of the U.S. Executive Director is 
        engaged in several initiatives in procurement: (1) the overhaul 
        of the IDB's project procurement systems with the objective of 
        a new system using MDB-system wide best practices for policies, 
        procedures and standard bidding documents; (2) reform of 
        corporate procurement; and (3) the creation of a Sanctions 
        Committee to give the Bank authority to disbar firms.

   We are also pushing the World Bank and the African 
        Development Bank to release the country ratings (Country Policy 
        and Institutions Assessment, CPIA)--including governance--that 
        determine country resource allocations under its performance-
        based allocation system.

   The MDBs need to further improve and mainstream staff 
        education, incentives, and processes for anti-corruption work. 
        Each MDB must enforce clear guidelines defining corrupt 
        behavior and stringent penalties for staff that violate the 
        rules.

   The MDBs should continue to strengthen their whistleblower 
        protections.

   We will continue to work with the World Bank to ensure that 
        the Department of Institutional Integrity (INT) has the 
        necessary resources and authority from the Board to carry out 
        its responsibilities of investigating allegations of corruption 
        and ensuring accountability of staff in all the Bank's 
        operations.
Conclusion
    In conclusion, Mr. Chairman, let me reiterate that this 
Administration takes very seriously the threat that corruption poses to 
economic development and to the effective use of MDB resources. As I 
have described in my testimony, the MDBs have taken important steps to 
combat corruption and the United States is at the forefront of 
continuing efforts to broaden and deepen those initiatives, including 
ensuring the full effectiveness of new anti-corruption units. The 
managements of the MDBs are to be commended for the positive steps they 
have taken in recent years to fight corruption, following the example 
set by the World Bank. Clearly more needs to be done, and we are fully 
dedicated to these efforts, and look forward to continuing to consult 
with Congress on our progress.

    The Chairman. Well, thank you very much, Secretary Taylor. 
Let me just say at the outset that one of the major functions 
of any Senate committee is oversight. When that function is not 
well-performed, usually there will be problems down the trail. 
Quite rightly, critics of the committee will say, why was there 
no oversight and why didn't you care?
    Now, we're in the process of getting ready for 
reauthorization of these multilateral development banks. It's a 
very important procedure that requires the confidence of our 
members in the House and the Senate. There are frequently 
critics of the Banks. There are critics of American foreign 
assistance generally. It is imperative that there be absolute 
confidence in the contributions that are made. Granted that 
these are multinational, the contributions come from many 
countries, but the United States' contribution of taxpayer 
funds is very considerable. So it's in that spirit that we have 
tried to begin that preparation.
    As I pointed out in my testimony--and it was not meant to 
be just anecdotal--we came across a case, and essentially 
attempted to find what was occurring in Treasury at the level 
of the Inspector General. And as I've recited, without 
hopefully being melodramatic about it, Mr. Schindel, who is 
responsible, I gather, felt he simply didn't want to testify, 
which is unusual. It's not that people always want to testify 
before our committee, but we've not had many conspicuous 
examples of people simply finding that this was not a 
worthwhile activity, so I'm especially grateful that you are 
here. You are knowledgeable about international banks and 
finance and obviously a very, very able spokesperson for the 
Department of the Treasury. So I just want to underline how 
much I appreciate your presence.
    Now, let me just ask this rudimentary set of questions. 
When allegations of corruption related to MDBs are forwarded to 
the Treasury, how does the Department process the allegation? 
Is something more done beyond simply forwarding the allegation 
to the World Bank or other relevant multilateral development 
banks? What follow-up is done to ensure the Banks' diligence in 
pursuing that?
    And since the Treasury Inspector General is not 
investigating fraud and corruption, what part of the 
administration is? In other words, try to trace, aside from 
these very important guidelines that you just mentioned, 
measurable results, following through to make sure the job gets 
done. Specifically, when the hotline produces somebody who 
says, you ought to take a look at this, what happens over at 
the Treasury?
    Mr. Taylor. The first line of attack if our staff hear 
about issues like this is to work through our executive 
directors at the institutions. They're basically the conduit 
for communicating to the management and the staff of the 
institutions.
    The Chairman. Now, by institutions you mean the Banks, the 
World Bank, or what have you?
    Mr. Taylor. Yes, sir. Not to say there are not many other 
ways to communicate, but this is the first things to do. They 
in turn communicate, raise the issues that occur on specific 
issues. On the issues that have to do with process and 
procedure, that appears in many different ways. There's 
communications directly to the management, there's working 
through the executive directors, working through the other 
shareholders, because almost of all the things that are reform-
oriented require the other shareholders to participate. And so 
we work with them on suggesting things like these measurable 
results, and they're not easy to get through, there's lot of 
different viewpoints.
    The U.S., in my experience here, Mr. Chairman, the United 
States is most often in the lead in pushing the items that 
you're interested in in this hearing, and we're very proud to 
do that. But it sometimes requires working, getting a consensus 
internationally--these are international organizations--to make 
it work.
    If we see there's something wrong with the procedures or we 
hear reports, for example, one of the people coming later 
today, former Attorney General Thornburgh, writes reports. We 
hear about those. That helps us, it helps guide us, and we will 
use those to work with the institutions to help them make the 
changes and say what we think is important and our executive 
directors can speak at the board meetings quite actively about 
that, so those are some examples.
    The Chairman. Well, even then, what happens if somebody 
brings an allegation to Treasury that in a specific country, on 
a specific project, money is being misappropriated, it's being 
stolen, it's being transferred to other accounts of people 
clearly in violation? What do you do about that?
    Mr. Taylor. Well, we communicate it through our executive 
directors to the institutions, and if there's a problem with 
how they're being handled, then we address that directly to the 
management. But the process is, especially now with the World 
Bank, the Department of Institutional Integrity is set up, 
there's been some recent changes in how the sanctions process 
works, the nature of the committee has changed due to outside 
recommendations. The communication is not the problem. The 
actions and making sure that there's actions taken is the 
problem in my experience.
    The Chairman. Well, does our government, if it believes 
that a particular institution, whatever the institution may be, 
is not taking appropriate action, do something about it? In 
other words, what recourse do we have at that point? Is our 
money all gone, and we just say, well, we just made a bad 
mistake on this one?
    Mr. Taylor. No, I don't think we want to take that kind of 
an approach. We want to be very demanding of the institutions. 
We want the institutions to work well. I always--I don't 
hesitate to criticize personally. To me, you criticize the 
institutions to make them work better. You criticize them 
because you know they have an important role in the world, you 
like the institutions, I like the institutions, but we want 
them to work better.
    So we don't mince words. We're candid with the criticisms 
that we have. If we hear reports from the staff that the 
process is not working well, we inquire at all levels on this. 
We take it very seriously and it's something that I certainly 
place a lot of emphasis on and Secretary Snow does as well.
    The Chairman. You touched upon the fact that you believe 
that in many ways the United States may be among the most 
vigorous in terms of demanding transparency. In our study in 
preparation for the hearing, we found that of 147 countries 
eligible for World Bank lending, 77 of them require 
parliamentary approval of multilateral development bank loans, 
or a ceiling in which the executive branch can accept the 
loans. In other words, the Parliaments of these countries are 
trying to ride herd on executives that are taking in the money, 
not with the supposition of malfeasance, but with recognition 
of the ways of this world and of the fact that a good number of 
the governments that they are overseeing may have some 
problems.
    We found in our first hearing that this oversight is well-
founded. There are some specific projects. You mentioned 
measurable results, such as the building of bridges and dams 
and roads and so forth. You can get some idea of whether there 
is a road or a bridge. But increasingly we heard from the banks 
that the loans are for so-called budgetary support--funds that 
may have been intended for the uplifting of whatever the 
objectives were of that government. This becomes very murky, in 
terms of finding measurable results in an education system. We 
are finding difficulty with that ourselves, for example, with 
No Child Left Behind. We are trying to get some grip on how 
this all works.
    With an increasing amount of money headed in that 
direction, there could be increasing skepticism about so-called 
budget support. A taxpayer in this country could very well 
raise the question. We are having difficulty meeting our own 
deficit problems. Some budgetary support here may be required. 
In Country X, for example, we are able at least to establish 
that a school got built, that schoolchildren are being taught, 
as opposed to a contractor siphoning money out of the process, 
thus undermining the entire international banking system. 
Furthermore, if we're not sufficiently observant, or if we have 
not allied with enough nations to track these people down and 
prosecute them, then there's going to be a lot of skepticism 
about this.
    Now, I'm not raising bogey men. For example, patriot Paul 
Volcker is investigating Oil-for-Food or Food-for-Oil or 
whatever went on there. There are lots of people now on top of 
that situation, and the whole foundation of the United Nations 
is under question. Even senior officials, people who don't like 
the United Nations, are now really into this with a vengeance, 
indicating that's what happens if you have multinational work 
and so forth. This is serious business.
    I'm hopeful that at Treasury, as you say, you've got some 
pretty good guidelines going here at this point, and that we're 
vigorous, as you point out, relative to other people. But at 
the same time, with your own background in international 
affairs, quite apart from the financial affairs of this 
country, please take another hard look at this and inform the 
Secretary that we think this is serious, and we think he ought 
to think it is serious. I'm sure he's focused on a lot of 
reforms now. This is a reform Secretary. I'm supportive of 
that, and so are most Senators. But we want to make sure that 
occurs also in these international situations that are not 
specifically his responsibility. This situation needs to come 
quickly into focus. We must build confidence as we get into the 
reauthorization process particularly, because we're going to 
have testimony from many sources next year about each of these 
banks.
    I would just say that as a result of our first hearing, 
they all realize that. They are taking the situation much more 
seriously. So that's obviously a salutary effect of having 
oversight.
    Mr. Taylor. Mr. Chairman, I very much appreciate what 
you're doing with these hearings. It's just the best in terms 
of oversight and trying to improve things. I'd like to respond 
to a couple of the points you made in your statement. Regarding 
budget support, I agree this is an area where we need to be 
very careful. I don't think there's any reason why we cannot 
insist on just as good measurable results and timelines for 
budget support as for project support.
    I made a particular point of traveling to a number of 
countries around the world, mainly in Africa, to observe how 
these measurable results are working. In some cases, they're 
working really well. You can see schools, individual schools 
where the PTAs are working with the parents and the teachers 
are working together to document how many textbooks are 
purchased and how much they spend and how much of a discount 
they got, rather than the reverse is what we're worried about 
in this hearing.
    But I quite frankly say it's all too rare. We need to get 
more of that done, and there's no reason why you can't have 
adjustment loans, policy loans, budget support, have just as 
good a system of measuring results as other kinds of support, 
and we're going to continue to work on that as much as 
possible.
    I agree the measurable results, there's different ways to 
do it. The No Child Left Behind focuses on performance and test 
scores. That is great. Ultimately we want to do that. We're 
starting with completion rates for primary education, that if 
the IDA programs lead to somewhat higher completion rates in 
primary schools, then there's a reward for that. And that's not 
test scores yet, but it's certainly on the way. You've got to 
have the kids staying in school at least through 6th grade to 
accomplish something in the schools.
    Mr. Chairman, on the Inspector General issue, I want to say 
a couple things if I may, because we have consulted, our staffs 
have consulted with the acting IG. First of all, of course, the 
IG reports both to Congress and to the Secretary of the 
Treasury. In consulting with the IG, I want to make the 
following statements. I'm going to read these if I may, Mr. 
Chairman. The Treasury Inspector General is responsible for 
conducting and supervising audits and investigations relating 
to the programs and operations of the Department except for the 
Internal Revenue Service. This authority would reach to 
Treasury's conduct of the process by which appropriated funds 
are made available to the development banks. It is unlikely 
that the IG's jurisdiction would extend to how the development 
banks actually distribute the funds and how the borrowers 
actually use the funds.
    I understand that the IG's office would be willing to 
discuss this directly with the committee and we can provide all 
the contact information that you need if that's the way you'd 
like to go, sir. So it is something we've been trying to 
address. I understand what you're saying here. I think we need 
to work with the acting IG to figure out exactly what the terms 
of reference, but what I just read to you here is the effort 
that we've already put into this, represents the product of the 
effort we've put into this.
    The Chairman. Well, I appreciate that, and I thank you for 
taking the situation seriously and entering this into the 
record. I would like to expand on the measurable results. 
Specifically when this pertains to situations like education or 
health or humanitarian situations. It occurs to me that the 
United States again and again has a great story to tell about 
work we are doing with people in many countries of the world. 
We have hearings on public diplomacy and the difficulties our 
country has had in that area, about the Pew Foundation polls 
asking people, do you like the United States or do you like 
Americans or don't you, with extraordinarily and tragically 
perverse negative results.
    The fact is that the good story of what we are attempting 
to do doesn't get told very often. Maybe we are not very adept 
at telling it. All I can say is that to the extent the Treasury 
Department, through your reports, through following through on 
these measurements of success, on specifics, while working with 
other countries, with other institutions, could have a lot to 
do. The alternative would be things simply being handled in a 
more routine fashion, without seeing too much of the light of 
day, perhaps outside the Department, without the certainty that 
you feel keep them from fulfilling the requirements. That's an 
extension of mission, but one that I hope you'll consider 
carefully.
    Mr. Taylor. Very much so. I think the international 
institutions have a very important role to play in providing 
assistance. Bilateral assistance is also important with the 
Millennium Challenge Account, it's a very important part of 
what we're doing. But this is good because it's international 
and we get the leverage, of course, five times as much as we 
put comes out, got to be done right.
    But I think it is an important thing, and I find, if I 
could just add personally from my dealings with other countries 
on this, sometimes when you're out in front on issues like 
measurable results or anti-corruption, it maybe doesn't look 
like the most popular thing to do, but the headlines frequently 
are about how much money is going less than how it's being 
used. But it's so important, and if you go around, as I think 
you have to, and see on the ground what's happening, you just 
know that there's so much more to do in using a given dollar 
more effectively.
    So that's got to be part of it, and our approach in asking 
for authorization and asking for appropriations from the 
Congress is to emphasize the way the funds are used and doing 
the best we can to show they're being used well. But I very 
much appreciate your point on the foreign policy, sir.
    The Chairman. Well, thank you very much. I appreciate your 
long-time public service. I think that the thing that we have 
to offer, in addition to the money and the supervision, is a 
sense around the world of our integrity, that even if others 
don't blow the whistle on corruption, that we do, we will. That 
makes a big difference down deep in terms of fledgling 
democracies, as well as those that are more mature.
    Well, thank you so much for coming to testify.
    Mr. Taylor. Thank you, Mr. Chairman.
    The Chairman. The chair would like to call now upon a 
second very distinguished panel, including the Honorable 
Richard Thornburgh, of counsel to Kirkpatrick & Lockhart in 
Washington, D.C.; Mr. Guido Penzhorn, advocate and senior 
counsel of the Durban Bar, Durban, South Africa; and Ms. 
Kimberly Ann Elliott, research fellow of the Institute for 
International Economics in Washington, D.C.
    We welcome another distinguished panel and we appreciate 
very much your patience in waiting through our emergency of the 
morning. The next break in the action will not be grave. We 
will simply be observing a roll call vote in the Senate at 
about 11:30. I will recess the hearing for about 10 minutes to 
go to the floor, vote, and return. But we will attempt to 
maintain the flow of the hearing as best we can. I would like 
for you to testify in the order that I introduced you. That 
would be first of all Mr. Thornburgh, the Honorable Richard 
Thornburgh. And let me just say that the testimony of all three 
of you will be placed in the record in full. Please proceed as 
you wish, either with summary or with the delivery of that full 
testimony.
    Secretary Thornburgh.

             STATEMENT OF HON. RICHARD THORNBURGH,
               OF COUNSEL, KIRKPATRICK & LOCKHART

    Mr. Thornburgh. Good morning, Mr. Chairman. Thank you for 
inviting me to be here today to discuss the efforts of the 
World Bank to deal with the problems of fraud and corruption in 
projects financed with bank funds. As the largest contributor 
to the Bank, the United States clearly has a critical stake in 
understanding how bank funds are used and what type of 
commitment the Bank has made to preventing these funds from 
being wasted as a result of fraudulent or corrupt practices.
    As you are aware, the Banks' articles of association, to 
which the United States is a signatory, require that the Bank 
make arrangements to ensure that the proceeds of any loan are 
used only for the purpose for which the loan was granted. For 
an organization that has disbursed as much as approximately $25 
billion a year in countries having some of the least developed 
economic, political, and legal systems in the world, this is 
not a simple undertaking.
    Funds loaned by and activities undertaken by the Bank are 
vulnerable to fraud and corruption by bank employees, by 
contractors, consultants, and others utilized in the execution 
of its projects and by officials and governments to whom the 
loans are made. An effective program to combat fraud and 
corruption is important, not only to ensure that disbursed 
funds are utilized in the manner intended, but also to maintain 
the Bank's reputation and to assure the continued willingness 
of member states to support its operations.
    Unfortunately, during most of the Bank's first 50 years, 
the culture within the Bank discouraged not only the taking of 
any action to address problems of fraud and corruption, but 
even the discussion of such action. When Jim Wolfensohn became 
president of the Bank in 1995, he instilled a notable shift in 
attitude. In a speech to the Bank's board of governors the 
following year, Mr. Wolfensohn became the first senior official 
within the Bank to acknowledge openly that fraud and corruption 
constitute a major problem for the Bank and for the nations 
that the Bank was attempting to assist.
    Along with a new attitude, Mr. Wolfensohn brought an 
institutional change as well. Beginning in 1966, the Bank 
undertook a number of steps designed to assess evidence of 
fraud and corruption in bank finance projects and to 
temporarily or permanently preclude suppliers, contractors, and 
consultants found to have engaged in such practices from 
participation on future bank projects.
    Thereafter, the Bank engaged me, along with my colleagues, 
Ronald Gainer and Cuyler Walker, both of whom have joined me 
here this morning, to consult with the Bank on furthering the 
adequacy and proper functioning of the program. During our 
engagement by the Bank, we have issued three reports, all of 
which have been furnished to your staff by the Bank. They dealt 
principally with the Bank's procedures for investigating 
allegations of fraud and corruption. The first report issued in 
January 2000.
    The second reported issued in August 2002 dealt principally 
with the Bank's procedures for sanctioning acts involving fraud 
and corruption, and the third report issued in July 2003 dealt 
with a strategic plan that had been produced within the Bank 
for its investigative unit and our analysis of the steps the 
Bank had taken to develop its internal investigative 
facilities.
    I should point out that in all cases the nature of our 
assignment was to assist the Bank in developing policies, 
procedures, and structures to enable it to protect its funds 
from fraudulent and corrupt practices. In preparing these 
reports, we were not asked to evaluate, quantify, or assess the 
specific nature, scope, or extent of the problem, nor were we 
asked to review or make recommendations relating to any 
particular case or a set of circumstances in which bank 
projects were alleged to be affected by fraud or corruption.
    Before summarizing certain of our findings and 
recommendations, it's worth taking a moment to note the 
uniqueness of the environment in which the Bank operates and 
how that necessarily has influenced the structures and 
procedures it has put in place to address fraud and corruption. 
As an international organization, the Bank does not possess 
many of the tools that a national government may bring to bear 
on a situation in which it has been the victim of fraud or 
corruption. The Bank does not have traditional law enforcement 
powers such as subpoena power or the ability to otherwise 
compel the production of documents or witness testimony or to 
conduct searches or electronic surveillance.
    As a result, the Bank must rely almost exclusively on 
informants and cooperating witnesses to build a case. 
Furthermore, since the Bank finances projects all over the 
world and often in some of the most remote parts of the world, 
the Bank's investigators are invariably viewed as outsiders 
with none of the advantages that come with knowing and being 
known by local citizens or authorities who are closest to the 
circumstances related to matters under investigation.
    In light of these factors, it is not realistic to expect 
the Bank's investigators to be as effective as police and 
prosecutors of a sovereign nation in establishing facts that 
support allegations or suspicions of fraud and corruption. When 
it comes to seeking redress for wrongdoing involving bank 
funds, the Bank is, however, no different than any other 
private party to a contract. If it desires to recover monetary 
damages, the Bank may initiate a civil action in a country in 
which the courts have jurisdiction over the matter. If it 
believes that a particular matter involves a violation of law, 
the Bank may refer the matter for criminal prosecution in the 
country whose laws may have been broken. In either case, the 
Bank must be able to uncover the underlying facts giving rise 
to the suspicions, which requires a sophisticated investigative 
capability since perpetrators of acts of fraud and corruption 
will be careful to cover their tracks as best they can.
    Another important factor must be noted. Since the Bank 
would be within its rights to treat those engaged in fraud and 
corruption in bank finance projects simply as contracting 
parties in a commercial transaction, such miscreants are 
subject to being declared ineligible from participation in such 
contracts in the future on the mere suspicion of improper 
conduct.
    However, the Bank is determined that its status as a 
leading international organization, that among other things 
promotes the rule of law and the independence of the judiciary 
in developing countries, requires that it apply elements of 
fundamental fairness, what we know in this country as due 
process, when dealing with allegations of fraud and corruption 
at a bank project.
    The bank has painstakingly tried to strike an appropriate 
balance between protecting the funds it loans out and 
respecting basic principles of fairness. From the inception of 
its anti-fraud and corruption efforts in the mid-1990s, the 
Bank has separated the two distinct functions that make up this 
effort, the investigation of activities involving fraud and 
corruption whereby the Bank focuses on covering and compiling 
evidence of such actions and the evaluation of the strength of 
that evidence whereby the Bank determines whether sanctions 
should be imposed, and if they are, what sanctions are 
appropriate.
    In each of the three reports that my colleagues and I 
prepared, we were asked to deal with both aspects of the Bank's 
program, at least to some extent. I will address our principal 
findings and recommendations relating to how the Bank deals 
with both investigations of instances of fraud and corruption 
on the one hand and sanctioning those found to have engaged in 
such practices on the other.
    In January of 2000, we recommended to the Bank that the 
investigations unit be merged into a new independent 
department, the Department of Institutional Integrity, to be 
created and assigned the principal responsibility for 
conducting all investigations on behalf of the Bank in 
instances of fraud and corruption. We also recommended that 
this new department exercise operational independence under the 
authority of the president of the Bank and report directly to 
the president.
    As part of the implementation of this new structure, we 
also made the following recommendations: that the new 
department be headed by a director with experience in 
investigating and prosecuting fraud and corruption cases; that 
the director be appointed for a fixed 5-year term to minimize 
the potential for undue influence; that the department recruit 
and develop a cadre of experienced in-house staff possessing 
investigative skills, knowledge of bank procurement and 
personnel procedures, forensic auditing and contract auditing 
skills, and other characteristics necessary for mounting an 
aggressive effort against fraud and corruption; that the use of 
outside law firms and auditors, previously a major tool for 
dealing with corruption allegations be minimized; that the 
department's personnel have access to all records, documents, 
and properties of the Bank in conducting its investigations; 
and that the Oversight Committee on Fraud and Corruption be 
reconstituted and given a policy-making, as opposed to 
operational, mission with responsibility for general 
supervision and coordination of all the Bank's programs 
intended to address problems of fraud and corruption, not just 
investigations.
    I am pleased to say that all these recommendations were 
accepted by the Bank and have been implemented. Beyond the 
overarching recommendations for restructuring its investigative 
efforts that we made in January of 2000, we offered as well a 
series of additional recommendations relating to the Bank's 
efforts to uncover fraud and corruption in projects it 
finances.
    These recommendations and similar recommendations outlined 
in our 2002 report are set forth at pages 8 through 11 of my 
full statement, and included the following: that the Department 
of Institutional Integrity, now known within the Bank as INT, 
develop and nurture close working relationships with other 
offices in the Bank whose responsibilities and activities 
necessarily overlap with and complement those of INT, including 
the legal department, the internal audit department, and the 
professional ethics office; that INT receive a mandate from the 
board so that its authority is derived from the Bank's 
governing body and not just from its chief executive officer; 
that INT develop procedures for reporting to the president of 
the Bank regularly on ongoing investigations and prepare an 
annual report to the president summarizing its activities and 
accomplishments during the preceding year and making 
recommendations for management and procedural improvements to 
aid in the deterrence or detection of fraud and corruption.
    Last year, my colleagues and I had the opportunity to 
revisit these and other issues when we were asked by the Bank 
to review and comment on a strategic plan that the Department 
of Institutional Integrity had prepared, and to review and 
evaluate how the structures that had been put into place were 
actually working and to what degree more needed to be done to 
implement our earlier recommendations.
    The proposed strategic plan focused on all aspects of the 
management and operation of INT. I will briefly comment on only 
the two most salient of these. The first is the department's 
proposed strategy to move from an emphasis on reacting to 
allegations of fraud and corruption when they are made to a 
program that includes proactive and preventive actions. The 
second concerns the proposed budget and staff for the 
department.
    We found the proposal for becoming more proactive to be 
sound and consistent with our earlier recommendations. If INT 
depends solely on a reactive approach that responds exclusively 
to allegations of wrongdoing reported to the Bank, it would in 
effect reward the most skillful manipulators of bank funds, 
since it is usually only the most obvious forms of fraud and 
corruption that tend to raise sufficient suspicions to be 
reported to INT. It will, of course, always be critical to the 
effectiveness and credibility of the Bank's anti-corruption 
program for INT to maintain its capability and commitment to 
zealously pursue allegations of wrongdoing when they are 
reported. We believe that these three kinds of efforts--
reactive, proactive, and preventive--should not be viewed as 
step-by-step progressions, but as component elements of an 
effective, coherent, overall strategy, regardless of the level 
of INT funding resources.
    An aspect of INT's strategic plan that is a prime candidate 
for some form of econometric cost benefit analysis is its 
proposal to structure a triage approach for case selection. 
Recognizing that the Bank's resources are finite and that INT 
is not likely to receive sufficient funding to enable it to 
undertake all the investigative activities that may be 
warranted, the proposed triage system would build upon a 
systemization of considerations that have been applied 
informally in INT's past allocation of resources.
    We encountered some concern that the concept of triage may 
seem to contradict the Bank's sincere expression of zero 
tolerance for fraud and corruption. Refusal to tolerate should 
not be confused with striking out at every instance of 
wrongdoing. As long as cases receive at least preliminary 
investigation and assessment by INT personnel, as complemented 
by INT's proposal, as long as matters apparently even involving 
low levels of seriousness, are occasionally brought to the 
sanctioning state, and as long as all geographic regions in 
which the Bank makes loans receive some degree of regular 
attention by INT's investigations, the triage system can be 
recognized as in furtherance of the zero tolerance concept, not 
in derogation of it.
    Turning to INT's proposal for significant increases in its 
overall budget and staffing level, it is interesting to note 
this was met with considerable skepticism in some quarters in 
the Bank. INT's staffing level had already given some offices 
in the Bank the impression of an instant bureaucracy exploding 
onto the Bank's scene and apparently destined to expand without 
boundaries.
    In assessing the justification for the Bank's expenditures 
on its anti-fraud and corruption program, the appropriate 
measure should not be a comparison of INT's accelerated growth 
in total staff over its first few years with a bank-wide growth 
in staff over the same period, but the size of the staff needed 
to do the job in an effective and cost-justified manner, 
tempered to a reasonable degree, of course, by budget 
realities, competing bank responsibilities, and similar 
constraints.
    Doing nothing, as was the case before, or doing only as 
much as can be accomplished by an arbitrarily limited level of 
personnel growth, is clearly not the proper response for an 
institution with a staff that probably possesses as great a 
capacity for collective econometric analysis as any institution 
in the world.
    While INT's strategic plan represents a major step forward, 
the planned use of resources must be continually subjected to 
rigorous analysis, and the manner in which it operates must be 
continually analyzed to identify areas where improvement can be 
made.
    In our report to the Bank last year, we identified a few 
steps that could be taken to improve INT's operations. They 
included the following: We continue to believe that INT would 
be well-served by having its terms of reference endorsed by the 
board. We believe that INT's stature would also be enhanced if 
various constituencies, both within and outside the Bank, 
receive a clear and unambiguous message from the Bank's senior 
management that it is committed to the fight against fraud and 
corruption. We believe that while the president should continue 
to have the ultimate authority and responsibility for INT, a 
more regularized process would be useful for acquainting the 
board of directors with the general nature of the problems that 
INT is able to uncover.
    Finally, we believe that the public disclosure of sanctions 
imposed by the Bank on the basis of findings of fraud or 
corruption should be automatic. Such disclosure will help 
achieve a level of deterrence that is one of the most valuable 
results of the Bank's efforts. In addition, it will add 
credibility to the Bank's anti-corruption program and will 
enable member nations and other international organizations to 
protect themselves from becoming victims of these perpetrators 
in the future.
    If an INT report contained evidence of criminal activity, 
then it is likely that the government of the country whose laws 
have been broken will want to obtain that information. Some 
have argued that the Bank may either have a legal or moral 
obligation to provide such information to its member countries. 
Without resolving those issues, it is apparent from a practical 
perspective that the Bank will have an interest in making 
criminal referrals in most, if not all, instances where it 
uncovers evidence of a crime.
    We have recommended to the Bank that as the number of 
matters eligible for criminal referral continues to increase, 
the Bank should regularize policies and procedures for 
evaluating such cases and for interacting with national 
officials in notifying them of the evidence and giving them 
access to bank files.
    When INT investigators discover fraud and corruption in 
bank finance contracts, the evidence may also place them in a 
unique position to identify problems in the Bank's operating 
procedures that have implications far beyond the matter being 
investigated. The Bank would be doing itself a disservice if it 
failed to take advantage of the educational value of the 
reservoir of information accumulated by INT through case 
studies or other methods of disseminating lessons learned.
    As I mentioned at the outset, in 2002 we were asked by the 
Bank to review and evaluate its process for imposing sanctions 
on firms and individuals that have been found to engage in 
corrupt activities. The principal tool available to the Bank 
under such circumstances is to declare the wrongdoer ineligible 
for future bank finance contracts, a process known as 
debarment.
    We made recommendations to the Bank in some 18 separate 
categories pertaining to its structures and procedures for 
imposing sanctions. These recommendations were thoroughly 
reviewed by the Bank's management and were presented to the 
Bank's executive directors. I've been informed that earlier 
this month all of those recommendations were accepted by the 
board, and the Bank will proceed to implement those 
recommendations.
    We also made a key recommendation related to the question 
of whether the sanctions committee should have the authority to 
impose sanctions on behalf of the Bank or should simply make 
recommendations to the president. Requiring the president of 
the Bank to review and evaluate every case in which fraud and 
corruption has been found and to determine whether the 
recommended sanctions are appropriate would place an enormous 
burden on the president's time. Furthermore, since the parties 
subject to sanction come from countries that are represented on 
the board of the Bank to whom the president reports, there is 
at least the perception that the president could be subjected 
to political pressure and undue influence on behalf of a party 
that had the support and sympathies of its government. For 
these reasons, it seems advisable not to include the president 
in the sanctioning decisions, and that as long as the sanctions 
committee is composed at least in part of individuals who are 
not current bank employees, the committee should be vested with 
authority to make final decisions without further review or 
appeal.
    The other recommendations contained in our 2002 report on 
the sanctioning process are set forth at pages 25 through 28 of 
my prepared statement, and are largely concerned with 
procedural matters and the Bank's desire to strike an 
appropriate balance between an efficient and expeditious 
process on the one hand and ensuring that the accused is 
afforded fairness on the other.
    In closing, Mr. Chairman, let me note that from a near 
standing start, and in less than a decade, the World Bank has 
created a greatly enhanced and increasingly credible capability 
to deal with the problems of suspected fraud and corruption in 
its activities. Problems remain, to be sure, many of them 
referenced in my statement. But given a continued level of 
commitment from executive leadership, buttressed by clear 
authorization for its activities from the Bank's board of 
directors and a widespread recognition within the organization 
itself of the worth of such an undertaking, there is no reason 
why this effort cannot mature into a showcase operation of how 
to deal with a challenge of integrity problems within an 
international organization.
    Key to meeting this challenge will be the continued ability 
to attract and retain INT staff and leadership of the highest 
caliber and widest experience, and to ensure that INT is 
recognized to be a genuine resource by all engaged in the 
worldwide operations of the World Bank group. An admirable 
beginning has been accomplished. Care must now be taken to 
ensure that continued improvement remains the aspiration for 
the future. Thank you.

    [The prepared statement of Mr. Thornburgh follows:]

                Prepared Statement of Richard Thornburgh

    Good Morning. I am pleased to be here today to talk to you about 
the ongoing efforts of The World Bank to develop effective policies and 
procedures for combating fraud and corruption in projects financed with 
Bank funds.
    As the largest contributor to the Bank, the United States has a 
critical stake in understanding how Bank funds are used and what type 
of commitment the Bank has made to preventing those funds from being 
wasted as the result of fraudulent or corrupt practices. As you are 
aware, the Bank's Articles of Association, to which the United States 
is a signatory, require that the Bank ``make arrangements to ensure 
that the proceeds of any loan are used only for the purpose for which 
the loan was granted . . .'' For an organization that has disbursed as 
much as approximately $25 billion a year in countries having some of 
the least developed economic, political and legal systems in the world, 
this is not a simple undertaking.
    Funds loaned by and activities undertaken by the Bank are 
vulnerable to fraud and corruption by Bank employees, contractors, and 
consultants utilized in the execution of its projects and by officials 
in governments to whom loans are made. An effective program to combat 
fraud and corruption is important not only to ensure that disbursed 
funds are utilized in the manner intended, but to maintain the Bank's 
reputation and to assure the continued willingness of member states to 
support its operations. Unfortunately, during most of the Bank's first 
fifty years, the culture within the Bank discouraged not only the 
taking of any action to address problems of fraud and corruption, but 
even the discussion of such action.
    When James D. Wolfensohn became President of the Bank in 1995, he 
instilled a notable shift in attitude. In a speech to the Bank's Board 
of Governors in 1996, Mr. Wolfensohn became the first senior official 
within the Bank to acknowledge openly that fraud and corruption 
constitute a major problem for the Bank and for the nations that the 
Bank was attempting to assist. Along with a new attitude, Mr. 
Wolfensohn brought institutional change as well.
    In 1996 the Bank's Executive Directors approved, in concept, the 
establishment of a committee to assess evidence of fraud and corruption 
in Bank-financed projects and to temporarily or permanently preclude 
suppliers, contractors and consultants found to have engaged in such 
practices from participation on future Bank projects.
    In 1996 and 1997, the Bank revised its procurement guidelines in 
order to make it manifest that fraud and corruption would not be 
tolerated.
    In early 1998, the Bank began the process of regularizing the 
investigation of allegations of fraud and corruption by suppliers, 
contractors and consultants with the establishment of an Investigations 
Unit. At the outset, the Investigations Unit was composed of a very 
small number of newly-hired Bank employees, most of whom were former 
U.S. prosecutors. Since the number of in-house investigators was 
insufficient to respond to various allegations of fraud and corruption 
the Bank was receiving, the Bank contracted out the conduct of most of 
its investigations to outside law firms and auditors.
    Also in 1998, the Bank established two committees of high-level 
officials to implement aspects of its anti-fraud and corruption 
program. One committee, the Oversight Committee on Fraud and 
Corruption, was given responsibility for the oversight and supervision 
of all investigations of fraud and corruption, whether involving Bank 
staff or Bank-financed projects. The other, the Sanctions Committee, 
was given responsibility for assessing evidence revealed by the 
investigations and for recommending to the President of the Bank the 
appropriate disposition of such cases.
    It was at this stage in the evolution of the Bank's program to 
combat fraud and corruption, that the Bank engaged me, along with my 
colleagues Ronald Gainer and Cuyler Walker, to consult with the Bank on 
the adequacy and functioning of the program. During our engagement by 
the Bank, we have issued three reports. The first report, issued in 
January 2000, dealt principally with the Bank's procedures for 
investigating allegations of fraud and corruption. The second report, 
issued in August 2002, dealt principally with the Bank's procedures for 
sanctioning acts involving fraud and corruption. And the third report, 
issued in July 2003, dealt with a strategic plan that had been produced 
within the Bank for its investigative unit and our analysis of the 
steps the Bank had taken to develop its internal investigative 
capabilities.
    I should point out that, in all cases, the nature of our assignment 
was to assist the Bank in developing policies, procedures and 
structures to enable it to protect its funds from fraudulent and 
corrupt practices. In preparing these reports, we were not asked to 
evaluate, quantify or assess the specific nature, scope or extent of 
the problem, nor were we asked to review or make recommendations 
relating to any particular case or set of circumstances in which Bank 
projects were affected by fraud or corruption.
    Before addressing our findings and recommendations, it is worth 
taking a moment to note the uniqueness of the environment in which the 
Bank operates and how this necessarily has influenced the structures 
and procedures it has put in place to address fraud and corruption.
    As an international organization, the Bank does not possess many of 
the tools that a national government may bring to bear on a situation 
in which it has been the victim of fraud or corruption. The Bank does 
not have traditional law enforcement powers such as subpoena power or 
the ability to otherwise compel the production of documents or witness 
testimony or to conduct searches or electronic surveillance. As a 
result, the Bank must rely almost exclusively on informants and 
cooperating witnesses to build a case. Furthermore, since the Bank 
finances projects all over the world and often in some of the most 
remote parts of the world, the Bank's investigators are invariably 
viewed as outsiders with none of the advantages that come with knowing 
and being known by local citizens or authorities who are closest to the 
circumstances related to matters under investigation. In light of these 
factors, it is not realistic to expect the Bank's investigators to be 
as effective as police and prosecutors of a sovereign nation in 
establishing facts that support allegations or suspicions of fraud and 
corruption.
    When it comes to seeking redress for wrong-doing involving Bank 
funds, the Bank is, however, no different than any other private party 
to a contract. If it desires to recover monetary damages, the Bank may 
initiate a civil action in a country in which the courts have 
jurisdiction over the matter. If it believes that a particular matter 
involves the violation of the law, the Bank may refer the matter for 
criminal prosecution in the country whose laws may have been broken. In 
either case, the Bank must be able to uncover the underlying facts 
giving rise to its suspicions, which requires a sophisticated 
investigative capability since perpetrators of acts of fraud and 
corruption will be careful to cover their tracks as best they can.
    While the Bank does not possess traditional law enforcement powers, 
it does enjoy special legal status including certain privileges and 
immunities that private actors and even national governments do not 
have. Except under certain exceptional and narrow circumstances, the 
Bank is not subject to the jurisdiction of the courts of any nation. 
This gives the Bank tremendous discretion in dealing with suppliers, 
contractors and consultants, as well as national governments themselves 
and its own employees. At the same time, it also imposes a heightened 
obligation on the Bank to act responsibly since, while its actions may 
not be subject to challenge in traditional ways, it will be subject to 
considerable scrutiny due to its governing charter and its high profile 
around the world.
    Another important factor must be noted. Since the Bank would be 
within its rights to treat those engaged in fraud and corruption in 
Bank-financed projects simply as contracting parties in a commercial 
transaction, such miscreants are subject to being declared ineligible 
from participation in such contracts in the future on the mere 
suspicion of improper conduct. However, the Bank has determined that 
its status as a leading international organization that, among other 
things, promotes the rule of law and the independence of the judiciary 
in developing counties, requires it to apply elements of fundamental 
fairness (or what might be thought of ``due process'' in a judicial 
proceeding) when dealing with allegations of fraud and corruption in a 
Bank project. When I describe our analysis of the Bank's sanctioning 
process and some of our recommendations for strengthening it, I will 
share some examples of the types of issues with which the Bank has 
wrestled in trying to strike the appropriate balance between protecting 
the funds it loans out and respecting basic principles of fairness.
    From the inception of its anti-fraud and corruption efforts in the 
mid-1990s, the Bank has separated the two distinct functions that make 
up this effort--the investigation of activities involving fraud and 
corruption, whereby the Bank focuses on uncovering and compiling 
evidence of such actions, and the evaluation of the strength of that 
evidence, whereby the Bank determines whether sanctions should be 
imposed and, if they are, what sanctions are appropriate. In each of 
the three reports that my colleagues and I prepared, we were asked to 
deal with both aspects of the Bank's program at least to some extent. I 
will address our principal findings and recommendations relating to how 
the Bank deals with both investigations of instances of fraud and 
corruption, on the one hand, and sanctioning those found to have 
engaged in such practices, on the other.
    With respect to the investigation of fraud and corruption, as I 
noted previously, in 1998, the Bank had established its Oversight 
Committee on Fraud and Corruption to oversee the investigations of 
allegations of fraud and corruption involving Bank staff and Bank-
financed projects. The Bank had set up an internal Investigations Unit 
with a small number of well-qualified investigators, but, due to its 
limited capacity, had to contract out most of the investigative work to 
law firms and auditors. This structure had evolved in a piecemeal 
fashion over the course of several years as the effort to be more 
responsive to allegations of fraud and corruption gained momentum, and, 
while it was clearly well-intended, we found it to be somewhat 
cumbersome and inefficient.
    The Oversight Committee was composed of senior officials of the 
Bank who brought a wealth of knowledge of and experience with Bank 
operations to the table. However, understandably, none of these 
officials had experience with investigative practices and procedures. 
Moreover, all had considerable demands on their time which made it 
difficult for the Committee to meet regularly and to provide the day-
to-day support and attention that the Investigations Unit required. 
Some had oversight responsibility, directly or indirectly, for some of 
the very operational components of the Bank whose projects were the 
subject of investigation.
    The Investigations Unit did not have sufficient staffing or 
resources to follow up on the various allegations of fraud and 
corruption that were being received by the Bank. The use of outside 
investigators has been satisfactory when the Bank had only a few 
matters under investigation at a time, but as the caseload increased, 
it became cost-prohibitive to continue to engage an ever-increasing 
number of outsiders who were unfamiliar with Bank practices to do this 
work. We were also concerned that since the Investigations Unit 
reported to a committee of several senior officials, there was at least 
the appearance that the Unit lacked independence and could be subject 
to inappropriate pressure under certain circumstances. I should note 
that we did not observe any such pressure, but the opportunity itself 
was sufficient to raise reservations about the oversight role of the 
Committee.
    Based on these findings, in January 2000, we recommended to the 
Bank that the Investigations Unit be merged into a new independent 
department, called the Department of Institutional Integrity, to be 
created and assigned the principal responsibility for conducting all 
investigations on behalf of the Bank into instances of fraud and 
corruption. We also recommended that the new Department exercise 
operational independence under the authority of the President of the 
Bank and report directly to the President. As part of the 
implementation of this new structure, we also made the following 
recommendations:


   that the new Department be headed by a Director with 
        experience in the investigation and prosecution of fraud and 
        corruption cases;

   that the Director be appointed for a fixed five-year term to 
        minimize the potential for undue influence;

   that the Department recruit and develop a cadre of 
        experienced in-house staff possessing investigative skills, 
        knowledge of Bank procurement and personnel procedures, 
        forensic auditing and contract auditing skills, and other 
        characteristics necessary for mounting an aggressive effort 
        against fraud and corruption;

   that the use of outside investigators be minimized;

   that the Department's personnel have access to all records, 
        documents and properties of the Bank in conducting its 
        investigations; and

   that the Oversight Committee on Fraud and Corruption be 
        reconstituted and given a policy-making (as opposed to 
        operational) mission with responsibility for general 
        supervision and coordination of all of the Bank's programs 
        intended to address problems of fraud and corruption, not just 
        investigations.

    I am pleased to say that these recommendations were accepted by the 
Bank and have been implemented.
    Beyond the overarching recommendations for restructuring its 
investigative efforts, in January of 2000, we made a series of 
additional recommendations relating to the Bank's efforts to uncover 
fraud and corruption in projects it finances. These recommendations 
included the following:

   that the Department of Institutional Integrity, now known 
        within the Bank as ``INT,'' develop and nurture close working 
        relationships with other offices in the Bank whose 
        responsibilities and activities necessarily overlap with and 
        complement those of INT, including the Legal Department, the 
        Internal Audit Department and the Professional Ethics Office;

   that INT receive a mandate from the Board, so that its 
        authority derive from the Bank's governing body not just from 
        its chief executive officer;

   that INT develop procedures for reporting to the President 
        of the Bank regularly on on-going investigations and prepare an 
        annual report to the President summarizing its activities and 
        accomplishments during the preceding year and making 
        recommendations for management and procedural improvements to 
        aid in the deterrence or detection of fraud and corruption;

   that INT develop a strategic ``risk management'' plan for 
        prioritizing its investigative resources based on an assessment 
        of those contracts, projects, geographic regions and countries 
        that may be particularly susceptible to fraud and corruption;

   that, in order to regularize and enhance the operations of 
        INT, as well as to ensure fairness in the conduct of 
        investigation, the Bank put in place written procedures with 
        respect to INT's practices in the following areas:

   adopting policies and procedures that ensure investigations 
        conform to acceptable norms, respect the rights of the accused 
        and develop evidence that can be used effectively in subsequent 
        proceeding;

   designing systems to ensure that resources are used 
        efficiently and to enable the Department to track ongoing 
        investigations to ensure adequate internal monitoring and 
        oversight.

   developing policies and procedures, based on objective 
        written criteria, to guide the Department in its decisions 
        about making other offices within the Bank aware of problems at 
        the appropriate time for informational purposes or remedial 
        action, about pursuing a matter either through civil or 
        criminal courts, and about making disclosures to affected or 
        otherwise interested parties outside the Bank; and

   establishing procedures for the recruitment, hiring and 
        training of qualified individuals capable of conducting 
        investigations in a multicultural international organization.

    In our 2000 report, we also proposed:


   that in addition to investigating wrong-doing that had 
        already resulted in the loss of funds, the Bank develop ways to 
        reduce opportunities for fraud and corruption from occurring in 
        Bank-financed projects, such as: increasing the scope of and 
        resources available for the pre-review of contracts; and 
        increasing the requirements that disbursements be made only in 
        increments upon demonstrated achievement of specific 
        milestones;

   that the Bank regularly review its loan agreements, 
        procurement guidelines and standard contracts, and insert 
        additional provisions designed to facilitate the prevention and 
        detection of fraud and corruption, such as: strengthening the 
        Bank's audit rights, document retention requirements and 
        contract representations and warranties; ensuring that 
        investigators have access to relevant personnel and documents 
        (whether in the control of the Bank or third parties); and 
        expanding the definitions of ``fraud'' and ``corruption'' in 
        the Bank's documents;

   that the Bank conduct routine background checks on new 
        employees and on suppliers, contractors and consultants engaged 
        in Bank-financed projects;

   that the Bank strengthen the financial disclosure 
        requirements applicable to high ranking officials and others in 
        particularly sensitive positions; and

   that the Bank adopt ``whistleblower'' rules protecting Bank 
        staff that report misconduct, disclose information or otherwise 
        cooperate with investigations involving allegations of fraud 
        and corruption, as well as other types of wrongdoing.

    Last year my colleagues and I had the opportunity to revisit some 
of these issues when we were asked by the Bank to review and comment on 
a strategic plan that the Department of Institutional Integrity had 
prepared and to review and evaluate how the structures that had been 
put in place were working and to what degree more needed to be done to 
implement our recommendations.
    The proposed strategic plan focused on all aspects of the 
management and operation of INT. I will briefly comment on only the two 
most salient of these. The first is the Department's proposed strategy 
to move from an emphasis on reacting to allegations of fraud and 
corruption when they are made, to a program that includes proactive and 
preventive actions. The second concerns the proposed budget and staff 
for the Department.
    We found the proposal for becoming more proactive to be sound and 
consistent with our earlier recommendations. If INT depends solely on a 
reactive approach that responds exclusively to allegations of wrong-
doing reported to the Bank, it would reward the most skillful 
manipulators of Bank funds, since it is usually only the most obvious 
forms of fraud and corruption that tend to raise sufficient suspicions 
to be reported to INT. It will, of course, always be critical to the 
effectiveness and credibility of the Bank's anti-corruption program for 
INT to maintain its capacity and commitment to zealously pursue 
allegations of wrongdoing when they are reported. The proposed 
proactive and preventive efforts are a logical extension of INT's 
current work and are likely to strengthen INT's potential impact on the 
Bank's overall objective of detecting and deterring instances of fraud 
and corruption in Bank-financed projects.
    We believe that these three kinds of efforts, reactive, proactive 
and preventive, should not be viewed as step-by-step progressions, but 
as component elements of an effective, coherent overall strategy, 
regardless of the level of INT funding. In any event, a more 
authoritative answer may be expected to emerge from a comparison of the 
costs and benefits of the three approaches that balances them against 
each other and that balances the overall utilization of Bank resources 
against the potential savings realized by reducing losses to fraud and 
corruption. Such an approach offers the prospect of more thoughtful 
resolution of competing considerations than less disciplined forms of 
evaluation.
    Another aspect of INT's strategic plan that is a prime candidate 
for some form of econometric cost-benefit analysis is its proposal to 
structure a triage approach for case selection. Recognizing that the 
Bank's resources are finite and that INT is not likely to receive 
sufficient funding to enable it to undertake all the investigative 
activities that may be warranted, the proposed triage system would 
build upon a systemization of considerations that have been applied 
informally in INT's past allocation of resources. This is the only 
reasonable approach that can be taken.
    We have encountered some concern that the concept of triage may 
seem to contradict the Bank's sincere expression of ``zero tolerance'' 
for fraud and corruption. Refusal to tolerate should not be confused 
with striking out at every instance of wrongdoing. As long as all cases 
receive at least preliminary investigation and assessment by INT 
personnel as contemplated by INT's proposal, as long as matters 
apparently involving even low levels of seriousness are occasionally 
brought to the sanctioning stage, and as long as all geographic regions 
in which the Bank makes loans receive some degree of regular attention 
by INT's investigators, the triage system can be recognized as in 
furtherance of the zero tolerance concept, not in derogation of it.
    Turning to INT's proposal for significant increases in its overall 
budget and staffing level, it is interesting to note that this was met 
by considerable skepticism in some quarters of the Bank. INT's staffing 
level had already given some offices in the Bank the impression of an 
instant bureaucracy exploding onto the Bank scene and apparently 
destined to expand without ultimate boundaries. At the same time, the 
staffing level had given INT personnel the impression of overwork and 
inadequate willingness by the Bank to confront fraud and corruption 
affecting large regions in which it operates.
    It is important to recognize that any responsible business 
enterprise would have been attempting, from the time of its inception, 
to stem fraud and corruption that interfered with its mission. In the 
Bank, however, senior management began to acknowledge the problem 
openly only in 1996 `` after significant amounts already had been lost 
to fraud and corruption. The Bank has a great deal of catching up to 
do.
    In assessing the justification for the Bank's expenditures on its 
anti-fraud and corruption program, the appropriate measure, therefore, 
is not through comparison of INT's accelerated growth in total staff 
over its first few years with the Bank-wide growth in staff over the 
same period, but the size of the staff needed to do the job in an 
effective and cost-justified manner (tempered, to a reasonable degree, 
of course, by budget realities, competing Bank responsibilities, and 
similar constraints). Doing nothing, as was the case before, or doing 
only as much as can be accomplished by an arbitrarily limited level of 
personnel growth, is clearly not the proper response for an institution 
with a staff that probably possesses as great a capacity for collective 
econometric analysis as any institution in the world. The Bank needs to 
develop a reasonable means of measuring, and recognizing in a practical 
fashion, the value of investigations as well as the costs. This is 
generally appreciated within the Bank, and many of the expressions of 
concern about INT's rapid growth and future ambitions appear to be 
bottomed primarily on a desire for assurance that the Department has 
the analytical capacity for concentrating resources effectively and the 
managerial capacity to assure that the anticipated effectiveness can be 
realized--all in the context of the Bank's principal mission.
    While INT's strategic plan represents a major step forward, the 
planned uses of resources must be continually subjected to rigorous 
analyses and the manner in which its operates must be continually 
analyzed to identify areas where improvement can be made. In our report 
to the Bank last year, we identified a few steps that could be taken to 
improve INT's operations. These included the following matters:


   We continue to believe that INT would be well-served by 
        having its terms of reference endorsed by the Board. While the 
        Board has been asked to approve the strategic plan for INT, it 
        has never taken any affirmative action on INT's role as the 
        principal instrument of the Bank for the investigation of fraud 
        and corruption in Bank operations. We think that bestowing such 
        a mandate upon INT would strengthen its ability to obtain 
        cooperation from other offices in the Bank and its authority to 
        conduct investigations in countries throughout the world.

   We believe that INT's stature would also be enhanced if 
        various constituencies, both within and outside the Bank, 
        receive a clear and unambiguous message from the Bank's senior 
        management that it is committed to the fight against fraud and 
        corruption. Since, as President Wolfensohn has noted, this 
        objective was not always a part of the Bank's culture, it may 
        be premature to assume that all Bank staff have accepted its 
        importance. The President has consistently spoken out about the 
        significance of this effort, as have several other Bank 
        officials. It would be helpful if these senior managers would 
        make it a point to regularly reaffirm the priority the Bank 
        places on its anti-corruption effort and its connection to the 
        Bank's antipoverty agenda, and also acknowledge INT's central 
        role in this effort. Another way to deliver this message within 
        the Bank would be to incorporate information about the Bank's 
        anti-fraud and corruption program and its importance into all 
        of the Bank's core training program.

   We believe that while the President should continue to have 
        the ultimate authority and responsibility for INT, a more 
        regularized process would be useful for acquainting the Board 
        of Directors with the general nature of the problems that INT 
        is able to uncover. If the Board is to be expected to support 
        INT's efforts and actions, it should be given a more complete 
        understanding of what INT is doing and what its investigations 
        uncover. In particular, the Board, through its Audit Committee, 
        should have the opportunity to receive sufficient information 
        about INT and its findings to appreciate whether there are 
        endemic problems in a particular country or geographic region, 
        whether there are systematic problems in how the Bank 
        administers its programs, and whether there are internal 
        obstacles within the Bank that prevent INT from effectively 
        conducting its investigations. At the same time, if the Audit 
        Committee is going to be given access to such information, its 
        members must recognize that INT would not be free to disclose 
        the details of some ongoing investigations, and that such 
        disclosure could be perceived as subjecting INT to the risk of 
        undue influence from the Executive Directors whose nationals 
        may be implicated in wrongdoing.

    Last year, we also reviewed a set of issues that concern how and 
with whom the Bank shares the results of its investigations, in 
particular: whether the Bank should publicly disclose that it has 
concluded that a firm or individual has engaged in fraudulent or 
corrupt practices and that the firm has been sanctioned by the Bank; 
whether the details and the results of INT's investigation should be 
shared with affected or interested parties; under what circumstances 
the results of an investigation should be referred to law enforcement 
agencies or prosecutors for possible criminal charges; and in what ways 
the lessons learned from those investigations can be imparted to Bank 
managers.
    The public disclosure of sanctions imposed by the Bank on the basis 
of findings of fraud or corruption should be automatic. Such disclosure 
will help achieve a level of deterrence that is one of the most 
valuable results of the Bank's effort. In addition, it will add 
credibility to the Bank's anti-corruption program and will enable 
member nations and other international organizations to protect 
themselves from becoming victims of the perpetrator in the future.
    Beyond publicizing the fact that sanctions have been imposed, the 
Bank is understandably cautious about releasing the details of INT's 
investigative reports that describe the evidence of fraud and 
corruption giving rise to sanctions. Nevertheless, there will often be 
stakeholders, both within the Bank and in interested member states, 
that would benefit from knowing the details of the fraudulent and 
corrupt activities described in these reports. Just as there is a 
deterrent effect from the public disclosure of sanctions, the 
disclosure to responsible officials of the particular events giving 
rising to those sanctions may provide an opportunity for the 
introduction of corrective measures that could prevent such events from 
recurring in future Bank-financed contracts. Over time, this could be 
of considerable benefit to the Bank.
    We recognize that there frequently will be information contained in 
INT case reports that the Bank would have a legitimate interest in 
keeping confidential. Such information includes: information about 
INT's sources and methods of investigation, the disclosure of which 
could undermine INT's investigative capacity; information about 
cooperating witnesses, the disclosure of which could subject those 
individuals to retaliation or physical harm; information of a less than 
compelling nature, the disclosure of which could cause unjustified 
damage to the subject of an investigation; and information that, 
although seemingly credible, has no bearing on the culpability of the 
subject of an investigation and unfairly portrays an innocent third 
party in a negative light, the disclosure of which could cause damage 
to that party's reputation. In such instances, the Bank could decide on 
a case-by-case basis either to decline to release a case report in its 
entirety or to withhold those portions of the report that the Bank 
determines should not be released. The fact that these concerns may 
arise in some situations does not suggest that the Bank should 
routinely decline to release such INT reports.
    If an INT report contained evidence of criminal activity, then it 
is likely that the government of the country whose laws have been 
broken will want to obtain that information. Some have argued that the 
Bank may have either a legal or a moral obligation to provide such 
information to its member countries. Without resolving such issues, it 
is apparent from a practical perspective that the Bank will have an 
interest in making criminal referrals in most, if not all, instances 
when it uncovers evidence of a crime. We have recommended to the Bank 
that, as the number of matters eligible for criminal referral continues 
to increase, the Bank should regularize policies and procedures for 
evaluating such cases and for interacting with national officials in 
notifying them of the evidence and giving them access to the Bank 
files.
    When INT investigators discover fraud and corruption in Bank-
financed contracts, the evidence may place them in a unique position to 
identify problems in the Bank's operating procedures that have 
implications far beyond the matter being investigated. INT may be able 
to glean instructive information from a single case report, and, in 
addition, over the course of the many diverse and disparate matters 
that INT investigates, it may discover patterns and trends that should 
be called to the attention of operational managers within the Bank, as 
well as to the attention of officials in member countries with 
responsibility for the awarding or supervision of Bank-financed 
contracts. The kinds of information that might be revealed in INT's 
investigations include information that would show if there are endemic 
problems in a country or geographic region, if there are systematic 
problems in how the Bank administers its programs, and if there are 
particular techniques or schemes that are being used to facilitate acts 
of fraud or corruption in Bank-financed contracts. if these lessons are 
made known to operational managers in the Bank and national officials, 
it may be possible to correct the problems, or at least improve the 
procedures for the awarding and executing of Bank-financed contracts to 
the extent that the potential for future problems is lessened. The Bank 
would be doing itself a disservice if it were to fail to take advantage 
of the educational value of the reservoir of information accumulated by 
INT.
    In our 2003 report, we also identified a number of technical issues 
relating to the Bank's policies and procedures concerning the 
investigation of incidents involving fraud and corruption that need to 
be resolved. These issues include:


   whether the Bank should be willing to grant immunity to a 
        cooperating witness or to immunize certain information provided 
        by a witness, and, if so, whether such authority should be 
        given to the Director of INT or should be exercised only with 
        the approval of a senior official outside of INT;

   whether the Bank should be willing to reimburse witnesses 
        for expenses incurred as a result of their cooperation with 
        INT;

   under what circumstances INT should have access to the 
        contents of a staff member's computer files and e-mail 
        databases; and

   under what circumstances the Bank should make Bank staff 
        available to testify in court given that, as a result of the 
        Bank's privileges and immunities, Bank staff cannot be 
        compelled to provide testimony.

    Issues of this nature must be dealt with in all national criminal 
justice systems, and they are resolved in the normal course. We 
understand that the Bank is still in the process of reviewing these 
matters and is attempting to resolve them in the near future.
    It is likely that other procedural issues with confront the Bank as 
INT matures as an investigative body. When such issues do arise, we 
have encouraged the Bank to resist the understandable tendency to 
resolve these issues by circumscribing INT's activities in a manner 
that would simply minimize the potential for complaints by the subjects 
of investigations. Since INT possesses only a limited set of 
investigative tools and none of the powers common to law enforcement 
agencies, we have advised the Bank that it should be reluctant to take 
away any prerogatives that INT would otherwise possess. To resolve such 
matters, we have also advised the Bank that, where there is 
disagreement between INT and senior managers over INT's methods of 
operation, the newly reconstituted Committee on Fraud and Corruption, 
now known as the Investigations Policy Committee, is an appropriate 
vehicle for recommending a resolution of the matter.
    As I mentioned at the outset, in 2002, we were asked by the Bank to 
review and evaluate its process for imposing sanctions on firms and 
individuals that have been found to have engaged in fraud and 
corruption in Bank projects. The principal tool available to the Bank 
under such circumstances is to declare the wrong-doer ineligible for 
future Bank-financed contracts, a process known as debarment. We made 
recommendations to the Bank in some eighteen separate categories 
pertaining to its structures and procedures for imposing sanctions. 
These recommendations were thoroughly reviewed by the Bank's management 
and were presented to the Bank's Executives Directors. I have been 
informed that, earlier this month, all of our recommendations were 
accepted by the Board and that the Bank will proceed to implement those 
recommendations.
    One of our principal recommendations with respect to the 
sanctioning process concerned the composition of the body given 
authority to frame the sanctions to be imposed by the Bank. As I 
described previously, in 1998 the Bank established a Sanctions 
Committee composed of five senior officials of the Bank to review 
evidence of fraud and corruption and determine whether or not to debar 
those found to have engaged in such actions. At the outset this 
composition was sensible because senior managers of the Bank are in a 
better position than any others to make thoughtful evaluations of 
whether it is in the interest of the Bank and its member nations to 
continue to do business with a firm that has engaged in practices that 
raise serious ethical concerns. However, over time, it became apparent 
that the composition of the Committee could be problematic.
    Some of the difficulties were of a managerial and administrative 
nature. An increasing caseload imposed greater time pressures on 
Committee members for reading the case files in preparation for 
hearings and for engaging in what has become in essence an adjudicatory 
exercise, rather than an exercise in business discretion. As senior 
Bank officials, each of the Committee members already has a full plate 
due too their principal responsibilities within the Bank and most had 
active travel schedules which made them unavailable for extended 
periods of time.
    Other difficulties were more troublesome in that they could be 
perceived as affecting the basic fairness of the Committee's 
determinations. First, the members of the Committee, other than the 
General Counsel, are not lawyers, yet they are often called upon to 
deal with essentially legal issues, such as the weight to be given 
certain kinds of evidence and the adequacy of the overall submissions 
required to satisfy a particular standard of proof. Second, the 
managerial and professional positions of the Committee members within 
the Bank open the entire process to claims of at least an appearance of 
conflict of interest. The premise of perceived conflicts is that Bank 
managers cannot fairly judge matters concerning loans that their 
subordinates evaluated and supervised, and that they themselves may 
have approved. Third, and closely related to concerns about conflicts 
of interest, is the fact that senior officials by the nature of the 
positions in the Bank may be perceived as being subject to externally 
generated pressures from member governments trying to protect their own 
nationals. These latter two concerns--conflicts and external 
pressures--could be costly to the Bank in terms of the credibility of 
the debarment process.
    For these reasons, we recommended to the Bank that the composition 
of the Committee be reconstituted to employ a system in which (a) the 
membership of the Committee is drawn both from current Bank employees 
who are not the most senior managers and from individuals who are not 
current Bank employees; (b) the membership on the Committee be balanced 
to ensure that it is composed of individuals with training and 
extensive experience in procurement matters, in law, and in the 
operations of the Bank or other international development banks; (c) 
the total membership consists of seven such individuals, with current 
Bank employees constituting no more than three; and (d) the Committee 
sits in panels of three to hear cases, with two members of each panel, 
including the chairman, being drawn from the Committee members who are 
not current Bank employees. We believe that a careful iteration of such 
an approach reasonably could be expected to minimize concerns about the 
current system--regarding membership availability and allocation of 
time, conflicts of interest, outside influences, and pressures of 
increasing caseload--while maintaining necessary membership experience 
and expertise.
    We also made recommendations as to whether the Sanctions Committee 
should have the authority to impose sanctions on behalf of the Bank or 
should simply make recommendations to the President. Requiring the 
President of the Bank to review and evaluate every case in which fraud 
and corruption has been found and to determine whether the recommended 
sanctions are appropriate places an enormous burden on the President's 
time. Furthermore, since the parties subject to sanction come from 
countries that are represented on the Board of the Bank to whom the 
President reports, there is at least the perception that the President 
could be subjected to political pressure and undue influence on behalf 
of a party that had the support and sympathies of its government. For 
these reasons, it seems advisable not to include the President in the 
sanctioning decisions and that, as long as the Sanctions Committee is 
composed, at least in part, of individuals who are not current Bank 
employees, the Committee should be vested with authority to make final 
decisions without further review or appeal.
    One of the reasons we are comfortable with making the Sanctions 
Committee's decision final and non-appealable is that we also 
recommended that the Bank appoint an officer to review all cases that 
are directed by INT to the Sanctions Committee to determine whether the 
evidence is sufficient to warrant sanctions and to suggest what 
sanction might be appropriate. As a result, there would be two levels 
of review in the process, the Bank officer and the Sanctions Committee. 
Considerations of fairness would not dictate that further opportunities 
for appeal would be required.
    The purpose of the reviewing officer within the Bank was intended 
to improve the Bank's sanctioning process in two other fundamental 
respects. First, we were concerned that the only mechanism for 
disposing of a case, no matter how strong or weak the evidence might 
be, was to conduct a full-blown hearing before the Sanctions Committee. 
Committee members must spend considerable time preparing for Committee 
proceedings and, as the quantity of evidence presented to the Committee 
continues to grow, an ever-increasing amount of time conducting 
hearings and meeting to decide how to rule on those cases. As the 
number of cases becomes larger, it will be more and more difficult for 
the Committee to hear cases and dispose of them in an efficient and 
timely manner. The role envisioned for the Bank's internal reviewing 
officer could alleviate much of this pressure. The accused will know 
that the reviewing officer, who is independent from those investigating 
the case, has reviewed the evidence and concluded there is sufficient 
evidence to warrant a hearing before the Sanctions Committee. The 
accused will also know what sanction has been recommended by the 
reviewing officer. Under these circumstances, the accused may decide it 
is in its best interests to avoid the time and cost of proceeding to a 
full hearing before the Committee. In such cases, the sanction 
suggested by the reviewing officer will take effect and the matter will 
be closed without requiring any of the Sanctions Committee's time.
    The second important feature of our recommendation for a reviewing 
officer is to provide the Bank with a mechanism for temporarily 
suspending the accused from participation in new Bank projects pending 
final action by the Sanctions Committee. Under the Bank's original 
procedures, an accused party remained eligible to be awarded additional 
Bank projects until the Sanctions Committee process had been completed 
and a debarment had been approved by the President. (The consequences 
of this approach are compounded by the fact that, since it could cause 
enormous costs and delays to a project that is already underway, a 
debarment does not affect contracts that have been previously awarded 
to a party that is subsequently debarred--although, under other long-
standing Bank procedures, the contract could be canceled if it was 
tainted by the same fraudulent or corrupt actions that gave rise to the 
debarment.) Since the accused could continue to compete for additional 
Bank contracts during the pendency of its case before the Sanctions 
Committee, the accused had an incentive to delay the proceedings as 
long as possible rather than bringing them to a speedy conclusion. 
Plainly, the Bank has an obligation to protect funds entrusted to it 
from misuse at the hands of a party who has already been shown by 
credible evidence to have engaged in fraudulent or corrupt practices, 
and the Bank would only look foolish were it to award further contracts 
under such circumstances on the mere technicality that it had not 
completed its formal processes. For these reasons, we recommended that 
if the reviewing officer determines, on the basis of the evidence 
presented by INT, that the accused has engaged in fraudulent or corrupt 
practices, then the accused would be temporarily suspended until the 
Sanctions Committee's decision on the matter becomes effective.
    The other recommendations contained in our 2002 report on the 
sanctioning process largely concerned procedural matters and the Bank's 
desire to strike an appropriate balance between an efficient and 
expeditious process on the one hand, and ensuring that the accused is 
afforded fairness on the other. Our recommendations on these procedural 
matters included the following issues:


   in response to arguments from some parties before the 
        Sanctions Committee that the Bank should be subject to some 
        sort of statute of limitations that would bar it from pursuing 
        matters that occurred in the distant past, we recommended that, 
        where there is reasonably sufficient evidence to establish that 
        a firm has in fact engaged in fraudulent or corrupt practices, 
        no matter how long ago the incident occurred, the Bank should 
        retain the opportunity to protect its assets from misuse in the 
        future by debarring the firm from participating in subsequent 
        Bank-funded contracts;

   in considering the manner in which evidence is presented to 
        the Committee, we recommended that the practice of receiving 
        both written submissions and oral presentations should 
        continue, with the caveat that, in order to keep the 
        proceedings manageable, reasonable limits should be placed on 
        the length of written submissions (other than documentary 
        evidence) and the duration of oral presentations;

   with respect to the burden of proof, we recommended that the 
        Bank should have the burden of establishing that an accused 
        party has engaged in fraudulent or corrupt practices, and that, 
        where such evidence has been presented, the burden should shift 
        to the accused to show cause as to why that party should not be 
        sanctioned as a consequence of such behavior;

   since the standard of proof applied by the Bank that the 
        evidence be ``reasonably sufficient'' to support a finding that 
        fraud or corruption had occurred was considered ambiguous by 
        several members of the Sanctions Committee, we recommended that 
        the Bank adopt of a more descriptive standard, such as ``more 
        likely than not;''

   in response to demands from parties before the Sanctions 
        Committee that they be given unfettered access to all documents 
        in the Bank's possession, we recommended that the Bank maintain 
        the practice under its existing procedures with respect to 
        providing access to its documents whereby the accused is not 
        given unlimited access to Bank documents but is entitled to 
        have access to all relevant evidence in INT's possession, or 
        known to INT, that would reasonably tend to exculpate the 
        respondent or that would mitigate the respondent's culpability;

   with respect to documents in the possession of parties under 
        investigation by the Bank, we recommended that the Bank's 
        procurement guidelines and the documents required to be 
        submitted by bidders on Bank-financed projects be revised to 
        enhance the Bank's ability to obtain meaningful information 
        from the records of all parties that bid on Bank-financed 
        contracts, whether or not they ultimately are awarded the 
        contract, and that an accused's obstruction of or failure to 
        produce such documents or otherwise to cooperate with an 
        investigation should be considered by the Sanctions Committee, 
        and the Committee should be permitted to draw an inference from 
        such actions by the accused that the evidence it refuses to 
        produce would tend to establish the accused's culpability;

   in response to demands from parties before the Sanctions 
        Committee that the accused be permitted to confront adverse 
        witnesses and compel them to testify in person before the 
        Sanctions Committee, we recommended that the Bank should 
        continue the practice whereby the Sanctions Committee accepts 
        witness testimony that is provided indirectly through either 
        INT or the accused, and that the Sanctions Committee assess the 
        weight to be given to such testimony in view of all the 
        circumstances, including the lack of opportunity to evaluate 
        the witness's credibility by face-to-face observation and the 
        lack of opportunity for the other party to cross-examine the 
        witness;

   with respect to the range of possible sanctions that may be 
        imposed on the basis of a finding of fraud or corruption, we 
        recommended that the range be expanded to include one or some 
        combination of the following: (a) permanent debarment; (b) 
        debarment for a term of years; (c) a compliance program in lieu 
        of debarment involving the positioning of monitors on a board 
        of directors or elsewhere within a finn, the termination of 
        corrupt employees, the initiation of ethical training for all 
        employees, the adoption of systematic audits and 
        investigations, and the encouragement of voluntary reporting by 
        employees; (d) restitution; (e) formal reprimand; (1) other 
        appropriate sanctions; and in all cases (g) publication of the 
        particulars of any sanction imposed;

   where there are circumstances beyond the underlying events 
        surrounding the fraudulent or corrupt activities of the 
        accused, such as prior conduct involving similar behavior, the 
        magnitude of losses caused by the accused, or the damage done 
        to the credibility of the Bank's procurement process, we 
        recommended that the Sanctions Committee take such aggravating 
        or mitigating circumstances into consideration in determining 
        the appropriate sanction to impose;

   In considering the impact of the panoply of possible 
        aggravating or mitigating circumstances, we recommended that 
        the Sanctions Committee give special weight to the degree of 
        cooperation an accused party provides to the Bank in the course 
        of an investigation because of the benefits to the Bank and the 
        efficient use of its resources that would result from such 
        cooperation, and we recommended, in particular, that the Bank 
        develop a voluntary disclosure program that would encourage 
        firms and individuals to volunteer disclosure of wrongdoing 
        before it is suspected by the Bank; and

   with respect to the parties that are potentially subject to 
        being sanctioned by the Bank, we recommended that the authority 
        of the Sanctions Committee to debar should apply not only to 
        the parties that enter into contracts for Bank-financed 
        projects, but also to any individual or entity that, directly 
        or indirectly, controls or is controlled by the contracting 
        party.

    In addition to these recommendations, in our report on the 
sanctioning process we made recommendation similar to those described 
in our 2003 report that the Bank should make public disclosure of the 
sanctions it imposes and should share evidence of criminal activity 
with national law enforcement agencies and with other international 
organizations.
    From a near standing start and in less than a decade, the World 
Bank Group has created a greatly enhanced and increasingly credible 
capability to deal with the problems of suspected fraud and corruption 
in its activities. Problems remain, to be sure, many of them referenced 
in my testimony today. But given a continued level of commitment from 
executive leadership, buttressed by clear authorization for its 
activities from the Bank's Board of Directors and a widespread 
recognition within the organization itself of the worth of such an 
undertaking, there is no reason why this effort cannot mature into a 
showcase operation of how to deal with the challenge of integrity 
problems within an international organization. Key to meeting this 
challenge will be the continued ability to attract and retain INT staff 
and leadership of the highest caliber and widest experience and to 
insure that INT is recognized to be a genuine resource by all engaged 
in the worldwide operations of the World Bank Group. An admirable 
beginning has been accomplished. Care must be taken to ensure that 
continued improvement remains the aspiration for the future.

    The Chairman. Thank you very much for that remarkable 
testimony, and likewise for the written statement that 
buttresses your oral testimony today. At this point, I want to 
recess the hearing. We're in the last four minutes of the roll 
call vote. We will quickly do our duty, and then return and 
proceed with our other two witnesses.

    [Recess.]

    The Chairman. The committee is called to order again. We 
now look forward to hearing from Mr. Guido Penzhorn, advocate 
and senior counsel, Durban Bar, Durban, South Africa. Welcome 
to the committee. Please proceed with your testimony.

   STATEMENT OF GUIDO PENZHORN, ADVOCATE AND SENIOR COUNSEL, 
                DURBAN BAR, DURBAN, SOUTH AFRICA

    Mr. Penzhorn. Mr. Chairman, I must thank you for the 
opportunity of being here, but I must also extend the thanks of 
the Lesotho authorities for the recognition that my being here 
signals for the work that they've done in Lesotho in combating 
corruption. The Lesotho authorities sometimes feel that they 
are somewhat alone in a world awash with corruption and that 
they are isolated in their efforts, and this invitation is a 
source of great encouragement to them.
    Mr. Chairman, in this paper I will briefly set out the work 
done in combating bribery in Lesotho involving multinational 
construction companies and consultants, and I will then express 
a few thoughts from my experience in leading these 
prosecutions.
    By way of background, the Lesotho highlands water project 
is the result of a treaty between South Africa and Lesotho 
dating back to 1986. You may recall, Mr. Chairman, that that 
was at the time of the stranglehold of sanctions against South 
Africa, and this was a way for South Africa to somehow get out 
of the stranglehold. And this treaty then allowed for the 
damming of water in Lesotho for the use in Gauteng in South 
Africa and for Lesotho to get the benefit of not only the 
revenue, but also the hydro power that would then be generated.
    Phases 1A and B have recently been completed, and 
negotiations are underway in respect to phase 2. This is a 
multibillion dollar water project, and in fact, I understand 
one of the biggest dam projects in the world.
    We started by prosecuting the chief executive of bribery in 
a bribery scandal that was up to then quite unprecedented in 
South Africa. He was convicted and sentenced to 15 years' 
imprisonment. The Canadian consultancy, Acres, was then 
prosecuted. They were convicted and fined about 15 million 
rand, which is about 6 \1/2\ million U.S. dollars. The 
engineering company from Germany, Lahmeyer International, was 
then prosecuted, convicted, and on appeal their fine was 
increased to 12 million rand, which is about $2 million.
    We then prosecuted the French firm, Schneider Electric SA, 
which had taken over Spie Batignolles, which had been involved 
in the project. They in fact pleaded guilty and a fine of 10 
million rand was agreed with them, and there are other 
prosecutions pending.
    Initially in 1999, these prosecutions were met with praise 
from the international community, but also with a degree of 
skepticism. The thought seemed to be that the chief executive, 
the recipient of the bribes, would be prosecuted and then once 
he is sentenced everybody would go on with their business. 
However, when the prosecutions then moved to the multinational 
companies involved, people started to take notice, and more 
particularly when the convictions started coming in, and then 
they really started taking notice.
    And what must be remembered is that these prosecutions must 
be seen against the background of mounting criticism in Lesotho 
against the prosecutions. No doubt some of these criticisms 
were very well-intended, because it was felt that Lesotho can 
hardly afford to mount these prosecutions involving expensive 
lawyers from South Africa and expensive accountants and 
specialist witnesses and so on, and it was felt that the money 
could be better spent in, for instance, the enormous AIDS 
pandemic that you have in Lesotho at the moment.
    However, some of the motivations for criticizing these 
prosecutions and seeking to undermine them no doubt also go to 
the very problem that you have with bribery, and that is, you 
don't know how far it goes. Some of the people criticizing the 
prosecutions may well have been doing so because they 
themselves were involved and they wanted to keep this thing 
covered up.
    We received help, Mr. Chairman, from various instances, 
particularly from the Swiss, also from OLAF, the anti-
corruption European Union unit. And we also received help from 
the World Bank, and we received considerable help from the 
World Bank. From early on, the World Bank extended to us access 
to their records that they had with regard to the companies 
that we were investigating. On the other hand, we extended our 
assistance to the World Bank which was the result of our 
investigations, and that cooperation was very fruitful and that 
cooperation has extended until now, and we are still 
cooperating quite extensively with the World Bank and we are 
very appreciative of the help that we've received from the 
World Bank.
    But I must add though that that assistance fell short of 
financial assistance, and this is a bugbear with the Lesotho 
authorities because various promises have been made with regard 
to financial assistance which was never forthcoming. One must 
realize that faced with its own economic and social problems, 
such as a frightening AIDS pandemic, Lesotho cannot really 
afford the costs incurred in these prosecutions. But it did 
what it had to do, and this involved the allocation of funds 
that could well have been used for other purposes.
    This clearly illustrates in my submission Lesotho's measure 
of commitment to fighting corruption. From our vantage point, 
we do not see any such commitment on the part of other 
countries, i.e., those whose companies were and still are 
involved in the water project. There is a lingering impression 
in Lesotho, Mr. Chairman, as well as in South Africa, that the 
interests of the first world countries in the present 
prosecutions lies not so much in the successful outcome of 
these prosecutions, but rather in protecting the interests of 
its companies that are involved. Hopefully, this impression 
will in time prove not to be correct.
    I'd like to deal with a few lessons that we've learned. 
Corruption is a worldwide industry. What Lesotho has shown is 
that something can indeed be done about it. All that is 
required is real and not merely token resolve. Such resolve 
presupposes a prosecuting arm that is not hamstrung by 
political considerations or, more importantly, skeletons in 
cupboards of persons in a position to influence prosecuting 
decisions. After all, the one sure way to get away with bribery 
is to compromise those that make the decisions whether or not 
to prosecute. This may explain why in so many countries, among 
others Africa, little seems to be done about what appears from 
the outside to be obvious corruption. My team and I were 
fortunate in that we did not have this problem in that the 
Lesotho prosecuting authorities gave us their unqualified 
support.
    International bribery is notoriously difficult to detect. 
The reason for this is that you do not have an obvious victim. 
The victim is the state and the public at large who would not 
normally get to know of this. Bribery involves two parties, the 
briber and the bribee, and the perception which we have found 
in the first world is that in Africa bribery is an Africa 
problem. And what I mean by this is that it is felt that the 
initiative for the bribe comes from the bribee as opposed to 
from the briber.
    What these prosecutions that we have been involved in has 
shown is that that is in fact not the case, that the initiative 
comes from the briber, from the briber company, and it 
initiates this through agents, and that's where the bribe comes 
from.
    I'd like to turn to something which I think is particularly 
important. I've heard testimony and I've read testimony from 
persons such as Nancy Boswell that testified before you at the 
last hearing as well as other testimony, and this testimony 
focuses on the supply side of bribery. In other words, from the 
vantage point of the donor agencies or the contractors 
involved. And then it focuses on transparency in the process, 
proper accountability, the level of corruption in a particular 
country, making sure the official is not bought off.
    Now, our perspective is from the demand side, and what we 
dealt with in Lesotho in this highlands water project is a 
project that was overseen by the World Bank, by the European 
union, by a joint investigating or oversight committee of South 
Africa and Lesotho, the regular inspections by the World Bank 
and the EU, regular visits, contracts that were won on merit--
both Acres and Lahmeyer, the ones that were convicted, won 
their contracts on merit--bribe payers that actually did not 
get their contracts, and so on.
    In other words, we're dealing with a perfectly transparent 
process. Where the real problem came in is that you are dealing 
with a sophisticated system all revolving around the agent or 
the middle man. This agent doesn't seek to obtain the contract 
by getting the chief executive of the authority to override 
procedures, or to bypass tenders that are better. Rather, it 
involves compromising him in his discretion.
    To use a simple analogy, it's like when my son is 
prosecuted for drunken driving and I pass the policeman $100 
and he accepts it, he's compromised, whether or not he helps my 
son or doesn't help my son or how he helps my son is not the 
point. The point is I have compromised him, and this is the 
nature of the bribery that we are dealing with here.
    The second problem is that the agent's costs are included 
in the tender amount, it is built in. And this was in fact the 
defense of companies like Acres and Lahmeyer that said, but the 
money that we paid to our agent is perfectly transparent, it's 
on our books, it's accounted for, et cetera, et cetera, what's 
the problem. In fact, they have a contract with the agent. That 
contract says the agent must do certain things and they somehow 
established that he did certain things.
    The point is then how do you prove it? You cannot really 
prove it from the supply side, because from the supply side you 
seem to work from the assumption that corruption comes from the 
demand side. That is perhaps why Lahmeyer and Spie Batignolles 
passed muster in an EU inspection, that is perhaps why Acres 
escaped World Bank sanction the first time around, because it 
was viewed from this perspective.
    We view it from the other perspective, namely through 
circumstantial evidence on the ground where the contracts take 
place, and this circumstantial evidence involves that the 
agent, for instance, wasn't really needed, the nature of the 
agreement between the contractor and the agent, other factors, 
the manner of the payments, i.e., that they were paid into 
secret accounts, the amounts of the payments, whether the 
agency relationship is a secret one or not.
    The point I'm making is that from our perspective from the 
demand side, we were then able to establish bribery. And as I 
said, Mr. Chairman, this all surrounds the question of the use 
of agents, and without sounding too simplistic, this is where 
the heart of the problem is. Certainly an agent or a middleman 
can serve a legitimate purpose. However, if he is given carte 
blanche to obtain the contract, and especially on the basis of 
a contingency fee, he's almost invited to obtain the contract 
through corrupt means. This is what the judge said in the Sole 
case, where he said that the agent there undertook in effect to 
secure the award of the contract, that is, to the extent that 
his fee would only become payable with the award of the 
contract. How can a consultant give such an undertaking bona 
fide?
    Now, although in Lesotho we are only dealing with the 
involvement of construction and consulting companies, it would 
be naive in our submission to think that the use of 
representatives to hide bribery is confined to the construction 
industry. The overwhelming probability suggests that this is 
also the way it is done in other large contracts involving 
public officials.
    Now, in this regard, Mr. Chairman, and these are my closing 
remarks, the Lesotho Court of Appeal, the highest court in 
Lesotho, has expressed itself very strongly in both the 
Lahmeyer case and the Acres case, and it has called on the 
international community, and specifically the World Bank, to 
readdress its practices and its procedures and to look more 
closely at the use of agents, because that is where the heart 
of the problem is. But also, what it has asked the donor 
agencies such as the World Bank to do is to help the courts in 
a place like Lesotho with regard to a deterrent form of 
punishment.
    The companies that we prosecuted are not natural persons, 
they are artificial persons, and you can't send them to prison. 
And what happens is, if you can't take his liberty away, what 
punishment do you impose upon him? The fines that the courts 
were able to impose, the companies more often than not paid out 
of their profits. In other words, it's like paying a criminal 
who stole things from your house, you punish him by ordering to 
give half of it back, but he still keeps the other half, so 
what sort of punishment is that? And that is what the Lesotho 
courts have asked the international community and the donor 
agencies to do, namely, to ensure that the companies involved 
are properly punished. I understand that in the case of Acres 
that the rehearing that has taken place has been concluded and 
we look forward to seeing what the result of that hearing is.
    In conclusion then, my last point, and that is this, in 
southern Africa, where I come from, we are dealing with a 
transparent process in the water process. We are dealing with 
the ability to prosecute these companies. What we are really 
looking for, that is, the Lesotho authorities, is support and 
encouragement from the outside world in this process, and for 
Lesotho to know that it's not alone in combating bribery.
    Thank you, Mr. Chairman.

    [The prepared statement of Mr. Penzhorn follows:]

                Prepared Statement of Guido Penzhorn\1\
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    \1\ Lead counsel on behalf of the Lesotho government in the present 
bribery prosecutions relating to the Highlands Water Project.
---------------------------------------------------------------------------
          COMMENTS ON THE CURRENT LESOTHO BRIBERY PROSECUTIONS

    In this paper I will briefly set out the work done in combating 
bribery in Lesotho involving multi-national construction companies and 
consultants. I will then express a few thoughts and make some 
suggestions from my experience in leading these prosecutions. In doing 
so I will deal in particular with the role played by the international 
community and the role it can play through international donor/lending 
agencies such as the World Bank.
Introduction
    The Lesotho Highlands Water Project is the result of a treaty 
between South Africa and Lesotho dating back to 1986 in terms of which 
water is dammed in the mountains in Lesotho for the purposes of 
supplying water to the Gauteng province of South Africa as well as 
hydro-power to Lesotho. Phases 1A and 1B have recently been completed 
and negotiations are underway in respect of phase 2. This is a multi-
billion dollar project and in fact one of the biggest dam projects in 
the world.
    In the mid 1990s an audit by Ernst & Young led to the dismissal of 
the Chief Executive of the project authority, Mr. Masupha Sole. This in 
turn led to civil litigation against him in the course of which it was 
discovered that he had bank accounts in Switzerland. An application to 
the Swiss authorities followed from which it was discovered that he was 
receiving enormous sums of money, mostly through intermediaries, from 
contractors and consultants involved in the water project. I was then 
briefed to lead the prosecution of Mr. Sole and the others involved in 
what was clearly a bribery scandal unprecedented in Southern Africa.
    Mr. Sole was the first to be charged. He was convicted and on 
appeal \2\ sentenced to 15 years imprisonment. Acres International, a 
firm of consulting engineers from Canada, followed and also on appeal 
\3\ it received a fine of R15 million (the exchange rate between the 
Dollar and the Rand is presently approximately 6.1 to 1). Lahmeyer 
International, the engineering consultancy from Germany, was then 
prosecuted, convicted and sentenced to a fine of R10.6 million. It 
appealed against the convictions and on appeal the fine was increased 
to R12 million. Judgment was delivered on 7 April this year.\4\
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    \2\ M. E. Sole v The Crown, Lesotho Court of Appeal, case number C 
of A (CRI) 5 of 2002, judgment delivered on 14 April 2003. Smalberger 
JA, Melunsky JA (both former judges of the South African Supreme Court 
of Appeal) and Gauntlett JA (Senior Counsel in South Africa and former 
Chairman of the South African Bar Council).
    \3\ Acres International Limited v The Crown, Lesotho Court of 
Appeal, case number C of A (CRI) 8 of 2002 delivered on 15 August 2003. 
Steyn President of the Court, Ramodibedi JA and Plewman JA (a former 
judge of the South African Supreme Court of Appeal).
    \4\ Lahmeyer International GmbH v  The Crown, Lesotho Court of 
Appeal, case number C of A (CRI) 6 of 2002, delivered on 7 April 2004. 
Steyn, President of the Court, and Grosskopf JA and Smalberger JA (both 
former judges of the South African Supreme Court of Appeal). (All three 
judgments referred to are electronically available.)
---------------------------------------------------------------------------
    In June 2003 one Du Plooy, the intermediary who acted on behalf of 
Impregilo of Italy, the lead partner of the consortium that built the 
main dam, pleaded guilty to bribing Mr. Sole on behalf of Impregilo. In 
exchange for co-operation with the prosecution he was fined R500,000, 
coupled to a lengthy period of imprisonment which was conditionally 
suspended.
    On 25 February 2004 Schneider Electric SA (formerly Spie 
Batignolles), the multi-national French construction company involved 
in building the transfer tunnels, pleaded guilty to 16 counts of 
bribing Mr. Sole. A fine of R10 million was agreed with the prosecution 
and was paid.
    Other prosecutions are pending.

International Assistance
    The institution of these proceedings in 1999 was met with praise 
from the role players involved and the countries from where they came. 
This included a number of European countries as well as the United 
States and Canada. This praise was however coupled with a fair degree 
of skepticism. The thinking seemed to be that the prosecutions would be 
confined to the demand side, i.e. the Chief Executive, Mr. Sole. Once 
he had been duly punished the point would have been made and everybody 
could go on with their business. When, however, the prosecutions moved 
to the international contractors/consultants involved and it was shown 
that the Lesotho authorities were serious about prosecuting these 
companies there was a discernible change in attitude. This was even 
more so when convictions followed and these convictions were confirmed 
on appeal by the highest court in Lesotho.
    The initial praise to which I have referred was also accompanied by 
offers of assistance. The extent and nature of such assistance, how it 
assisted us and what lessons can be learnt therefrom is what I propose 
touching on in this paper.
    Offers of and actual assistance should firstly be seen against the 
mounting resistance to these pending prosecutions in Lesotho once word 
leaked out about the application to the Swiss authorities relating to 
Mr. Sole's bank records. The institution of these prosecutions was 
questioned by for instance suggesting that they were unlikely to 
succeed, that they were too expensive, and so on. Such resistance only 
quietened down once the convictions started coming in. These attempts 
to undermine the prosecutions in my view illustrate the very insidious 
nature of the crime of bribery. It may well be that certain prominent 
persons genuinely questioned the prosecutions because they thought they 
were too expensive or they thought that they were unlikely to succeed. 
It is also possible however that the criticisms stemmed from a desire 
to keep a lid on things. The point is that one simply does not know. 
When prosecuting bribery, and this is what these cases have taught us, 
one is met with an almost impenetrable wall of silence. Even Sole, who 
is now serving his time in prison, is still not willing to come forward 
and place it all on the table despite a clear indication to him that 
this could well result in a reduction of sentence.
    The prosecutions were and still are largely based on bank records 
received in terms of the Swiss mutual assistance legislation. The 
Lesotho government approached the Swiss federal authorities in Berne 
for assistance which in turn referred the application to Zurich where 
it was dealt with. The prompt and efficient manner in which the Swiss 
authorities dealt with what eventually became a complex and multi-
layered application contributed immeasurably to the successful outcome 
of these prosecutions. Without this prompt response and continued co-
operation which kept the momentum going these prosecutions may well 
have been scuttled already at a very early stage.
    Apart from the Swiss authorities, we also received considerable 
assistance from OLAF, the EU anti-corruption unit. Over the last year 
or so it has given us enormous support which support has to date for 
instance impacted directly on the conviction of Schneider Electric SA.
    At about the time the bribery scandal surfaced in Lesotho several 
overseas companies that were involved in the water project changed 
their corporate structure. Despite what the companies may say, we 
believe that this may well have been done in order to evade 
prosecution. One such company was Spie Batignolles. OLAF helped us 
access its company records in order to ascertain the nature and effect 
of its merger with Schneider Electric SA on criminal liability. But for 
the help of OLAF we would not have been able to show that Spie 
Batignolles, which was involved as lead partner of one of the 
consortia, in fact survived the merger with Schneider Electric SA. 
Together with OLAF we are presently investigating other companies that 
we are considering prosecuting and good progress is being made here as 
well.
    The point is that for a small country like Lesotho with its limited 
resources to investigate matters such as these without the assistance 
of institutions such as OLAF is quite simply not feasible.
    The World Bank as a major sponsor of the water project took an 
interest in these prosecutions from early on, to the extent that there 
was World Bank funding involved, which was the case with among others 
Acres, Lahmeyer and Spie Batignolles. The interests of the World Bank 
and those of Lesotho largely coincided and this resulted in close co-
operation between the Bank's investigation and ours. The World Bank 
lawyers visited Lesotho on a number of occasions to share our 
information and we did likewise when visiting Washington. The resulting 
benefits were considerable. On the one hand the World Bank lawyers had 
access to our documentation and witnesses which they could use in 
proceedings against the contractors/consultants involved, and we had 
similar access to World Bank documentation as well as any responses by 
the contractors/consultants in answer to the charges leveled against 
them by the Bank.
    Assistance by the European Union and the individual countries from 
where the accused contractors/consultants came was far less 
encouraging. Initial approaches for assistance from the Maseru office 
of the EU came to nothing. In fact, our approaches were met with what 
bordered on suspicion.
    As to actual financial assistance, I make mention of a meeting held 
in Pretoria at the commencement of these prosecutions in November 1999. 
This meeting was called by the World Bank in order to discuss the 
pending prosecutions in Lesotho and ways in which Lesotho could be 
assisted by the international community. It was attended by 
representatives from South Africa, Britain, the European Union, the 
European Investment Bank, individual banks in Europe, as well as 
others. Various promises of assistance were made by those attending. 
The official minutes of the meeting also record such promises, such as 
the representative of the EU undertaking to ``contribute to the cost of 
the process'' and the British High Commissioner in Lesotho saying 
``that DFID could possibly offer direct assistance, even though a part 
of the EU.'' The World Bank representative that chaired this meeting, 
Pamela Cox, assured the Lesotho Attorney General in the context of 
assistance that ``the World Bank has deep pockets.'' Unfortunately none 
of this help has been forthcoming. I can only surmise that someone 
higher up in the World Bank did not share Pamela Cox's willingness to 
assist.
    The EU did send out a team (not OLAF) a few years ago to 
investigate the involvement of European companies. We placed all our 
information and resources at its disposal. The team could find 
virtually nothing untoward and largely gave the European companies a 
clean bill of health (this included Lahmeyer which was convicted and 
Spie Batignolles which pleaded guilty). We also noted a reluctance on 
the team's part to give us the evidential material gathered by them 
which led to their findings. I regret to say that they left us with the 
impression that they were not so much concerned with helping us than 
with white-washing EU spending.
    Apart from Switzerland, and to some extent France which helped with 
an application for mutual legal assistance, no assistance was received 
from any other overseas country. This despite the fact that these 
prosecutions have received considerable publicity overseas and interest 
groups such as NGO's have taken up the question of funding with various 
governments. When addressing the EU Committee on Development and Co-
operation in June last year I also raised the question of assistance in 
the form of funding. Nothing has come of any of this. Faced with its 
own economic and social problems, such as a frightening AIDS pandemic, 
Lesotho cannot really afford the costs incurred in these prosecutions. 
But it did what it had to do and this involved the allocation of funds 
which could well have been used for such other purposes. This clearly 
illustrates Lesotho's measure of commitment to fighting corruption. 
From our vantage point we do not see any such commitment on the part of 
other countries, i.e. those whose companies were and still are involved 
in the water project.
    There is a lingering impression in Lesotho, as well as in South 
Africa, that the interest of first world countries in the present 
prosecutions lies not so much in the successful outcome of these 
prosecutions but rather in protecting the interests of its companies 
that are involved. Hopefully this impression will in time prove to be 
not correct.
    There is a close working relationship between South Africa and 
Lesotho in matters such as these and here we also received considerable 
assistance from South Africa, particularly in the form of bank records.
    The actual assistance I have referred to, particularly that from 
overseas, apart from the direct impact it has on the actual 
prosecutions, has also had a wider beneficial effect in Southern 
Africa. It is this. Lesotho is a member of SADC, the Southern African 
Development Community. This assistance and encouragement coming from 
institutions such as the World Bank and OLAF has been a subject of 
discussion at various meetings of SADC. I have no doubt that this will 
serve as encouragement to other Southern African countries when 
deciding whether or not to tackle high level corruption.

Lessons Learned
    Corruption is a world wide industry. What Lesotho has shown is that 
something can indeed be done about it. All that is required is real and 
not merely token resolve.
    Such resolve pre-supposes a prosecuting arm that is not hamstrung 
by political considerations or, more importantly, skeletons in 
cupboards of persons in a position to influence prosecuting decisions. 
After all, the one sure way to get away with bribery is to compromise 
those that make the decision whether or not to prosecute. This may 
explain why in so many countries, i.e. in Africa, little seems to be 
done about what appears from the outside to be obvious corruption. My 
team and I were fortunate in that we did not have this problem. We were 
given an open mandate by the Lesotho Attorney General to do what we 
considered had to be done and throughout he gave us his full support.
    International bribery is notoriously difficult to detect. It is 
clearly not in the interests of those involved to have their conduct 
known. The injured parties, i.e. the State and the public at large, 
would then not normally get to know of it. Having said that, however, 
where bribery is actually discovered, prosecuting it is not that 
difficult, that is once the prosecution gets past all the various legal 
hurdles placed in its way. On the one hand you have a contractor 
seeking a contract and on the other a State official who is in a 
position to exercise his influence in the award of the contract. There 
is no relationship between them other than this fact. If money then 
passes between them, particularly in suspicious circumstances such as 
through Swiss banks, then, in the absence of some or other convincing 
explanation, the only inference to be drawn is that this money 
constitutes a bribe. In law we would call this compelling 
circumstantial evidence. To everyone else, it would simply amount to 
common sense.
    Bribery involves two parties, the briber and the bribee. In a given 
situation it is normally difficult to establish who initiated the 
corrupt transaction. There seems to be a perception in the first world 
that in the context of construction contracts in the third world the 
initiative comes from the bribe taker rather than the bribe giver. In 
the African context this has been described as an ``African problem.'' 
No doubt corruption can be initiated by the bribe taker. This has 
however not been the evidence in the present prosecutions in Lesotho. 
The evidence has shown that Mr. Sole's first Swiss accounts were opened 
for him by the intermediary acting on behalf of French contractors, 
whereafter the payments commenced. Also that the payments were then 
normally linked to so-called representative agreements between the 
contractor/consultant and its agent (to which I will return below). 
Only once these agreements were in place were funds transferred to the 
intermediaries who in turn transferred the funds wholly or in part to 
Mr. Sole. This would suggest that the initiative came from the briber 
and not the bribee.
    The sophistication of the way in which it is done, and by for 
Instance ensuring that the bribe payments come out of the receipts that 
the bribe giver receives as payment for its services for its 
contractual services under its contract with the employer, suggests an 
established practice and fine tuning by the bribe giver so as not only 
to protect itself but to also suit its financial accounting purposes. 
This will hardly come from the bribe taker.
    The purpose of these prosecutions has not only been to obtain 
convictions. The objective has also been to get to the bottom of this 
problem and to seek to prevent it from recurring. To this end overtures 
have been made to various of the persons or entities involved to rather 
co-operate with the prosecuting authorities, in return for possible 
exemption from prosecution. All this has fallen on deaf ears. Even Mr. 
Sole, now languishing in prison, has chosen to remain silent. At the 
time when all the accused were still together (they were initially 
charged together but the Court ordered a separation of trials) there 
also seemed to be a clear conflict of interests between them. Despite 
this they presented a unified front. What precisely it is that makes 
persons involved in the shadowy world of bribery stick together is not 
clear. Perhaps it is akin to some sort of honor among thieves. The more 
likely explanation would seem to be that once you get involved in 
bribery particularly of this magnitude you are not at liberty to simply 
look after your own interests when things go wrong.

The Use of Agents
    Multi-national contractors/consultants almost invariably it would 
seem rely on so-called representative agreements. In terms of these 
agreements the contractor/consultant would engage a local agent 
ostensibly to perform various services in the country where the 
contract is sought. Included among these is then also the obligation to 
secure the contract coupled to a stipulation that unless the contract 
is obtained the agent will not be paid.
    I have heard and read various presentations at conferences and the 
like as to how contractors should seek to prevent corruption by its 
officials. Without wanting to sound too simplistic, at the heart of the 
problem lies the control of the agent. Certainly an agent can serve a 
legitimate purpose. However, if he is given carte blanche to obtain a 
contract and especially on the basis of a contingency fee, he is almost 
invited to obtain the contract through corrupt means. In this context 
the presiding judge in the Sole case had the following to say, thereby 
really stating the obvious as judges are sometimes obliged to do (at 
pp. 203-204 of the judgment):

          If the consultant is bribing a public official, then he is 
        doing so for a purpose: either he is securing confidential 
        information leading to an award of a contract, or he is 
        securing such award outright. Surely, in that case, the results 
        produced by the consultant speak for themselves? How can the 
        principal be unaware of the consultant's activities, 
        particularly where they are extended over a period?

          It will be seen that under the consultancy agreement between 
        HWV and Mr. du Plooy, the latter undertook to supply not alone 
        the necessary information, but also undertook in effect to 
        secure the award of the contract that is, to the extent that 
        his fee would only become payable with the award of the 
        contract. How can a consultant give such an undertaking bona 
        fide? Surely the consideration which he offers and which he 
        executes is the services which he renders and not the results 
        thereof. In some jurisdiction legal practitioners have been 
        known to offer their services on a result basis; while the 
        system does not gain general approval, it cannot be said to be 
        mala fide: there the confidence of the practitioner is based 
        upon the strength of his client's case. The construction 
        industry gives rise to different considerations, however. Where 
        many tenderers are involved, vying with one another for the 
        award of a contract at an undisclosed sum, there is little 
        basis for confidence, and any agreed undertaking by a 
        consultant to secure the award, is then surely suggestive of 
        bribery on the part of both consultant and principal: indeed it 
        suggests that the consultant has already prepared the ground 
        for such undertaking.

    Although in Lesotho we are only dealing with the involvement of 
construction and consulting companies in the water project, it would be 
naive to think that the use of representatives to hide bribery is 
confined to the construction industry. Instead and as a matter of 
overwhelming probability this is the way it is done in other large 
contracts involving public officials.

Preventative Steps
    The Lesotho Court of Appeal (Lesotho's highest court) in the 
Lahmeyer appeal judgment observed as follows, at page 55:

          However, it is also incumbent on the international community 
        and particularly the funding agencies to revisit those 
        practices and procedures it has in place and to use those 
        sanctions it has the power to impose whenever contraventions of 
        the kind proved in respect of this project occur. One of the 
        devices employed in various cases that served before this Court 
        was the use of ``representative agreements.'' They were used 
        extensively as mechanisms through which payments intended as 
        bribes were clothed with contractual respectability. They were 
        in fact, in all the cases before us, used as cloaks to disguise 
        and obfuscate the money trail. It required intensive research, 
        expensive court procedures across international boundaries and 
        tiresome and time-consuming efforts to obtain the necessary 
        information to unravel the complex evidential strands required 
        to determine and thus to provide the necessary evidence. Above 
        all it required political will and the provision of the 
        necessary resources. To their credit the Lesotho authorities 
        did this in full measure. They should be commended for their 
        resolve.

    And in paragraph [65] at page 56 it stated as follows:

          This Court trusts that the various funding agencies will have 
        regard to the above comments; that it will revisit its 
        practices and procedures in general, but for present purposes, 
        more particularly the practice of the employment of 
        representatives who can play the obfuscating role played so 
        frequently in this mammoth project. But also, that it will be 
        firm and resolute in enforcing its disciplinary proceedings on 
        any agency, company, individual or institution who participates 
        in the practice of bribing those employed on development 
        projects.

    These sentiments were obviously addressed at funding institutions 
such as the World Bank. Were the World Bank to act firmly against 
contractors and consultants involved in third world corruption, this 
would firstly have the effect of deterring corruption of the nature we 
are dealing with in Lesotho. Secondly, and equally importantly from the 
Lesotho vantage point, it would have the effect of encouraging a 
country such as Lesotho in its efforts to fight corruption. Lesotho 
would be told that it is not alone in fighting corruption which, after 
all, was largely initiated outside Lesotho and more particularly where 
the contractors come from. Perhaps most importantly what such action 
would be saying is that corrupting officials in a third world country 
such as Lesotho is not in any way condoned by the donor/lending 
agencies.
    In the Lahmeyer case the Lesotho Court of Appeal remarked as 
follows on the World Bank's approval of the use of agents (at p. 19):

          The World Bank suggests that it may be helpful for a 
        consultant operating in a foreign country to employ a local 
        representative who knows the country and can keep the 
        consultant informed, particularly in the early stages of a 
        project cycle when most consultancy business occurs. Detailed 
        information concerning the World Bank's approach to RAs 
        [representative agreements with agents] was not placed before 
        us. It obviously does not envisage the RAs being used for 
        improper or unlawful purposes. But the potential for abuse, 
        without proper control being exercised, is very real and, on 
        the evidence, not unknown. Whether in a particular case a RA 
        was intended for unlawful purposes, and put to unlawful use, is 
        a matter for evidence and/or inference given the circumstances 
        of that case. In short, a RA cannot simply be taken at face 
        value.

    As to steps that contractors can take to ensure that the agent does 
not act corruptly, the Lesotho Court of Appeal in the Acres case 
offered the following ``advice'' (p. 38):

          The genuineness of the agency contract would be best 
        evidenced by proof that the services to be delivered by this 
        mandate:

                  (i) Were genuinely required by the consultant 
                concerned;

                  (ii) Could be delivered by the representative;

                  (iii) Were in fact delivered; and

                  (iv) Generated remuneration that was commensurate 
                with the anticipated and the actual service delivery.

    This, with respect, amounts to no more than common sense and the 
fact that contractors and consultants do not take such basic 
precautionary steps when engaging agents tends to militate against 
their professed good faith. In our prosecutions none of the 
consultants/contractors put up any invoicing, memos, faxes, 
correspondence or any other evidence pointing to a bona fide 
relationship with the agent.
    In addition to the Court's above sentiments, it is suggested that 
the World Bank make greater use of the contractual provisions that 
entitle the beneficiary of World Bank funding to audit the entity that 
it is contracted with. These prosecutions have shown that the bribe in 
engineering/consulting contracts is normally built into the mark-up 
factor. That is one of the things that such an audit would then focus 
on. This in turn would assist in the prosecution in that prosecutors 
have great difficulties otherwise in obtaining access to company 
records.

Other Observations
    There is one big difference between prosecuting a natural person 
and prosecuting a company and that relates to punishment. A company 
cannot be sent to prison and neither does it suffer the social stigma 
of a conviction. The best the courts can do is to impose a fine which 
in most cases the company involved can easily pay out of it profits.
    Or the company simply does not pay the fine, as is the case with 
Acres which still owes a large portion of the fine which was imposed. 
Here the difficulty is that criminal sanctions (which fines are) are 
normally not enforceable in other countries. What the solution here is 
I do not know but something must be done to ensure that companies 
cannot simply walk away.
    Another problem here is companies changing their corporate 
structure through for instance mergers in order to escape prosecutions. 
This practice also needs to be looked at. This the Italian authorities 
have indeed done by making the take-over company also criminally 
responsible for the acts of its predecessor.
    The real punishment is sanctions by the international donor/lending 
agencies. By taking away the contractor/consultant's means of 
livelihood is the only real punishment which would match for instance 
the taking away of a natural person's liberty. Despite a somewhat 
inauspicious start, the World Bank seems to now be acting firmly 
against firms involved, starting with Acres. This is to be welcomed and 
hopefully the EU will follow suit.
    Corruption has both a supply and demand side and in a country like 
Lesotho where international contractors/consultants are involved it is 
from the vantage point of the recipient of the bribe that one is able 
to view matters. This brings about obvious problems when having to deal 
with the payers of the bribes, such as bringing them before court and 
obtaining evidence from the countries where they are based.
    Overseas prosecutions could then focus on the supply side. 
Countries on the demand side, such as Lesotho, could then obviously 
assist and it would then not be necessary for for instance Lesotho to 
also seek to prosecute the alleged payers. (Clearly when you prosecute 
the one you must also prosecute the other. As the Lesotho Attorney 
General is apt to say, ``it takes two to tango.'') Similar help could 
then also be extended in the other direction. This is what is already 
happening with OLAF.

    The Chairman. Thank you very much, Mr. Penzhorn, for coming 
to our hearing today and offering that extraordinary insight 
from your experiences as a prosecutor in South Africa.
    I want to call now upon Ms. Kimberly Ann Elliott. She is 
with the Institute for International Economics as a research 
fellow. Please proceed, Ms. Elliott.

    STATEMENT OF KIMBERLY ANN ELLIOTT, RESEARCH FELLOW, THE 
             INSTITUTE FOR INTERNATIONAL ECONOMICS

    Ms. Elliott. Thank you, Mr. Chairman, and thank you for 
inviting me to address you on this important topic. It's a 
striking contrast to just a decade ago that it's no longer 
necessary to begin such a statement by arguing that corruption 
impedes economic development and that addressing it should be a 
priority in international efforts to combat poverty.
    Despite the change in attitudes, however, corruption does 
remain a serious problem, and I commend you and the committee 
for focusing attention on the important role that the 
multilateral development banks should and do play in combating 
in.
    In assessing the performance of the development banks, I'd 
like to begin with three contextual issues. First, as others 
have emphasized, I think it is important to recognize that 
substantial progress has been made over the past decade in 
combating corruption. The MDBs have beefed up internal controls 
to prevent corruption in projects they finance, and more 
importantly, they now explicitly address corruption and 
governance issues as impediments to development.
    Second, there's no excuse for the MDBs taking so long to 
confront corruption, but these institutions do operate in an 
environment that is influenced by the broader political and 
foreign policy priorities of major donor countries. During the 
Cold War, security concerns often trumped development 
objectives, and there is a risk of that happening again as part 
of the war on terrorism.
    Finally, as Mr. Thornburgh mentioned in his testimony with 
respect to the triage approach to investigating cases, a zero 
tolerance approach to corruption is appropriate for framing 
institutional attitudes towards corruption, but it is also 
important to remember that efforts to control corruption divert 
time, money, and resources from other priorities. Rigorous cost 
benefit analysis, as Mr. Thornburgh suggested, is as 
appropriate for anti-corruption policies as it is in other 
areas.
    Though not perfect, improvements in internal controls do 
appear to have been relatively effective in preventing large 
scale corruption in projects that development banks directly 
fund. The World Bank does appear to be ahead of the regional 
development banks in some areas, and the U.S. Treasury should 
continue, as Dr. Taylor emphasized this morning, to push for 
improvements in the other regional development banks, for 
example, mutual recognition of blacklists of firms involved in 
bid rigging. Perhaps the MDBs should also consider extending 
their procurement rules and disclosure requirements to parts of 
projects they don't directly fund.
    But as you noted earlier, Mr. Chairman, procurement reforms 
may work less well for non-project lending or for smaller 
community-based projects, like building schools or health 
clinics. In these cases, competitive bidding, if possible, 
rigorous auditing, and other technical safeguards are still 
important. But the ultimate effectiveness of such projects 
depends on local stakeholders being able to monitor officials 
and hold them accountable for delivering services as promised. 
For example, Dr. Taylor mentioned the case of the PTA 
scrutinizing a local school and ensuring that books and other 
supplies were delivered as promised.
    Enhancing accountability means having maximum transparency 
in government operations, independent media to uncover and 
disseminate information, organized civil society groups like 
the PTA. The World Bank has improved its disclosure policies 
and has implemented programs in some countries to strengthen 
the local media. It is also doing more to consult with local 
groups about its projects. Such consultations are typically 
focused on ensuring that local stakeholders support projects, 
but they should also be explicitly geared to transmit 
information about projects, to facilitate monitoring by local 
groups, and to provide mechanisms for feedback on potential 
corruption in projects.
    In some countries, however, even the best safeguards will 
not be enough. Earlier this year, my colleague, Steven Radelet, 
testified before the House International Relations Committee on 
the need for a more comprehensive and coherent U.S. foreign 
assistance strategy. Among other things, he recommended that 
how well a country is governed and how effective its 
institutions are should determine the amount of money for which 
it is eligible and the discretion that the government is 
allowed in deciding how to spend it. Poorly governed countries 
then would receive relatively less money, directed to 
particular agencies that have demonstrated effectiveness in the 
past, and mostly for specific projects with intensive 
monitoring. If the corruption risks are unacceptably high and 
cannot be mitigated, then the only option is to not lend.
    The regional MDBs and the World Bank have been more 
selective in their lending decisions in recent years, but the 
World Bank's operations evaluation department just recently 
released its annual report and concluded that the World Bank 
could do even more in terms of selectivity.
    Finally, the highest level of selectivity is needed in the 
energy and mining sectors. Extensive research has shown that 
countries rich in natural resources, if they also have weak 
political and social institutions, often do not develop 
economically and have high levels of poverty.
    Recognizing these problems, the World Bank Group recently 
commissioned an independent review of its lending for 
extractive industry projects. In a draft response to that 
review, bank management promises to better assess corruption 
risks before providing support, to be more selective in lending 
to high-risk countries, and to require transparency in relation 
to the revenue from these projects as a condition for lending.
    The bank's strategy depends crucially on the effectiveness 
of its anti-corruption mechanisms, and the results of its 
efforts to make the Chad-Cameroon pipeline project a model will 
be an important test of whether transparency and revenue 
control measures can be effective in controlling resource 
corruption in poorly-governed countries.
    In addition to this, a Center for Global Development-
sponsored Commission on Weak States recently recommended that 
the Treasury could play a role in coordinating with other U.S. 
Government agencies to ensure that our policies do not undercut 
any reforms adopted by the multilateral development banks in 
the area of extractive industries, for example, by requiring 
disclosure for Ex-Im Bank and OPIC funding.
    To close then, the multilateral development banks have 
taken important steps to ensure that project funding is not 
diverted for corrupt purposes and to promote anti-corruption 
reforms in vulnerable countries. The U.S. Treasury should 
continue pressing the regional development banks to match the 
more far-reaching reforms of the World Bank, should support 
more ongoing independent evaluations of the effectiveness of 
bank lending, as Dr. Taylor mentioned, and take steps to ensure 
that U.S. Government support for extractive industries does not 
undermine efforts to increase transparency and improve 
governance in resource-dependent countries. Thank you, Mr. 
Chairman.

    [The prepared statement of Ms. Elliott follows:]

               Prepared Statement of Kimberly Ann Elliott

       COMBATING CORRUPTION IN THE MULTILATERAL DEVELOPMENT BANKS

    Chairman Lugar, Members of the Committee, I would like to thank you 
for inviting me to address the Committee on this important topic. In 
contrast to just a decade ago, it is no longer necessary to make the 
argument that corruption impedes economic development in many poor 
countries and that addressing it should be a priority in international 
efforts to combat poverty. Despite the change in attitudes, however, 
corruption remains a serious problem, and the Committee is to be 
commended for focusing attention on the important roll that the 
multilateral development banks (MDBs) should play in combating 
corruption. I would like to begin by discussing the broader context in 
which assessments of that role should be placed. I will then discuss 
how different approaches could be tailored to different categories of 
lending and to different types of countries and conclude with some 
comments on the special problems related to extractive industries.

Assessing Multilateral Development Bank Performance on Corruption 
        Issues
    Since President Wolfensohn's 1996 speech emphasizing the need for 
the international development community to address the ``cancer of 
corruption,'' substantial progress has been made in raising the profile 
of the issue and in developing strategies to combat it. The MDBs, led 
by the World Bank, have beefed up internal controls to prevent 
corruption in projects they finance, and, more significantly, they now 
explicitly address corruption and governance issues as impediments to 
development at the country level. Thus, estimates of how many billions 
of dollars have been lost to corruption since the World Bank was 
created must be adjusted to reflect more recent experience.
    In addition, while the MDBs should not be excused for taking so 
long to confront corruption, these institutions operate in an 
environment that is influenced by the broader political and foreign 
policy priorities of major donor countries. During the Cold War, 
security concerns often trumped development objectives. For example, it 
was no secret that Zaire was pervasively corrupt in the 1980s under the 
leadership of Mobutu Sese Seko. But U.S. policymakers at the time were 
more concerned about maintaining Mobutu's cooperation against the 
Soviet Union and access to strategic resources in Zaire than they were 
about corruption or economic development.\1\
---------------------------------------------------------------------------
    \1\ Several years ago, the Financial Times (May 12, 1996, p. 1) 
published a detailed report estimating that the International Monetary 
Fund, under pressure from the U.S. government and other western donors, 
lent Zaire more than $1 billion after a senior official warned that 
much of the money was being wasted through corruption (cited in 
Kimberly Ann Elliott, ``Corruption as an International Policy Problem: 
Overview and Recommendations,'' p. 214, in Corruption and the Global 
Economy, edited by Kimberly Ann Elliott, Washington: Institute for 
International Economics, 1997).
---------------------------------------------------------------------------
    Since September 11, 2001, there is more recognition that economic 
development often is a security objective and that poorly governed and 
failed states can provide a haven for terrorists. Still, there is some 
fear that corruption and broader governance concerns are once again 
being put aside in some cases as part of the war on terror and that 
pressures are being brought to bear on the international financial 
institutions to lend to certain countries for foreign policy purposes, 
regardless of the likely development effects.
    Finally, in assessing the MDBs' performance in combating 
corruption, there is a question as to the appropriate standard against 
which to measure progress. World Bank officials, as well as outside 
observers, frequently speak of a zero tolerance approach to corruption. 
This is appropriate for framing institutional attitudes towards 
corruption, particularly given the MDBs' past failures. But cost-
benefit analysis should be applied to anti-corruption policies, just as 
it is to policies in other areas. This is not intended to revive the 
old arguments that some forms of corruption--for example, ``greasing 
the wheels'' of an unwieldy bureaucracy--are beneficial. (No one taking 
that position has ever explained how a political and social environment 
that permits ``efficient'' corruption can be structured to prevent 
other more pernicious forms also developing.) But it is also important 
to keep in mind that controlling and reducing corruption requires time, 
money, and other scarce resources that cannot be used for other 
priorities.

Addressing Vulnerabilities in Different Types of Lending and Countries
    Despite the gains made over the past decade, corruption remains a 
serious problem in many countries where the MDBs operate. Much of the 
testimony presented to the committee in May noted this as well and 
emphasized that the opportunities for corruption, and for controlling 
it, differ by type of lending and by sector. Corruption related to non-
project lending is harder to detect and to control than corruption in 
projects that the MDBs directly fund and oversee. More broadly, 
corruption will inevitably be harder to control in countries with weak 
institutions and governments that are able to avoid transparency and 
accountability to the public.
    Although not perfect, improvements in internal controls appear to 
have been relatively effective in preventing large-scale corruption in 
projects that the MDBs directly fund. The World Bank generally requires 
international competitive bidding and has changed bidding documents to 
beef up anti-corruption provisions. It now posts on its website a list 
of firms that have been blacklisted because of corruption, and it has 
created hotlines for reporting corruption and whistleblower protections 
for staff who want to report corruption. The World Bank is often ahead 
of the regional development banks, however, the U.S. Treasury should 
push for further harmonization of anti-corruption procurement 
policies--for example, mutual recognition of blacklists. For large 
projects, exceptions to international competitive bidding should be 
rare and fully explained with as much disclosure as possible.
    Thus, a great deal has been done to guard against corruption in 
project lending, and most analysts conclude that it is relatively rare 
in parts of projects that the MDBs directly fund. On many projects, 
however, the Banks provide only a fraction of the overall funding, and 
they do not monitor procurements for portions of projects that do not 
use MDB funds. But corruption anywhere in a project can undermine the 
effectiveness or raise its costs, so it makes sense for the MDBs to 
require competitive bidding and transparency in all parts of projects 
for which they provide even partial funding. To be effective, however, 
such a policy change would have to be coordinated with official export 
credit and investment insurance agencies in the United States and other 
OECD countries.
    But these procurement safeguards may work less well for smaller, 
community-based projects, such as building schools, health clinics, or 
roads, where there may be fewer bidders in the initial construction 
phase and where ultimate effectiveness depends on ongoing monitoring to 
ensure that teachers show up and are qualified, that drugs and other 
supplies are not stolen, and that maintenance is adequate. In these 
cases, transparency in the procurement process, rigorous auditing, 
whistleblower protection, and other safeguards are still essential. But 
it is also crucial to engage local stakeholders to do ongoing 
monitoring and to hold officials accountable for delivering services as 
promised.
    But in some countries, even the best safeguards may not be enough. 
Earlier this year, my colleague, Steven Radelet, testified before the 
House International Relations Committee on the need for further reform 
of bilateral development assistance to make it more effective in 
achieving U.S. goals.\2\ In discussing the need for a more 
comprehensive and coherent foreign assistance strategy, he recommended 
that the government develop different approaches for different types of 
countries. In essence, he argued that how well governed a country is 
and how effective its institutions are should determine the amount of 
money for which it is eligible and the discretion that the government 
is allowed in deciding how to spend it.
---------------------------------------------------------------------------
    \2\ ``U.S. Foreign Assistance after September 11th,'' Testimony for 
the House International Relations Committee, February 26, 2004.
---------------------------------------------------------------------------
    Thus, high-performing countries, such as those that have qualified 
for the new Millennium Challenge Account, should receive more funding, 
most in the form of non-project lending and principally allocated to 
the central government. The client government would be responsible for 
demonstrating that the money was effectively used but would also have 
broad discretion in setting priorities and allocating the money 
accordingly.
    Low-performing countries would receive fewer dollars, most of it 
for specific projects with intensive monitoring and directed to 
particular agencies that have demonstrated effectiveness in development 
projects. In the context of U.S. aid, Radelet recommends that in cases 
where the corruption risks of dealing with the government cannot be 
mitigated, aid should be channeled through non-governmental 
organizations. The only option in cases where corruption risks are 
unacceptably high is to avoid lending. The World Bank has already moved 
in the direction of more selectivity in its lending, but the Operations 
Evaluation Department just released its report on ``development 
effectiveness'' recommending that the Bank could do more.\3\
---------------------------------------------------------------------------
    \3\ World Bank, Operations Evaluation Department, 2003 Annual 
Review of Development Effectiveness, Washington, 2004.
---------------------------------------------------------------------------
    At the same time, the development banks have also increased the 
share of loans going to public-sector institutional reform in countries 
with weak governance. The World Bank website notes that ``more than 40 
percent of the Bank's lending operations now include public-sector 
governance components.'' In some cases the World Bank has also 
conditioned non-project lending on specific reforms, such as the 
creation of anti-corruption commissions or agencies. But externally 
imposed anti-corruption conditions are unlikely to be effective in 
situations where the political will to adopt fundamental reforms is 
weak or absent. Recent research by the World Bank's chief corruption 
expert, Daniel Kaufmann, also finds that narrow civil service and 
technocratic reforms have yielded relatively little in the battle 
against corruption. Kaufmann concludes that reforms should, instead, 
focus on ``external accountability mechanisms, with new participatory 
approaches, providing voice and feedback mechanisms to stakeholders 
outside the executive . . .'' (emphasis in original).\4\
---------------------------------------------------------------------------
    \4\ Daniel Kaufmann, ``Rethinking Governance: Empirical Lessons 
Challenge Orthodoxy,'' Discussion Draft, World Bank, March 11, 2003.
---------------------------------------------------------------------------
    Such external accountability mechanisms depend on maximum 
transparency in government operations, an independent media to uncover 
and disseminate important information, and organized civil society 
groups. The World Bank has implemented programs in some countries to 
strengthen the local media, and it is doing more than previously to 
consult with local groups that will be affected by its projects. Such 
consultations are typically focused on ensuring that local stakeholders 
support projects in their area, but they would also be useful in 
transmitting information about projects, facilitating monitoring by 
local groups, and providing mechanisms for feedback on potential 
corruption in projects, as well as other aspects of effectiveness. 
Kaufmann also recommends that the Bank develop ``citizen scorecards'' 
to help in the evaluation of projects and notes that ``Transparency-
enhancing mechanisms involving a multitude of stakeholders throughout 
society can be thought of as creating millions of `auditors' '' (ibid., 
p. 35).

The Special Problem of Extractive Industries
    Finally, extensive research has shown that countries rich in 
natural resources, if they also have weak political and social 
institutions, often have poor growth and development outcomes and high 
levels of poverty. In these cases, corrupt governments often collude 
with corrupt investors, bankers, and other private sector actors to 
steal the proceeds of extractive industries, rather than investing them 
in the country's development. In many countries, weak governance and 
inadequate oversight by external funders have meant that publicly 
financed projects in extractive industries have led to environmental 
degradation, social problems, such as AIDS, and, in all too many cases, 
human rights violations and violent conflict to gain control over 
resources.
    Recognizing these problems, the World Bank Group recently undertook 
a review of its lending for extractive industry projects, including 
creating an independent ``stakeholder consultation process,'' headed by 
the former Minister for Population and Environment from Indonesia. In 
part out of concern over global warming and other environmental 
problems associated with carbon fuels, and in part because of the well-
documented problems in controlling corruption in extractive industries, 
the independent Extractive Industries Review (EIR) recommended that the 
Bank sharply reduce its lending for oil and gas, as it has already done 
for coal, and increase lending for investment in renewable energy 
sources (www.eireview.org).
    In the draft response to the EIR, which has been released for 
public comment before presentation to the Board of Executive Directors, 
the Bank management promises to better assess the corruption risks 
before it provides support for extractive industries, to be more 
selective in lending to countries ``where the risks are deemed too 
great and cannot be mitigated,'' and to require transparency in 
relation to the revenue from these projects as a condition for lending. 
But, while Bank management accepted the EIR recommendations on 
selectivity, it rejected the recommendation to completely phase out 
support for oil production by 2008 for environmental reasons. But the 
Bank's strategy of continuing to finance such projects in resource-
dependent countries depends crucially on the effectiveness of the 
mechanisms to guard against corruption. The success of the World Bank-
supported Chad-Cameroon pipeline project will be an important test of 
whether transparency and intrusive resource revenue controls can be 
effective in controlling corruption in poorly governed countries. 
Careful evaluation of the results of this project should guide future 
decision-making in this area.
    In addition, MDB policies in relation to extractive industries need 
to be coordinated with and supported by bilateral official credit and 
insurance agencies. The Commission on Weak States and U.S. National 
Security, sponsored by the Center for Global Development (CGD), 
recently recommended that the U.S. government take steps to ensure that 
Export-Import Bank and OPIC support for extractive industries be linked 
to transparency conditions. The Commission recommended specifically 
that the National Security Council should:

          . . . broker an interagency agreement that outlines basic 
        principles of transparency and accountability in the handling 
        of natural resource revenues that must be met by governments 
        before the U.S. supports public-sector financing of extractive 
        industry projects.\5\
---------------------------------------------------------------------------
    \5\ Commission on Weak States and U.S. National Security, On the 
Brink, Washington: Center for Global Development, 2004, p. 56.

    The Commission recommends that the Treasury Department have 
responsibility for overseeing the implementation of this agreement.
    For countries with extractive industries that do not need public 
financing, the report recommends that the Treasury Department 
coordinate an interagency review of the options for regulating 
multinational corporate payments to such countries. In particular, the 
Commission proposes giving ``serious consideration'' to the 
recommendations of the publish-what-you-pay campaign to have developed-
country stock market regulators require full disclosure as a condition 
of being listed (ibid., p. 57). The U.S. Treasury and State Department 
could also do more to support British Prime Minister Tony Blair's 
Extractive Industries Transparency Initiative, which the World Bank 
Group has already endorsed.

Conclusions
    In sum, the World Bank Group has taken important steps to ensure 
that project funding is not diverted for corrupt purposes, but 
continued vigilance is essential and some further improvements in 
transparency and accountability of Bank operations would be useful. The 
U.S. Treasury needs to continue pressuring the regional development 
banks to adopt similar reforms where they have not and use the U.S. 
voice and vote to ensure that increased selectivity in lending is used 
where anti-corruption safeguards are unlikely to be effective. The 
Treasury should also ensure that the development banks do more thorough 
and rigorous analysis of the effectiveness of various institutional and 
governance reforms they support. As recommended by the CGD-sponsored 
Commission on Weak States, the Treasury should also take steps to 
ensure that U.S. government support for extractive industries does not 
undermine efforts to increase transparency and improve governance in 
resource-dependent countries.
    Mr. Chairman, Members of the Committee, I thank you for the 
opportunity to be heard on this important topic and look forward to 
your questions.

    The Chairman. Thank you very much, Ms. Elliott. Let me 
begin questioning just by clarifying in my own mind, Mr. 
Penzhorn, exactly what happened in Lesotho. Essentially, are 
you saying that the agents for major firms offered money? In 
other words, they attempted to compromise officials in the 
Lesotho Government? And if so, how did all this come to public 
scrutiny? Who blew the whistle, and why was there a 
prosecution?
    Mr. Penzhorn. Mr. Chairman, how this came about is that the 
chief executive of the project was disciplined and dismissed 
after an audit by Ernst & Young that discovered certain 
irregularities. He was then taken to court civilly and in the 
civil process it was discovered that he had bank accounts in 
South Africa, which in turn showed payments from Switzerland. 
An application was then made to the Swiss for these bank 
records, and these records then showed an elaborate system of 
payments by the contractors/consultants on the water project to 
middlemen in Switzerland, and then payment by those middlemen 
to the chief executive, also in Switzerland, and he then 
brought the money back to South Africa. So there was no 
whistleblower.
    The case rested basically on those bank accounts, and it 
was simply that as a basis that formed part of the other 
evidential material. For instance, why would you use a Swiss 
bank account to pay this particular agent while you're paying 
your subcontractors in South Africa? Why didn't you tell 
anybody else that this man was your agent? Why was it never 
discovered, and so on? And it was this web of circumstantial 
evidence that made the case against the chief executive.
    The companies came along and the companies all said, he was 
our agent, we trusted him, we vetted the agent, he was a very 
well-known man. In the case of Acres, for instance, he was 
Canada's honorary counsel in Lesotho. So we all trusted this 
man. But the incontrovertible fact is that they paid him 
certain amounts of money over a period of time, which he then 
shared with the chief executive of the water project. Acres, 
for instance, said--I'm simply using Acres as an example--they 
said, show us anywhere where the tendering procedures were 
violated, show us anywhere that we didn't get the contract on 
merit. Now, we were not in a position to do so. We said, well, 
we assume you got the contract on merit, the same with 
Lahmeyer. But the fact of the matter is, you paid that person, 
he paid the chief executive, what on earth were you paying him 
for if not for him to help you in some way?
    Then the question arose, how did he help us? We simply 
don't know. All we know is that the moment you pay a chief 
executive like that, you are undermining his ability to 
exercise an independent discretion, and that's corruption. And 
that is the level at which we proved our cases, and we proved 
it on the basis of circumstantial evidence, and I suggest to 
you circumstantial evidence that would be acceptable in any 
court in the United States.
    The Chairman. Well, you've described a very sophisticated 
process. We of started this morning with the discussion with 
our own United States Treasury and their oversight. We then 
proceeded with Mr. Thornburgh's testimony about reforms that he 
and his associates have suggested to the World Bank, and which 
they have adopted. One of them is the debarment of companies.
    But in this particular case, do you believe, Mr. Penzhorn, 
that the World Bank moved rapidly enough to debar the companies 
involved? On what basis would they have known all that you have 
found out through circumstantial evidence?
    Mr. Penzhorn. Mr. Chairman, the World Bank took the 
information that it had at its disposal--I'm speaking as an 
outsider, this is what I understand happened--and the 
information at its disposal was supply-side information. It was 
the information that they had, the procurement process, et 
cetera, and what, of course, Acres and Lahmeyer and the other 
companies told it. And on the basis of that evidence, I'm not 
surprised that they were not able to come to a finding that 
there was indeed corruption, because the explanations given by 
these companies sounded reasonable.
    It is from our vantage point where we were on the ground 
that we were able to establish all these other circumstantial 
facts, that together with what the World Bank already knew, 
could make then a conclusive case. And that probably is, and I 
was not party to the second hearing of Acres, that probably is 
then what persuaded, if it did persuade, the sanctions 
committee, because--and that is the sort of cooperation that 
we're talking about. In other words, we can do the work 
perfectly satisfactorily on the ground in Lesotho and in South 
Africa, we can prosecute the people there.
    So from our vantage point it's not a question of 
strengthening the process, strengthening the transparency of 
the process and so on. This was all done in a perfectly 
transparent process. But running parallel to this transparent 
process, there was this separate agreement with this agent that 
would give you a second bite, as it were, at the chief 
executive around the tendering process. So from our vantage 
point, to strengthen the procedures and transparency and so on 
is not really the point. From our vantage point, it is simply 
what that agent does, and it all goes back to that agent or 
that middleman.
    The Chairman. What you have suggested, however, is that 
this was an expensive process for Lesotho. The World Bank did 
not assist with the financial problems that were involved in 
prosecution. This situation involved a developing country with 
vast problems. You cited the horrors of the HIV/AIDS pandemic. 
They would be sorely tempted to use the money for those 
purposes, as opposed to establishing an anti-corruption ethic.
    Attorney General Thornburgh, can you give us any thoughts 
as to what thinking in the World Bank has proceeded with regard 
to the financing on the part of developing countries that are 
very poor, and yet whose skills, with regard to prosecution in 
these situations, may be critical to the whole process?
    Mr. Thornburgh. There is a general commitment within the 
Bank to supporting the strengthening of the rule of law and the 
independence of courts and the professionalism of prosecutors 
through program grants that are made by the Bank. But to my 
knowledge, I know of no discussion that has taken place with 
regard to the funding of individual investigations and 
prosecutions. But that may be true, it's just something I'm not 
aware of.
    The Chairman. Do you agree that it is a consideration that 
the Bank ought to be thinking about?
    Mr. Thornburgh. It's an enormous problem, and I think one 
of the things that's peculiar in my understanding of the 
Lesotho case was that it kind of proceeded in reverse fashion. 
What generally is contemplated within the Bank is that they 
will develop a sufficient case to apply sanctions and then 
refer that to the particular country. To the credit of Lesotho 
authorities, they got ahead of the Bank and in fact outstripped 
the Bank in pursuing this, but it was of necessity at their own 
expense.
    The Chairman. This is an important story because, as Mr. 
Penzhorn has pointed out, the normal process didn't happen. It 
worked the other way around in terms of supply and demand. I 
suppose this is perhaps always the case, as you get into 
discovery of how the world works. The dilemma, leaving aside 
Lesotho, is probably going to be there for a number of other 
countries, that may decide that this is simply not worth the 
time and trouble and the alienation of others who may be 
helpful, in terms of national objectives.
    That's why I raise the question, maybe for some additional 
thought, as you counsel the World Bank. Let me just indicate 
that you've proceeded, I think, very comprehensively through 
the three reports. You have likewise stated that the World Bank 
adopted the recommendations in the reports. This therefore, I 
suppose, negates a question that I would have had, and that is, 
should the United States Government and our Treasury Department 
do more to encourage the steps to be taken? I gather you're 
indicating that the World Bank has already implemented all the 
steps you have advised at this point.
    Mr. Thornburgh. That's my understanding.
    The Chairman. So it's a question now, I suppose, of 
witnessing the experience of how well those recommendations 
that have come from the three reports work. Are you continuing 
your work with the World Bank, or are you of counsel to them?
    Mr. Thornburgh. I have no present connection with the World 
Bank. We completed our reports and we regard our engagement 
having been completed with the adoption of those reports. As I 
said at the outset, we have not been consultants on particular 
cases or on particular procedures. We were to take a look from 
a fresh vantage point of how their operations were proceeding 
and to make such recommendations as we felt might improve them.
    The Chairman. Ms. Elliott, as an independent viewer of all 
of this, what is your judgment or those of your associates? 
Have you looked at this, as to how well each of the parties 
we've been talking about today are proceeding, and what more 
could they do to address the questions with regard to the 
Treasury Department, the Congress, and the World Bank? We've 
had some testimony, some question and answer with regard to the 
responsibilities of all three of these entities.
    Ms. Elliott. Well, my impression from my own research, from 
reading the other testimony that you've heard, and talking to 
colleagues, is that the problem with respect to bank 
procurement is relatively limited because of the various 
reforms, because of the work that Mr. Thornburgh and others 
have done, and while there is still more that can be done, that 
that's really not where the problem is. It's the problem of 
countries that are desperately poor that do need help but that 
don't have the internal mechanisms to deal with corruption, the 
sort of judicial system that Lesotho did have and was able to 
use to prosecute these things. A lot of countries don't have 
the will to even begin to prosecute, and that's really the 
problem--how do you deal with these countries?
    And that is something where I think the Banks and the 
Treasury and with Congress' support are pushing in the 
direction of more selectivity. But you don't want to abandon 
countries, because you're abandoning people who are not to 
blame for the sins of their government. There is a need to try 
and find ways of either targeted lending that can be put behind 
a corruption-safe fence if possible. But there is also a need 
to work on--and there's some excellent research on this by 
Daniel Kaufmann at the World Bank--on external accountability 
measures, and Kaufmann doesn't mean by external, the 
international community, but he means going beyond narrow, 
technical, civil service reforms within governments to reforms 
that empower people to be able to monitor their governments and 
to be able to hold them accountable. And in the worst 
countries, that's not easy, and you have to have at least the 
acquiescence, if not the full support, of the government in 
those cases.
    I think it's those broader issues where we need to have 
some more focus and some more creative thinking.
    The Chairman. You make a very interesting point that I'll 
just follow for a second. Clearly in our work in the Congress, 
following the leadership of the President's proposal on the 
Millennium Challenge Account idea, the thought was that 
American foreign assistance by and large should go to countries 
that have adequate controls against corruption, and that have 
at least some democracy-building elements in them, even if they 
have not yet come to fulfillment of all of that, as well as 
respect for human rights and some additional things that we 
believe are very important to support.
    Sixteen countries have been nominated to come to the United 
States Government with proposals for the expenditure of money, 
not unlike the procedures of countries coming to the 
international institutions. But we've already drawn up a pretty 
rigorous set of requirements. Only 16 countries are going to be 
involved. We must consider the humanitarian person who comes 
into the committee and says, well, what about the other 147 or 
so that are eligible right now with the international banks, 
what happens to them? It is a very good question.
    You can say, well, what happens to them is that they had 
better get their act cleaned up, get institutions there that 
don't have corruption, and get the authoritarianism out of 
their governments, as well as the scandals with regard to human 
rights and so forth. Easier said than done. For many citizens 
suffering in those regimes already, this becomes a very 
poignant dilemma.
    So there's sympathy, I think, on the part of all of us for 
the problems of the international banks, because they are 
tackling 100 countries or more that are sort of beyond the pale 
of what we feel we can devote our taxpayer funds to, in terms 
of foreign assistance.
    Having said that, however, it doesn't absolve all of us 
from the thought that we're making, as a country, contributions 
to these banks. Those funds are being utilized, along with 
those of others. They are being leveraged a great deal. So the 
question is, even if people don't measure up to our Millennium 
Challenge standards, what kind of standards can we try to bring 
about and enforce? How do we get cooperation from other 
nations? How do we share equitably, as in the case of Mr. 
Penzhorn's situation, with a very poor country that was trying 
to do a very good job, but became poorer in the process, having 
proved that at least they were able to fight corruption? I know 
you have a thought, Mr. Thornburgh.
    Mr. Thornburgh. I just wanted to take note of the sea 
change that's occurred in international attitudes toward this 
problem over the last 25 years. It is now an item, the problem 
of corruption is now an item that's center stage on the 
international agenda. I well remember when I came to the 
Department of Justice to head the criminal division in the 
1970s was the very first encounter we'd had with this 
phenomenon in the Lockheed cases and the prosecution that took 
place of American corporations for making bribes abroad, 
followed by the enactment of the Foreign Corrupt Practices Act, 
which in many quarters around the world made us laughing-
stocks, that people thought that the FCPA was simply an attempt 
to impose American morality on business practices around the 
world. Many countries, as you know, allowed bribes to be 
deducted from their taxable income at that time.
    When I came back as Attorney General in 1988, one of my 
first assignments was to go to Zurich and to meet with the 
leaders of the Swiss banks about more transparency and openness 
and following that paper trail that has been described so aptly 
in the Lesotho case. Once again, it was an attitude of derision 
and kind of condescension toward what we were trying to get 
done.
    During the ensuing decade, however, extraordinary things 
have happened. We now have a UN Convention on Corruption. We 
have the UN creating its own internal operation, which I 
recommended to them a decade ago, the World Bank beefing up 
their capability, the OAS having a convention, the European 
community having its own.
    The stage is set for some real breakthroughs in this area, 
and it's the kind of problems that the chairman has suggested, 
the sophisticated problems that are going to have to require 
some further attention, and I commend you for putting those on 
the agenda, because it's the issues of implementation of all of 
these high-sounding conventions and plans and what-have-you 
that's going to occupy true center stage in this new century. 
And I hope that you and your colleagues persist in monitoring 
this and making the kinds of suggestions that can help 
countries rid themselves of the scourge of corruption.
    The Chairman. I thank you for that institutional history, 
which is really very important. I remember vividly as a junior 
member of the Banking Committee in 1977, Senator Proxmire of 
Wisconsin was our chairman and Jake Garn of Utah our ranking 
member. We were trying to wrestle with problems that American 
business persons were having because they felt that our efforts 
at morality around the world were cutting them out of business. 
They simply came in to point that other competitors did not 
have any fastidious ideas about paying bribes. They routinely 
added these to their proposals. As a matter of fact, suddenly 
the fact that we were going to have criminal prosecutions in 
the United States because our business people were bribing 
people seemed to be grossly unfair.
    Now, that is barely a quarter of a century or so ago. I 
trust there are still some people who feel that that's still 
unfair, and that bribery does go on, and that they are still 
disadvantaged in the international markets. But I would say 
that this is one reason why the work of this committee, the 
Banking Committee, and others in the Congress who have taken up 
this issue, is important. It provides reassurance to our own 
community that in fact the world is now working in a different 
way, and that the international community has been moving in 
the direction of integrity. This is certainly reassuring to 
poor people in these countries. One of the greatest problems we 
have in public diplomacy is often the feeling that we are 
feathering the nests of the rich and not really aware of what 
is occurring at the grassroots.
    I appreciate the testimony of all three of you, and 
likewise your patience in going through a very unusual hearing 
schedule. You've proceeded with equanimity and with wisdom.
    We thank you, and the hearing is adjourned.

    [Whereupon, at 12:35 p.m., the hearing was adjourned.]


                            A P P E N D I X

                              ----------                              


            Responses to Additional Questions Submitted for
                      the Record by the Committee

  RESPONSES TO QUESTIONS FOR THE RECORD SUBMITTED TO SECRETARY TAYLOR
                       BY CHAIRMAN RICHARD LUGAR

    Question. When allegations of corruption related to the MDBs are 
forwarded to Treasury, you noted that Treasury typically forwards the 
allegations to the U.S. Executive Directors at the relevant MDBs? What 
follow-up is done by Treasury to ensure bank's diligence in pursuing 
the specific allegation? Since the Treasury Inspector General is not 
investigating fraud and corruption related to the MDBs, what part of 
the administration is?

    Answer. If an allegation were to involve a contractor, supplier, or 
consultant on an MDB financed contract or an MDB staff member, Treasury 
staff, in coordination with the USED office, would report the 
allegation to the institution through the Office of the U.S. Executive 
Director and inform the Treasury Department's Office of the General 
Counsel of it. The Treasury Department would, through the Office of the 
U.S. Executive Director, monitor the process, while maintaining 
sufficient distance from the investigation so as not to interfere, or 
be perceived to be interfering, in the process. If the allegation were 
to involve someone in the Office of the U.S. Executive Director, 
Treasury staff would report the matter to Treasury's Office of the 
General Counsel.
    With respect to fraud and corruption related to the MDBs, as stated 
in the July 21 testimony before the Senate Foreign Relations Committee, 
we at the U.S. Treasury monitor the MDBs through a variety of practices 
and processes. On a regular basis we work with the U.S. Executive 
Directors (USEDs) on their participation in Board policy discussions 
and with the managements of these institutions. With respect to 
corruption, we urge the institutions to establish policies and 
mechanisms to reduce the opportunities for corruption and to detect and 
punish corruption when it occurs. Treasury reviews all loans, grants, 
and policy proposals to make sure they include fiduciary safeguards and 
measurable results. It is the responsibility of the individual MDBs to 
investigate specific allegations of fraud and corruption and it is the 
responsibility of the Treasury Department, through the USED's offices, 
to work with other shareholders to see that the MDBs have systems in 
place to investigate such allegations.

    Question. In the past three or four years, the number of people 
working on MDB issues at the U.S. Treasury Department has reportedly 
declined from about 50 to about 30. The United States is one of the few 
countries that routinely monitor MDB lending and MDB operations. All 
told, the MDBs employ close to 17,000 people and in 2003 they loaned 
nearly $44 billion to almost 150 countries. Does the Treasury 
Department have enough people to effectively oversee the MDB program 
and to assure that taxpayers' money is used effectively and proposed 
reforms are being implemented appropriately?

    Answer. In fact the number of professional staff working on MDB 
issues has been on the increase in recent years. This number was about 
18 in 1998, went to about 24 in 2001 and is expected to reach bout 27 
by late fall 2004. This number does not include administrative staff 
and Deputy Assistant Secretary level officials who devote all or most 
of their time to MDB issues. In addition, it does not take into account 
the offices of the U.S. Executive Directors at the MDBs, which number 
more than 20 professionals, including USEDs and Alternates, all of whom 
monitor MDB lending and operations. The professional staff in the 
offices in Treasury covering regions of the world also review 
individual MDB operations for the countries they cover. Finally, 
Treasury chairs an interagency working group that also reviews MDB 
operations. Thus, Treasury, assisted by a number of others in the U.S. 
Government, has an efficient process to ensure the effectiveness of MDB 
operations--both individual loans and grants and policy proposals/
reforms. However, due to the growing responsibilities of Treasury, 
additional professional staff are needed. To further improve our 
ability to ensure the highest quality of MDB operations, Treasury is 
increasingly working ``upstream'' to monitor proposed operations and 
strategies long before they come to the Board for formal approval.

    Question. Currently, the multilateral banks do not disclose how 
much money has been disbursed for individual projects and programs. 
Hence it is very difficult for those outside the Banks to know whether 
projects and programs are being implemented successfully. Likewise, one 
cannot tell if money is being disbursed--perhaps for corrupt purposes--
even though little is actually being done on the ground. The World 
Bank's Moscow office made disbursement information available on its web 
site in order to promote public trust and dispel charges of clandestine 
corruption. Do you believe that the MDBs should make this kind of 
information public regularly and routinely?

    Answer. We support making disbursement information publicly 
available, with the exception of business sensitive information. In 
fact, both the World Bank and the Inter-American Development Bank make 
disbursement information publicly available on their websites on 
individual projects. We are currently working with our Executive 
Directors in the other MDBs to get them to implement similar disclosure 
practices. It is important to note that all the institutions have in 
place a variety of supervisory mechanisms and practices that are 
intended to prevent the fraudulent and corrupt use of MDB resources and 
ensure that money is spent for the purposes set out in the loan 
contract.

    Question. The multilateral banks are often faulted for having a 
``loan approval culture'' where staff is rewarded for the amount of 
money they move in new loans rather than the quality or effectiveness 
of the activities funded by those loans. Many argue that this leads to 
less emphasis on corruption control. Is this a fair criticism? If so, 
how do you think the MDBs should alter their internal staff incentives 
in order to lessen this problem?

    Answer. Historically, there has been an institutional focus on 
lending volumes at the MDBs. However, this culture of lending has 
diminished in recent years largely as a result of concerted efforts by 
donors such as the United States to focus on delivering measurable 
results. For example, due to strong U.S. leadership, the IDA-13 
replenishment agreement called for the development of a results 
measurement system. The Bush Administration is now working with other 
donors in the course of negotiating the various MDB replenishments to 
expand upon the important recent progress. Among other things, we are 
pressing for: (1) results frameworks for each project and program 
including specific, quantifiable indicators connected to a timeline 
with baseline data and periodic assessments of project and program 
performance; (2) standardized country indicators covering governance, 
human development and economic growth topics that will be used to 
monitor progress and assess achievement of results; and (3) a set of 
institutional-level indicators with results to be independently 
verified.
    To further promote the development of a results-focused culture, we 
are also working in the course of negotiating the MDB replenishments to 
create a stronger link between MDB staff incentives and these efforts 
for broader and measurable results.

    Question. What is your assessment of the magnitude of the 
corruption problem at the MDBs? How much MDB funding has been siphoned 
off due to fraud and corruption?

    Answer. Corruption clearly reduces the effectiveness of countries' 
economic development and poverty reduction efforts through the 
diversion of scarce resources away from productive activities 
benefiting the poor. Consequently, the Bush administration does not 
tolerate any corrupt activities involving MDB projects. In an attempt 
to minimize these activities to the greatest extent possible, we are 
actively pursuing an ambitious anti-corruption and transparency agenda:

   At the institutional level, we focus on improving the 
        functioning of the MDBs' internal control processes for 
        preventing and responding to corruption and fraud.

   At the project level, we focus on encouraging the MDBs to 
        conduct analysis and design projects and lending policies that 
        help to reduce opportunities for corruption and ensure that 
        funds will be well spent.

   At the country level, we are pushing for greater 
        transparency and disclosure of MDB operations and analysis. 
        This is something that we have worked hard on in concert with 
        Congress.

    This comprehensive agenda builds off the significant efforts 
already undertaken by the World Bank and other MDBs, which I elaborated 
upon during my recent testimony on corruption and the MDBs.

    Question. Though borrowing countries bear the ultimate 
responsibility for MDB loans because they must repay the funds to the 
MDBs, not all borrowing country parliaments have oversight authority 
over MDB borrowing. Of the 147 countries eligible for WB lending, 77 of 
them require parliamentary approval of multilateral development bank 
loans or a ceiling within which the executive branch can accept loans. 
What, if anything, is the U.S. government doing to encourage borrowing 
countries to promote legislative oversight over MDB borrowing?

    Answer. The U.S. government has pushed all the MDBs to consult with 
a wide range of ``stakeholders'' on proposed MDB policies and 
operations, based on evidence that such consultations have been shown 
to improve the quality of the policies and operations. This includes 
the legislative bodies in individual countries, as well as private 
sector representatives, local representative bodies, NGOs, academics 
and others. We have also consistently supported modernization of the 
state programs that aim to increase the effectiveness of the 
legislatures in developing countries. The U.S. government has not 
specifically urged borrowing countries to promote legislative oversight 
over MDB borrowing.

                               __________

RESPONSES TO ADDITIONAL QUESTIONS FOR THE RECORD SUBMITTED TO SECRETARY 
                 TAYLOR BY SENATOR JOSEPH R. BIDEN, JR.

    Question. Under Secretary Taylor, one project that has raised 
significant environmental and social concerns is the Camisea gas 
pipeline project in Peru. I am aware that the IDB is poised to move to 
final closure on the loan, and that officials from USAID and your 
department have been reviewing compliance with social and environmental 
loan conditions. What actions are you taking to ensure full compliance 
with all environmental and social loan conditions prior to financial 
closure?

    Answer. My staff has reviewed the documentation provided by the IDB 
regarding compliance with the conditions precedent to loan closure. 
While there has been substantial progress on meeting these conditions, 
we are still working with IDB Management to resolve remaining issues. 
Since loan closure is not a subject for formal discussion by the Board 
of Directors, we will seek to address what we perceive as deficiencies 
in certain loan conditions on an informal basis.

    Question. I also understand that the IDB is in the process of 
revising its 25-year-old environmental policy and that a draft of the 
new, proposed standards have been released for comment. What actions 
are you taking to support a thorough review of the IDB's core policies 
and the strengthening of the Bank's environmental and social standards? 
What actions are you taking to support that the new social and 
environmental policies will be in line, if not exceed, those of the 
IDB's peer institutions, such as the World Bank and the International 
Finance Corporation?

    Answer. My staff is undertaking a process that seeks to shape both 
the draft environment and safeguard policy as well develop a U.S. 
position on the version that is presented to the IDB Board. As part of 
this process, we will solicit the views of other U.S. government 
agencies and civil society, as well as engage with Bank staff 
responsible for drafting the policy. We will also compare the draft 
proposed by the IDB with best international practices for public and 
private sector lending. Social and environmental policies of the World 
Bank and IFC, however, are themselves in flux and new policies at these 
institutions will not be finalized for several months.

            Additional Information Submitted for the Record


         Statement Submitted by Thomas Devine, Legal Director,
                   Government Accountability Project

  WHISTLEBLOWER PROTECTION POLICIES OF MULTILATERAL DEVELOPMENT BANKS

    Thank you for considering written testimony by the Government 
Accountability Project (GAP) for this Committee's second hearing into 
corruption at the Multilateral Development Banks (MDBs). The 
Committee's leadership is badly needed for institutions that should be 
a cornerstone of civility, integrity and stable markets necessary for 
globalization to strengthen rather than destroy community development. 
Unfortunately, due to lack of internal checks and balances, secrecy and 
corruption, all too often the MDBs undermine their mission instead of 
serving it.
    Over the last year the Ford Foundation commissioned GAP to conduct 
in-depth research on one key element of accountability at MDBs--the 
free flow of information from whistleblowers, those employees who 
exercise free speech rights to challenge abuses of power that betray 
the public trust. Unfortunately, our organization found that all of the 
MDB whistleblower policies flunk minimal standards of legitimacy, both 
in terms of providing a safe channel to bear witness, and having a 
realistic chance to make a difference against corruption. Our 
organization could not responsibly recommend that employees risk 
retaliation by trusting the current whistleblower policies as 
administered at any of the MDBs. That means the current programs are 
ineffective both inside and outside institutional walls at ending 
abuses of power sustained by secrecy, the breeding ground for 
corruption.
    Our credentials for assessing whistleblower policies are grounded 
in some 27 years of experience. GAP is a nonprofit, public interest law 
firm dedicated to whistleblower advocacy. The organization's mission is 
to advance governmental and corporate accountability by promoting 
whistleblower rights, investigating their claims, litigating their 
cases, sharing our expertise through publications, and developing 
legislative and regulatory reforms. We have led the campaigns to enact 
or defend virtually all national whistleblower laws in the United 
States. On the international front, GAP works with national 
governmental bodies, and with colleagues from American University Law 
School co-authored a model whistleblower law approved by the 
Organization of American States to implement its Inter-American 
Convention Against Corruption.
    The analysis below explains how whistleblower protection is 
relevant for the Committee's oversight, and summarizes our findings 
from the published studies already provided to Committee staff.
Relation to Hearing Testimony
    At the July 21 hearing we were gratified that expert testimony 
generically highlighted that strengthened whistleblower protection 
means strengthened accountability. Four specific conclusions from that 
day's testimony further reinforce the importance of an active role by 
this Committee in achieving that goal.

   Nearly all major reform recommendations to date have been 
        implemented, but corruption is still a significant problem. 
        Whistleblowers are the human factor to provide the free flow of 
        information that is the life-blood of anti-corruption 
        campaigns. Without their active participation, the campaigns 
        are lifeless, empty magnets for cynicism. The Banks badly need 
        visible proof that employees who participate can safely make a 
        difference. It will take breakthroughs of organizational 
        leadership and structure before that kind of trust could be 
        based in reality.

   The Banks' progress against corruption must be assessed 
        through objective, measurable results. This conclusion applies 
        with an exclamation point to the Banks' whistleblower policies. 
        At every major institution, their track record at best is a 
        secret. None of the institutions have published a track record 
        detailing either (1) meaningful results when employees risk 
        harassment to testify against corruption; or (2) a reasonable 
        rate of alleged reprisal victims successfully defending their 
        rights through MDB policies. Last year in the No Fear Act for 
        U.S. agencies with merit system duties, Congress unanimously 
        required transparency for results of employment discrimination 
        and whistleblower protection programs. That basic ``show me'' 
        principle needs to be extended to MDBs.

   A major challenge for MDBs is corruption within member 
        nations receiving Bank loans. The risk of corruption is 
        inherent to all institutions--government, corporate and even 
        non-profit. Even the most vigilant institutions cannot 
        effectively oversee all the potential opportunities for 
        corruption, which are limited only by the imagination. This is 
        why GAP has urged the Banks to (1) extend their own 
        whistleblower policies to cover anyone making disclosures about 
        spending Bank funds throughout the life of a project, whether 
        or not the whistleblower is a Bank employee; and (2) make 
        effective whistleblower protection a precondition for receipt 
        of MDB funding. Continued congressional leadership will be 
        necessary to encourage this expansion of policies that too 
        often only cover MDB employees challenging corruption that 
        threatens institutional self-interest rather than the Banks' 
        public service mission.

   The Treasury Department Office of Inspector General does not 
        believe it has jurisdiction to investigate fraud, waste of 
        abuse of taxpayer funds appropriated for the Banks. This 
        accountability vacuum places increased responsibility on 
        Congress and the Treasury Department's Office of Development 
        Policy. Continuing, stepped up congressional oversight is badly 
        needed, both to defend the taxpayers' investment generally, and 
        to enforce the accountability reforms passed by Congress this 
        January as appropriations requirements. The provision, known as 
        the Leahy-McConnell amendment, requires:

                   greater transparency, from project 
                preparation to publication of Board minutes;

                   resources and conditions in each loan and 
                strategy to ensure that applicable laws are obeyed;

                   public summaries of independent audits of 
                the institutions' operational effectiveness, policy 
                compliance, and internal control mechanisms;

                   effective complaint mechanisms that also 
                protect employee and other whistleblowers from 
                retaliation, consistent with standards in national and 
                international law;

                   website postings of case summaries resulting 
                from internal corruption investigations;

                   reports by the Treasury Department to 
                Congress on these and all other aspects of the section 
                by September 1, 2004 and March 1, 2005; and

                   completion of listed goals by June 2005.

                (Administrative Provisions Related to Multilateral 
                Development Institutions, Sec. 581, Title XV of the 
                International Financial Institutions Act, 22 USC 262o-
                262o-2.)

    Based on GAP's experience to date, there will be a direct 
relationship between the extent of Congress' oversight of Treasury on 
this issue, and the extent of Treasury's oversight of the Banks.

Overview Summary of GAP Findings
    The GAP study was prepared by our MDB project team of John 
Fitzgerald, Charly Moore, Sophia Sahaf, myself and law students from 
the University of District of Columbia Law School who participate in 
our legal clinic. We found substantial deficiencies in each of these 
Banks' whistleblower protection policies, affording insufficient 
protection to those who seek to bring fraud, mismanagement or other 
wrongdoing to light to protect the institution's integrity. Notably, 
none of the Banks recognizes the concepts of external transparency or 
external accountability, extending whistleblower protections only to 
internal disclosures. At present, GAP would not recommend that 
whistleblowers risk retaliation by utilizing the existing procedures. 
Instead, GAP hopes to work constructively with the Banks in the coming 
months to address these deficiencies in order to improve transparency 
and accountability.

            Whistleblowing: An Emerging Global Phenomenon
    GAP has long defended U.S. whistleblowers who challenge abuses of 
power that betray the public trust. Now, whistleblower rights are an 
emerging global phenomenon. A human rights activist Helena Kennedy 
explained in her foreword to the 2004 book Whistleblowing Around the 
World: Law, Culture and Practice, ``[B]oth culturally and legally, 
things are changing. Whistleblowing is coming of age. There is a 
growing recognition around the world that people who encounter 
corruption and wrongdoing must be given as safe an environment as 
possible, to be able to tell someone in authority what they know.'' See 
also, Vaughn et al., The Whistleblower Statute Prepared for the 
Organization of American States and the Global Legal Revolution 
Protecting Whistleblowers, 35 George Washington International Law 
Review 857 (2003).
    Whistleblower protection provisions have become standard in anti-
corruption conventions and treaties, such as those adopted by the 
United Nations, Organization of American States and the Council of 
Europe. As a leader in whistleblower advocacy, GAP has witnessed an 
upsurge in international interest in whistleblowing as an integral 
transparency measure in recent years. Governmental organizations across 
the globe increasingly demonstrate their desire to work with those who 
have witnessed abuses of power, and are eager to learn how best to 
protect them from reprisal.
    Strong whistleblower protection policies give those who bring 
corruption to light a fighting chance to defend themselves, and serve 
the Banks' institutional interest in preserving integrity. Weak 
policies, on the other hand, will cause many individuals to remain 
silent observers to corruption, and may actually harm some 
whistleblowers by creating a false impression of adequate protections. 
MDB whistleblower protection policies have particular significance, 
because the MDBs can set the pace for anti-corruption standards in loan 
recipient nations. Working with governments and national and 
international businesses to implement development projects, the Banks' 
influences are far reaching. Unfortunately, the Banks themselves remain 
a focal point of corruption investigations. During the initial May 2004 
Senate Foreign Relations Committee hearings, Chairman Lugar estimated 
that the World Bank alone has lost $100 billion to corruption. These 
problems significantly impede the MDBs' ability to advance their 
humanitarian mission of promoting community development and economic 
self sufficiency in developing countries.

GAP's Methodology
    This study covered policies at the World Bank (WBG), Asian 
Development Bank (ADB), European Bank for Reconstruction and 
Development (EBRD), and Inter-American Development Bank (IDB). The 
African Development Bank was not included, because it did not have 
completed accountability policies relevant for whistleblowers. At each 
other MDB, GAP researched all available data on whistleblower 
protection policies and practices, and held at least one meeting with 
representatives from each Bank. GAP staff also studied academic 
research on the MDBs and interviewed whistleblowers, legislative staff, 
nongovernmental organization (NGO) leaders, critics and representatives 
from the four MDBs covered in the study. The resulting record was 
compared to a 24-point-checklist developed by GAP to evaluate 
whistleblower policies at each MDB. The checklists were distributed to 
each MDB for comment several months prior to the drafting of the 
reports. After completing the draft reports, GAP submitted them to each 
bank for comment.
    The 24-point-checklist evaluates whether the MDBs' policies (1) are 
comprehensive in scope; (2) offer the chance for a hearing in an 
impartial proceeding; (3) provide modern legal standards for 
adjudication of claims; (4) provide sufficient relief for those who win 
their cases; and (5) allow whistleblowers to make a difference against 
abuses of power if they risk retaliation to speak out. Each bank 
received a pass/fail rating for each criterion, along with a rating 
system based on a 0-4 scale.
GAP's Conclusions
    All four of the Banks surveyed received an overall failing grade 
when compared with the legal norms compiled in the 24-point-checklist. 
On a scale of 1-100, the scores were 45 at the EBRD, 49 at the IDB, 50 
at the ADB and 60 at the World Bank. While the Banks have recognized 
the value of whistleblowing, by limiting protections to internal 
disclosures the Banks have effectively precluded external 
accountability and transparency. The full reports can be found on our 
website at www.whistleblower.org.
    The good news is that the MDBs' policies and culture are evolving. 
The Banks are beginning to recognize the benefits of whistleblowing as 
an internal management tool, and have started the process of developing 
effective whistleblower protection policies. In preliminary discussions 
with MDB representatives, nearly all have expressed interest in 
upgrading their policies. It will take a sustained, broad-based effort, 
however, to establish fully effective whistleblower protection programs 
at these Banks. This institutional effort must be led by the Banks' 
presidents, whose leadership has been inconsistent to date.
    Finally, while the Banks' overall efforts to date are deficient in 
many ways, each bank has scored some passing grades on various specific 
issues identified in the 24-point-checklist. These best practices, 
coupled with strong executive leadership, can serve as a starting point 
for the MDBs to improve their policies.

MDB Strengths
    Common strengths among the surveyed MDBs' policies are summarized 
below:

   Except for the EBRD, the Banks GAP studied have embraced the 
        notion of whistleblower protection. This is a significant 
        prerequisite for developing a functioning whistleblower 
        protection program.

   The MDBs have established a duty to disclose that helps 
        prevent retaliation. There generally is less hostility against 
        whistleblowers who act pursuant to a mandatory duty rather than 
        on personal initiative.

   The MDBs have recently established anti-corruption units, a 
        useful first step toward the development of full-scale 
        whistleblower protection programs. These units are too new for 
        GAP to recommend them to whistleblowers as a safe avenue for 
        seeking relief from retaliation. (The only exception is the 
        World Bank's Department of Institutional Integrity, on a case 
        by case basis.)

   The Banks provide a realistic limitations period within 
        which whistleblowers must act on their rights. Employees have 
        at least 90 days to file a grievance through administrative 
        processes.

MDB Challenges
    The surveyed MDBs' policies contain numerous deficiencies in 
whistleblower protection. These areas for improvement are summarized 
below:

   The Banks' existing whistleblower policies only cover 
        internal disclosures; external disclosures are not protected, 
        including even those made by witnesses to third-party citizen 
        complaint mechanisms. In fact, the Banks prohibit external 
        disclosures that could be detrimental to the Banks, including 
        disclosures to law enforcement agencies and legislatures of 
        member nations.

   With the exception of the World Bank, the existence and 
        quality of confidential hotlines are unpredictable and 
        unreliable.

   None of the Banks studied offer independent due process. All 
        of them limit enforcement of employee rights to in-house 
        grievance hearings, potentially tainted by conflict of interest 
        because the defendant institution acts as judge and jury.

   The Banks fail to support stated promises of protection with 
        enforceable rights. While the World Bank adopts them on paper 
        for informal investigations, its Administrative Tribunal 
        consistently ignores such rights in formal hearings.

   Whistleblowers appear to lose even when they win, because 
        none of the Banks has a record of returning them to their jobs 
        even when they prove that their removal was illegal. In 
        practice, the Banks limit relief to financial compensation, 
        which is small comfort to an employee deported for losing MDB 
        employment.

   With anecdotal exceptions, the MDBs have no record of 
        protecting whistleblowers who rely on the MDBs' existing 
        protections.

   MDB policies do not have credibility with would-be 
        whistleblowers. As a result, many would-be whistleblowers 
        remain silent about the fraud and mismanagement they have 
        witnessed.

   The Banks fail to protect parties and witnesses who 
        participate in the newly-created citizen complaint mechanisms. 
        The MDBs created these mechanisms to give individuals who are 
        negatively impacted by a Bank loan decision the chance to 
        challenge that decision.

Recommended Actions for the MDBs
    GAP recommends that each of the four MDBs take the following 
actions to improve transparency and accountability:

   Protect direct disclosures to external authorities when 
        necessary to avoid a significant threat to public health and 
        safety, damage to the Bank's mission or criminal violations of 
        national or international law.
   Protect participation in the citizen complaint mechanisms 
        for addressing harm caused by MDB-financed activities. 
        Safeguards could be included to prevent public release of 
        proprietary information.
   Provide a flow of information from secure hotlines to each 
        bank's Boards of Directors.

   Offer alleged reprisal victims the opportunity to seek 
        justice through third-party, independent, binding arbitration 
        by a decision-maker selected through mutual consent.

   Institutionalize the legal burdens of proof from the U.S. 
        Whistleblower Protection Act to judge whether a whistleblower's 
        rights have been violated, as the World Bank does for reprisal 
        investigations.

   Provide prevailing whistleblowers full make-whole relief 
        from confirmed retaliation, including the right to 
        reinstatement as necessary to maintain national residency 
        rights.

   Establish performance standards for bank investigative 
        agencies, to ensure that misconduct threatening the Banks' 
        public service missions is given a high priority.

   Enfranchise whistleblowers to file complaints under the 
        citizen complaint mechanism regarding misconduct that threatens 
        the Banks' public service missions.

   Provide visible institutional leadership by the Banks' 
        presidents, through broadly communicated policy statements, 
        active employee outreach, training for staff and management, 
        and personal intervention against retaliation.

    GAP intends to continue its efforts to achieve genuine 
whistleblower protections atthe MDBs. Next steps include the following:

   Distribute GAP's MDB whistleblower protection assessment 
        reports to members of Congress, senior U.S. and foreign 
        government officials, the MDBs (including the U.S. Executive 
        Directors), the media and interested nongovernmental 
        organizations.

   Offer to work directly with the Banks to help upgrade 
        existing policies, and to apply lessons learned for 
        constructive solutions to legitimate confidentiality concerns.

   Keep the U.S. Treasury Department and congressional 
        oversight agencies informed of progress, as well as equivalent 
        ministries or legislative bodies from any other member nation 
        that requests such updates.

   Analyze the U.S. Treasury's September 2004 and March 2005 
        reports to Congress on these issues, and provide feedback to 
        the Treasury and to Congress.

   Monitor individual whistleblower cases, with consideration 
        for ``friend of the court'' briefs or representation to test 
        how the MDBs' policies are applied in practice.

   Maintain and update the assessments presented in this study, 
        including the ultimate recommendation of whether or not to 
        recommend that whistleblowers work within a particular bank 
        system.

    Whistleblowing is a concept whose time has come, as evidenced by 
institutional leaders' routine rhetorical embrace of the principle, and 
establishment of formal policies and structures. Now the challenge is 
to make it effective. GAP calls genuine policies ``metal shields,'' 
because those who defend themselves with metal shields have a fighting 
chance to survive. Unfortunately, so far the Banks have what we call 
``cardboard shields,'' which guarantee doom to anyone relying on them. 
The latter is worse than nothing, because the net result of 
disingenuous whistleblower programs is to create victims and cynicism. 
GAP looks forward to working with this Committee to turn the rhetorical 
breakthrough for whistleblower rights into genuine, enforceable rights, 
a metal shield both for those who ``commit the truth'' and for the 
Banks' public service mission.

                               __________

                Statement Submitted by Nancy Alexander,
                Citizens' Network on Essential Services

            moving money in middle-income countries (mics):
    the bank's proposed strategy and implications for the issues of 
             corruption and infrastructure development \1\
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    \1\ By Nancy Alexander, Citizens' Network on Essential Services, 
Silver Spring, Maryland, USA, with assistance from Bea Edwards, Public 
Services International and Tim Kessler, Citizens' Network on Essential 
Services.
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                            I. Introduction

    The U.S. Senate's Foreign Relations Committee is in the midst of 
holding hearings on corruption at the multilateral development banks 
(MDBs). The Congress wants to know where these institutions' money is 
doing and whether it's going into some hidden pockets. However, in the 
future, it may be difficult or impossible to answer that question. The 
reason is that the World Bank's Board of Directors is moving toward 
approval of a new strategy\2\ for middle-income countries (MICs), which 
would move billions of dollars to certain governments with little ``red 
tape.'' As is common practice, the regional development banks may 
follow the lead of the World Bank and adopt similar policies.
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    \2\ The working document describing the strategy is entitled 
``Enhancing World Bank Support for Middle-Income Countries.''
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    Middle-income countries\3\ produce 20% of the world's goods and 
services, but have more than 80% of the world's population. They borrow 
at near-market rates from the World Bank's International Bank for 
Reconstruction and Development (IBRD). In categories from most to least 
prosperous, middle-income countries include: (1) Korea, Mexico and 
Hungary; (2) Poland, Malaysia, and Costa Rica; (3) Brazil, Turkey, 
Colombia, Iran, and Egypt; and (4) the Philippines, Syria, the Ukraine 
and Iraq. A few poorer countries obtain a blend of market-rate and 
concessional resources, including Pakistan, India, Uzbekistan and 
Indonesia.
---------------------------------------------------------------------------
    \3\ The World Bank defines middle-income countries as those with a 
specified per capita income range (less than $9360 and more than $745 
per year). High middle-income countries performed much better than low-
income countries, according to Bank measures.
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    The MIC Strategy is intended to reduce or eliminate fiduciary and 
safeguard (e.g., environmental and social policy) ``barriers'' to 
borrowing to World Bank-certified countries, If the MIC Strategy is 
approved, the institution will provide ``certification'' to those MIC 
governments with acceptable national policies that are ``equivalent'' 
to the fiduciary and safeguard policies of the Bank. (The certification 
process is described in part III.) It will also determine whether 
borrowing countries follow appropriate macroeconomic and development 
policies required to ease or eliminate specific loan conditionality.
    The proposed MIC strategy poses three important questions for 
borrowing countries:

    1. Will national policies be enforced? It is true that standards 
that curb corruption and protect vulnerable populations and ecosystems 
may be inconvenient for borrowers to implement. However, it is unclear 
why, when borrowers resist implementing the Bank's standards, they 
should be expected to enforce their Own.
    If approved, the MIC Strategy would increase the pace and volume of 
lending to certified countries. As described in part H, the new 
approach to lending to MICs would make it much more difficult, within 
certain borrowing countries, to investigate where the Bank's money goes 
or how it is used. The new strategy is particularly troubling in light 
of findings by the Bank's own internal evaluators, who conclude that 
the institution has had ``only modest success'' in curbing 
corruption.\4\
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    \4\ Annual Report on Development Effectiveness 2003 (ARDE), OED, 
World Bank, p. 34.

    2. Could the MIC strategy create a conflict of interest? Given that 
the World Bank would both certify and profit from the increased volume 
of lending, there is a potential for conflict of interest arising from 
implementation of the MIC Strategy. The Bank's ability to avoid such a 
conflict may determine its capacity to address corruption among 
borrowers. Before they consider the MIC proposal, the U.S. government 
and other shareholders should ask whether corruption and conflicts of 
interest might be stemmed if an independent process for certifying MICs 
is established. Such a process might include an agency that would be 
accountable for monitoring and evaluating ``equivalence'' between the 
fiduciary and safeguard policies of creditors and developing country 
---------------------------------------------------------------------------
governments.

    3. Is more debt good for borrower or lenders? It is worth asking 
whether lower levels of lending could benefit MICs--especially those in 
which excessive amounts of hard currency debt hamper growth and 
development potential. By increasing the volume and pace of Bank 
lending, the MIC strategy seems to address the World Bank's current 
predicament as much as, if more than, the situation facing most middle 
income borrowers. At present, the institution is a kind of debt 
collection agency, collecting more in debt service than it lends. This 
situation has emerged largely as the result of a sharp drop in overall 
lending and years of poorly-performing loans.\5\ While more new lending 
could reverse that situation in the short term, unless it leads to 
significantly higher growth rates, borrowing countries will eventually 
face higher debt service burdens again--possibly worse than those 
experienced today. Unfortunately, while the Bank is correct that faster 
growth is one of the keys of poverty reduction, it has not shown that 
Bank resources (and associated policies) lead to higher growth. In 
short, expanding MIC lending represents a gamble that borrowing 
countries will leverage new resources to grow much more quickly and 
sustainably than they have over the last thirty years.\6\
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    \5\ Bank lending to MICs has dropped precipitously; lending in the 
2000-2003 period is only half as high as in 1999. According to the 
Bank's US Executive Director, Carole Brookins, during the 1990s the 
Bank's infrastructure investment lending declined by 50 percent, and 
even more steeply in the middle-income countries. In 2002, Bank lending 
for water and sanitation projects was only 25 percent of its annual 
average during 1993-1997. Notwithstanding the World Bank's efforts to 
bolster the legitimacy of private infrastructure and press borrowing 
governments into adopting it, interest of private investors declined 
sharply. From a 1997 peak of US $50 billion, private investment in 
developing country energy projects dropped to $7 billion in 2002. See 
Transition Newsletter (World Bank), Volume 14/15, April 2004.
    \6\ In addition, the Boards of Governors of the IMF and World Bank 
are considering the adoption of a ``Debt Sustainability'' Proposal at 
the upcoming Annual Meeting of the institutions that will limit the 
Bank's ability to lend to certain debt-distressed countries. The MIC 
could compensate for any loss of business stemming from implementation 
of the Debt Sustainability Proposal and reverse the Bank's decline in 
infrastructure lending.
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                     II. The Proposed MIC Strategy

A. Corruption and Adjustment Loans
    The primary defense against corruption is openness in the borrowing 
and the repayment process. Any loan operation should provide factual, 
quantitative and qualitative information to the public throughout the 
loan cycle. How much is to be borrowed? What does it pay for? What is 
the interest rate? From whom is it borrowed? How much is owed? To whom 
is it owed? The answers to these questions allow the representatives of 
the public to determine whether it is reasonable to conclude that 
borrowed funds will be effectively used and that investments using 
borrowed funds can produce the returns necessary for a sound repayment 
program. Structural adjustment (or ``policy-based lending'') evades 
these basic considerations.
    Structural adjustment lending breaks the link between the loan and 
its repayment. It makes the most relevant question about any loan--What 
does it pay for?--a moot point. Through structural adjustment lending, 
the Banks simply require that certain policies be implemented as a 
condition for budget support in hard currency. No one is responsible 
for producing any proof that the policies implemented have produced the 
returns necessary to repay the loan. Nor do adjustment loans need to 
generate hard currency for debt repayment. For example, the World Bank 
claims that it is fighting poverty by requiring the protection of 
certain social programs as a condition of a structural adjustment loan 
(SAL). But the social programs are financed with local currency.
    Rather than fortifying these programs, the infusion of capital in 
hard currency to a central bank, in the absence of capital controls, 
fuels capital flight and benefits corrupt insiders.\7\ Thus, loans 
presented to the public as funds to ``fight poverty'' can actually 
discourage economic growth by accelerating the loss of capital and 
increase the debt, the worst possible scenario for a developing 
country.
---------------------------------------------------------------------------
    \7\ Joseph Stiglitz made this point in Globalization and Its 
Discontents.
---------------------------------------------------------------------------
    Further, we this consequence may be deliberate rather than an 
unanticipated side effect of large-scale policy based lending because 
increasingly these loans are ``fast-disbursing.'' The loans have become 
like an insiders' signal to investors that it is time to withdraw. In 
addition, the funds lent as structural adjustment programs become 
``pork barrel'' spending because they are not tied to concrete 
objectives. Funds that are not used to underwrite capital flight 
disappear in bogus contracts and consultancies, or corrupt 
privatization schemes.
    Hence the debt crisis: after decades of SALs, there is deeper debt. 
The required policies did not produce the returns--otherwise known as 
sustained economic growth--necessary to repay. This occurred uniformly 
across almost all borrowing countries and not in just a few.
    To reduce corruption and politically-motivated legal spending on 
activities that do nothing to stimulate development, the Banks should 
eliminate the grace period attached to borrowing. With a grace period 
on repayment of 3-5 years, the administration that negotiates the loan 
is almost never responsible for repaying it. In the terminology of the 
Bank, this is a ``perverse incentive.''
    If the performance of certified countries does not measure up to 
expectations, the consequences could be severe. Heretofore, there has 
been little effort on the part of the Bank to monitor structural 
adjustment loans. This could be an open invitation to corruption, 
particularly countries such as Brazil. In 1992 the President of Brazil 
was impeached for massive corruption and the last President, Henrique 
Cardoso, narrowly avoided a broad Congressional probe into central bank 
insider trading. According to Dow Jones, ``The original probe failed 
after the government released some 80 million reals ($1=BRR2.325) in 
budget funds to finance pet projects that were proposed by coalition 
legislators between 1999 and 2000 but never materialized. This last-
ditch effort by President Fernando Henrique Cardoso and his allies 
helped weaken support for the original request for the probe.'' (Dow 
Jones Newswires, May 21, 2001)
    Conditionality. If the MIC strategy is approved, policy conditions 
will not be attached to SALs if the World Bank finds adequate 
conditions in a few broad areas: the quality of a government's 
macroeconomic policy framework,\8\ the quality of its development 
policies at the sector and country le levels, and its institutional 
capacity.
---------------------------------------------------------------------------
    \8\ With respect to the quality of policies, the IMF consistently 
puts countries at a serious disadvantage because the wildly over-
optimistic growth projections. The actual and inevitably disappointing 
growth rates reduce revenues I sharply curb expenditures. The Director 
of the IMF's Independent Evaluation Office (IEO), Marcelo Selowsky's 
that, in studying the IMF's record, ``We found very significant (IMF 
staff) optimism in projecting private-sector activity and growth, 
particularly when the program commences in very adverse situations . . 
. optimism about growth means that expenditure ratios end up higher 
than programmed ... Negative growth occurred 10 times as often as 
projected.'' For full transcript, see: http://www.imf.org/external/np/
tr/2004/tr040608.htm
---------------------------------------------------------------------------
    The Bank conducts several assessments to discern whether it is 
necessary to attach any conditions to adjustment loans. To ascertain 
the quality of policies and institutions, the Bank conducts routine 
assessments for each of 130+ borrowers. Two important annual 
assessments are: the Country Policy and Institutional Assessment (CPIA) 
and the Investment Climate Assessment. The Bank's ratings of the costs 
to investors of ``doing business'' in a particular country are a 
principal input to the country's Investment Climate Assessment. The 
Bank's determination of whether to provide certification for a MIC will 
de end significantly upon whether the country is creating an attractive 
investment climate. (See Annex 2 and following section.)

    ``Doing Business'' Ratings. The Bank's ``Doing Business'' project 
to eliminate the regulatory barriers in borrowing countries is 
problematic because it does not seriously take into account that fact 
that certain regulations are necessary to protect the public interest 
and the interests of employees, including the right to collective 
bargaining. Appropriate levels of regulation are also necessary to 
ensure against corruption.
    Each year, the Bank produces a ``Doing Business'' report for each 
borrowing country. The recommendations of the Bank often constitute 
violations of the Articles of Agreement, which prohibit the institution 
from interfering in the internal political affairs of its borrowing 
states. How can the Bank claim to promote ``good governance'' while 
undermining regulations that have been established through national 
political dialogue? How can the Bank claim to fight corruption while 
weakening regulation on private sector activity, a locus of large-scale 
corruption in both the developed and the developing world during the 
1990s?
    A 2001 Bank publication states, ``At a general level, it is 
possible to say that the weaker the government system, the stronger the 
case for choice for citizens (by means of private sector development 
(PSD)) and free entry for entrepreneurs.'' \9\ This suggests that where 
capacity for regulation is weakest, markets should be most open, (See 
Annex 2.) and is clearly a broad-brush, openly ideological statement.
---------------------------------------------------------------------------
    \9\ PSD: Entrepreneurship, Markets and Development, The World Bank, 
May 9, 2001.
---------------------------------------------------------------------------
    The ``Doing Business'' project puts greater emphasis on the 
lowering the ``cost of doing business'' than lowering the ``cost of 
living.'' The Bank's system of certifying MICs will put an emphasis on 
the degree to which these countries are willing to create an investment 
climate that is friendlier to investors, if current practice is any 
indication, certification will encourage deregulation to attract 
investors rather than regulation to protect the public interest, such 
as the U.S. has established over the years and still, to some degree, 
maintains.\10\
---------------------------------------------------------------------------
    \10\ For instance, the proposed MIC Strategy says that ``Loan 
conditions are thus a means to an end, which is the fostering of good 
policy environments, rather than the ends in themselves.'' Once upon a 
time policies themselves were a means to an end, namely poverty 
reduction.
---------------------------------------------------------------------------
    Each year, the Bank profiles the cost of regulatory barriers faced 
by potential investors in each of 130 countries, including 
industrialized countries. Each country's profile assigns a rating to 
its labor regulations, credit markets, entry regulation (ease of 
establishing a business), contract enforcement, and bankruptcy 
procedures. These ratings are a significant input to the Investment 
Climate Assessment, which the Bank conducts for each borrowing 
country.\11\
---------------------------------------------------------------------------
    \11\ To see how the Bank rates any country along these dimensions, 
see http://rru.worldbank.org/DoingBusiness/. A chart that displays the 
degree of rigidity or flexibility in labor markets in 130 countries can 
be viewed at: http://rru.worldbank.org/DoingBusiness/ExploreTopics/
HiringFiringWorkers/CompareAll.aspx. To see an example of a major 
country, see Brazil's ``Doing Business'' report at: http://
rru.worldbank.org/DocumentslDoingBusiness/EconomyProfiles/
BrazilReport.pdf. To understand how ``Doing Business'' ratings 
influence lending programs, see http://rru.worldbank.org/Documents/
PSDForum/2004/klein.pdf
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B. Expanding of Lending for a Failed Infrastructure Model
    For investment projects, the MIC strategy proposes attaching policy 
conditions to loans only if they are proven necessary for the success 
of the project. (By implication, the Bank seems to admit that is has 
long made a practice of attaching unnecessary conditions to its 
lending.) However, the Bank's underlying models for infrastructure 
lending are deeply flawed. The Bank should be asked to account for its 
systemic failure in a range of areas identified by the institution's 
evaluators in their ``Annual Report on Development Effectiveness'' 
(2003) which include systemic failures (many of which contribute to 
corruption) to:

   tailor operations to country circumstances and policy 
        preferences;

   monitor and evaluate operations during and especially after 
        project completion;

   correct systemic problems with project performance in 
        sectors, such as water and sanitation, where two of every three 
        loans fail to succeed over the long-term;

   correct a commercialization and privatization model that has 
        retarded development of the power sector and resulted in price 
        hikes that make infrastructure services unaffordable to poor 
        groups.

    In addition, environmental sustainability is not adequately 
integrated into Bank operations. This is due to basic differences among 
member countries about the appropriate role of the World Bank. Indeed, 
the burst of Bank interest in environmental sustainability in the years 
just before and after the 1992 Earth Summit has almost entirely 
fizzled. Now, for instance, a government can achieve an excellent 
country performance rating even if it has ruinous environmental 
policies. At best, the Bank has a mixed record in addressing systemic 
problems in implementing policies and programs that protect the natural 
environment and certain vulnerable groups. If the Bank itself cannot 
comply with social and environmental safeguards, how can it ensure that 
borrowers do?
    Given the Bank's emphasis on extractive industries and 
infrastructure, its lack of concern for the environment could be 
calamitous, not only for the environment, but also for the poor and 
vulnerable groups that are directly affected by Bank-financed projects. 
This disregard is also seen with respect to the institution's gender 
policy, even though the Bank cites very high performance ratings for 
borrowers' gender policies.

    Additional concerns include:

    1. Commercializing infrastructure is not a strength of the Bank. 
According to the institution's evaluators, Bank-financed 
``(C)ommercialization turned out to be incompatible with the kinds of 
potential and social considerations to which many governments gave 
higher priority than commercial success.'' In the water and sanitation 
area, the evaluators see the risk that the Bank will ``advocate or be 
perceived to be advocating practices that may not turn out to be 
``best'' or even ``good''--at least in all cases.''

    Water and Sanitation. This problem is one of many that lead to 
abysmal sustainability rates of water projects. Half of IDA resources 
to Africa go through (mostly rural) community-driven development (CDD) 
mechanisms, although all CDD resources do not reach communities and 
only 24% of the water components of these projects are sustainable. 
Only 40% of urban water supply projects are sustainable. Water supply 
projects undercut the role of local governments in delivering services 
and, often, in monitoring and regulating them.
    Widespread opposition to water privatization exists throughout 
Peru, but notwithstanding the will of the people, the management of the 
Inter-American Bank will ask for Board approval of a loan to privatize 
water in 54 municipalities in Peru. As privatization of ``model'' water 
privatizations supported by the World Bank and the Netherlands move 
toward the bidding stage, the Bank is not requiring that public private 
contracts be disclosed to the public, even though they will bind the 
municipalities for generations. Finally, the Peruvian water regulator, 
SUNASS, does not have the capability to regulate privatizations. Even 
if it did, the Bank's new operational guidance note for water and 
sanitation lending instructs the Bank's staff to avoid giving any 
central government regulator authority over subnational service 
delivery.
    Non-transparent and unaccountable policy and project lending 
fosters corruption. When such lending results in populations being 
deprived of their right to affordable water, it will be cause for 
revolution, as has been the case in Bolivia.

    Power. Evaluators find that the Bank's privatization model may have 
``retarded the development'' of the power sector. In sum, they find 
that ``The risks of promoting inappropriate policies appear to be most 
pronounced in policy areas where progress on reform has been difficult 
. . . as is the case in many in infrastructure sectors . . .\12\
---------------------------------------------------------------------------
    \12\ ARDE 2003, p. 35.
---------------------------------------------------------------------------
    In short, the Bank has a long and embarrassing history of unholy 
alliances in its infrastructure lending. At best, project teams looked 
the other way while corrupt governments looted investment projects. At 
first, the Bank actively collaborated with the most unsavory political 
and economic interests in the theft of national patrimonies.\13\
---------------------------------------------------------------------------
    \13\ The World Bank and the Inter-American Development Bank allowed 
the government of Alberto Fujimori in Peru to move authority over loan 
funds designated to reform the water sector in Peru to the newly 
created Ministry of the Presidency from which they disappeared.

    2. Financing of commercialized infrastructure will boom, if 
proposed accounting practices are adopted. Although the removal of most 
policy conditions from project loans is intended to facilitate the 
financing of projects, many governments cannot borrow large sums and 
continue to comply with IMF and World Bank budget targets. A solution 
to this problem is being explored by the IMF in about ten cc unties 
where it is piloting an approach that changes accounting standards so 
its borrowers aren't forced to count commercialized infrastructure 
investments as current expenditures in formulating budget targets.\14\ 
(The Presidents of Argentina and Brazil Summit proposed an approach, 
such as this, at the Copacabana Summit earlier this year. The issue 
also dominated the Inter-American Development Bank's annual meetings in 
Peru at the end of March 2004.)
---------------------------------------------------------------------------
    \14\ For further details, see ``Public Infrastructure and Fiscal 
Policy'' by Teresa Ter-Minassian and Mark Allen, IMF, 3/12/04: http://
www.imf.org/external/np/fad/2004/pifp/eng/PIFP.pdf
---------------------------------------------------------------------------
    In order to qualify for financing, governments would agree to 
institute full cost recovery (including the cost of borrowing) for 
infrastructure services. As a result of this policy, there is likely to 
be a boom in commercialized (and privatized) infrastructure in 2005 and 
beyond. This proposal seems to be proceeding toward approval in the 
absence of adequate (or in some cases, any) regulatory oversight in 
many countries. The proliferation of unregulated commercial and 
privatized services could be a disaster for poor people for whom water 
and electricity prices, among other things, could be prohibitively 
high.\15\
---------------------------------------------------------------------------
    \15\ The IDB proposes an October approval for a loan to Peru that 
would promote private provision of municipal water services in 54 
cities, yet Peru lacks the capacity to oversee such processes. 
Moreover, the World Bank-Netherlands Water Partnership is not requiring 
the Government of Peru to disclose public-private water contracts in 
Puira and Tumbes where bidding for water systems is currently underway. 
Puira and Tumbes are model projects intended to prove that private 
provision can reach the poor. The model was developed by donors and 
creditors in an extensive ``Paris process'' that engaged dozens of 
consultants. The citizens of Peru overwhelmingly oppose private 
provision of water, yet the Banks continue to support leaders that will 
even resort to force to suppress opposition to these policies.
---------------------------------------------------------------------------
    Moreover, approval of this proposal could significantly increase 
pressure to cut spending on health care, education, and other social 
purposes in hard budgetary times.

    3. Expansion of Bank financing. The Bank estimates that there is a 
need to ``potentially double'' actual financing for infrastructure from 
the average of 3.5% of GDP in all developing countries to 7% of 
GDP.\16\
---------------------------------------------------------------------------
    \16\ World Bank, ``Infrastructure Action Plan,'' April 8, 2004, p. 
3.
---------------------------------------------------------------------------
    In FY 2005, the Bank is increasing infrastructure lending $7 
billion, an increase of about $1 billion over FY 2004. (Infrastructure 
projects had a 35% economic rate of return during the period FY 1999-
2003.) Expanding the financing for commercialization and privatization 
models that are failures and disregard the need for regulation for 
fiduciary and public interest purposes could doom efforts to curb 
corruption. These failures could also reduce inequality and increase 
poverty in much of the developing world.
    Equally problematic is the fact that trade rules could ``lock in'' 
privatization and commercialization policies in and make many of them 
almost irreversible. Some of these policies are good for economies and 
good for people, but not in unregulated environments and not where 
people and their elected representatives are unengaged in shaping their 
own development future.
C. Providing ``Flexible'' Assistance to Certified Countries
    Approximately every three years, the World Bank designs a CAS for 
each borrowing country that identifies the operations that it plans to 
finance and the rationale for these operations. The content of the CAS 
is determined by each government's CPIA rating, its ``doing business'' 
rating, and the government's own aspirations. In the proposed MIC 
Strategy, the CAS would function more as a ``strategic compass than a 
detailed blueprint.'' Aspects of flexible CASs are described in Annex 
3. While the Bank should not be rigid in its approach to governments, 
its Bank's track record in complying with its own policies do not merit 
expansion of lending. Nor does the Bank's record in project lending 
(e.g., infrastructure) and adjustment lending merit expansion of 
lending.
D. Making Other Institutional Changes
    The Bank is already making internal changes, including:

   A revision of promotion criteria. Although staff performance 
        appears tightly linked their ability and willingness to ``move 
        money,'' the proposed MIC Strategy says that staff incentives 
        reward complex lending programs that are divided into many 
        small operations and that that must change. It also asserts 
        that MICs also need simple, repeater operations to expand and 
        replicate successful operations on a larger scale. Hence, 
        promotion criteria will be revised and the evaluation criteria 
        for proposed projects could be revised as well.

   Improvement in staff skills.

   Expanding the use of existing Bank financial services and 
        products and the invention of new ones.

   Piloting of joint IBRD, IFC and MIGA offices. For instance, 
        the Bank is establishing joint IDA IFC offices in several 
        African countries.

   Development of a framework for lending to financial 
        institutions (including municipal development funds) and for 
        advisory services.

                  III. Certification of Qualified MICs

A. Identifying MICs as First Class or Second Class
    Should the MIC Strategy be approved, the political stakes for the 
World Bank and the U.S. could be high. As the major shareholder of the 
World Bank, the U.S. could be seen as facilitating the assignment of 
middle-income countries to first class or second class status depending 
upon whether the institution grants or withholds certification.
    If the World Bank denies certification to an MIC government and, 
thus, disqualifies it for streamlined lending, the international 
financial community could see that government as a bad bet. If their 
debt burdens are not too high, MIC governments with World Bank 
certification will obtain significant, streamlined loans with few 
strings attached. This may produce competition for World Bank 
certification or it may produce tensions and resentments. Poorly done, 
the MIC Strategy could exacerbate economic and political crises and 
corruption among first and second class MICs.
B. Other Certification Issues
    As noted above, if the MIC Strategy is approved, the World Bank 
would ``certify'' governments with acceptable national policies that 
are ``equivalent'' to the fiduciary and safeguard policies of the Bank.
    The Bank's Board has expressed concern about what kind of 
``equivalence'' should exist between national fiduciary, environmental 
and social standards and the standards still embodied by the Bank's own 
(watered down) operational policies. In addition, there is concern 
about whether or how the World Bank's Inspection Panel would 
investigate compliance with safeguards with regard to operations that 
the Bank finances in credentialed low- and middle-income countries. The 
Bank, itself, has been largely unable to provide adequate project 
supervision. Examples are legion: around the developing world, 
privatization projects financed and promoted by the World Bank and the 
regional development banks produced poor quality services, corrupt 
insider deals, bogus debt swaps, and political uproar. Vast 
infrastructural investment projects, such as the Yacireta project or 
Cana Brava in Latin America became internationally notorious. If the 
Bank's record of compliance with its own safeguards was better, one 
could have more confidence in the Bank's supervision of each borrower's 
compliance.
    Prior to country certification, the Bank's Board would examine the 
methodology and results of management's assessments of the country's 
willingness and capacity to comply with safeguards. The proposed MIC 
Strategy says that ``Board approval of an operation relying on a 
certified safeguard system implies that the national system constitutes 
the reference point for any Inspection Panel investigation.'' Then, the 
Bank's management signed a memo with the Inspection Panel that ensures 
continued use of the Bank's operational policies as the reference 
point. Given management's ambivalence or antipathy to the Inspection 
Panel, it could be important to monitor implementation of this policy.

                             IV. Conclusion

    At best, it is premature to approve and implement the MIC Strategy. 
Before it is approved, the Bank's shareholders should ask questions 
about whether the MIC Strategy would exacerbate existing problems with 
corruption, accountability, and development effectiveness. For 
instance:

   Would it constitute a conflict of interest for the World 
        Bank to both certify MIC governments and profit from the 
        resulting surge in lending?

   How might it be possible to follow the money trail of large 
        adjustment loans that the Bank is currently offering to most of 
        its borrowers?

   Will the policy result in rampant non-compliance with 
        fiduciary and safeguard policies--or, especially, their 
        implementation? Already, the Bank has a mixed record of 
        complying with the spirit, if not the letter, of its own 
        policies. Thus, would it be equipped to help governments who, 
        heretofore have viewed Bank policies as a barrier to borrowing, 
        to upgrade and enforce their national policies and standards?

   What would be involved in judging whether fiduciary and 
        safeguard standards are ``equivalent'' to it's the World Bank's 
        standards? How compliance could be effectively supervised, as 
        called for by the Strategy?

   How could country ``ownership'' of lending policies be 
        improved? Most parliaments have little power over loan design 
        or approval. (They may approve increases in the debt ceiling). 
        The lack of country ownership can lead to unsustainable lending 
        and corruption. Moreover, policy-based loans, untied to 
        specific objectives, build in the possibility of pork barrel 
        spending to buy loan approval from potentially corrupt 
        parliamentarians.

   How will democratic, fiduciary and safeguard controls be 
        created or maintained at the subnational and regional level? An 
        increasing number of loan/grant operations are being executed 
        at the subnational lending where consultation consists of 
        citizens being asked whether they want money for 
        commercializing/privatizing services or no money at all. (This 
        is the process in 54 municipalities in Peru and countless other 
        places.) An increasing number of loan/grant operations are also 
        being executed at the regional level, e.g., the Balkans 
        Infrastructure Development (BID) Facility, which is supported 
        by USAID, among others. Indeed, the World Bank has divided each 
        geographical region into infrastructure grids for 
        infrastructure lending purposes. However, it is unclear the 
        kinds of democratic governance, fiduciary and regulatory 
        structures and processes could govern regional infrastructure 
        development.

   What will be the outcome of orchestrated pressure to 
        undercut labor rights and standards? The degree of labor 
        rigidity or flexibility in 130 countries is displayed here: 
        http://rru.worldbank.org/DoingBusiness/ExploreTopics/
        HiringFiringWorkers/CompareAll.aspxT The large adjustment 
        programs will create much stronger pressure to liberalize 
        investment (which implement the Bank's ``Doing Business'' 
        project) than currently exists.

   Will the U.S. and other large shareholders join in the 
        implementation of the MIC Strategy? To implement the Strategy, 
        the Bank seeks to strengthen its relationship with partners, 
        particularly bilateral donors, since half of all bilateral aid 
        flows, about $25 billion, support MICs.

    Such questions should be answered before the World Bank cast itself 
as a ``partner of choice'' in development knowledge and finance for 
MICs.\17\ The Bank should be obliged to account for its past failures.
---------------------------------------------------------------------------
    \17\ The situation is particularly dire for the Bank because new 
lending to many ``debt distressed'' countries will slow or stop if, at 
the 2004 Annual Meeting of the IMF and World Bank, the Governors of the 
institutions approve the ``debt sustainability'' (DS) proposal 
advocated by the U.S. government and its allies. If the DS proposal is 
approved, the IMF and World Bank would assign a debt threshold to each 
borrowing country corresponding to its debt burden, its vulnerability 
to shocks and, especially its policy and institutional performance.
    Except in emergencies, governments could not borrow after they 
reach their debt threshold. Instead, they would rely upon a scarce 
supply of grants that would be primarily directed to the governments 
considered to have gone farthest in adopting policy and institutional 
reforms prescribed by the World Bank. How will the U.S. government deal 
with situations in which the World Bank will cease lending to 
governments that have reached their debt thresholds? In some cases, 
fiscal transitions can be maintained with grant flows, but the IMF and 
World Bank acknowledge that the supply of grant resources will be too 
meager to meet the demand.
---------------------------------------------------------------------------
    As democracies have emerged in borrowing countries, corrupt, non-
democratic regimes have been obliged to respond to questions about 
corruption and repression, at least to some extent. In Latin America, 
Argentina, Chile, Guatemala and Peru have established ``Truth 
Commissions'' to investigate corruption and repression, which often 
went hand-in-hand. The Banks, which comfortably did business with these 
governments, have never been asked about their lending under past 
dictatorships: what did the loans pay for? Who benefited? How much is 
this debt worth now?
    Particularly since Reagan and Thatcher revolutionized the goals and 
functions of the World Bank about 25 years ago, the history of the 
institution has been marked by waves of struggles between those who 
would focus on the quantity of lending and those concerned with the 
quality and impacts of lending. The year 1991, when Bank VP Willi 
Wapenhans chaired a commission investigating the quality of Bank 
lending, was historic in this regard. The eminent German's commission 
exposed the miserable quality of most Bank lending. For many years, the 
Bank diligently strove to improve its portfolio.
    However, since 1990, there has been considerable conflict over the 
institution's direction among the Bank's Board.\18\ In 1992, the U.S.-
led effort to have a Private Sector Development (PSD) Strategy adopted 
as the overarching purpose of the World Bank and the regional 
development banks overcame fierce opposition.
---------------------------------------------------------------------------
    \18\ Significant conflict led up to the Bank's approval of the 
Private Sector Development (PSD) Strategy in February 2002 and has 
continued since.
---------------------------------------------------------------------------
    Under the appropriate conditions, the role of the private sector 
needs can be usefully expanded. But if appropriate conditions are 
lacking--particularly in the regulation of the pricing and delivery of 
basic services--the adverse implications are significant. The current 
lack of regulation for fiduciary and public interest purposes should 
stop consideration of the MIC strategy in its tracks.
    The time to ask questions and get answers about the MIC strategy's 
likely impacts is before, not after it is approved. There is still time 
to donors, other creditors, parliaments, citizens, and the media in 
industrialized and developing countries to pressure the Bank's Board 
into considering the risks and costs of the proposed strategy, and to 
search for ways to make the Bank more, not less accountable for the 
results of projects and policies that its resources help finance.

                                Annex's

                                ANNEX 1

         The Bank's Draft CAS for India: What is the Future of
                      Basic Services for the Poor?

    In adjustment lending, policy impacts may not be taken into 
account. Top priorities in the draft Indian CAS include reforming power 
and water policies. In the area of water, the Bank promotes 
reallocation of water from low-value users (subsistence farmers) to 
high-value users (agribusiness, industry, cities). This policy will hit 
the most vulnerable people the hardest, since the overwhelming majority 
of poor people are subsistence farmers who rely on affordable drinking 
water and, sometimes, access to water for irrigation.\1\
---------------------------------------------------------------------------
    \1\ In the Bank's water project in Senegal, reallocation is 
facilitated by raising water prices higher for rural consumers of water 
from standpipes than for any other classification of rate payers.
---------------------------------------------------------------------------
    The Bank would help those Indian states that meet ``guidelines for 
engagement'' by implementing a comprehensive reform effort. Eligible 
states could receive up to 15% of total lending as adjustment lending 
over five years (governments that are off-track will have their loan 
disbursements suspended). Adjustment lending will be particularly 
appropriate for states with a good track record, but problems with debt 
sustainability.
    In the cities, the Bank is working to make cities less dependent on 
financial transfers from the central government, obtain more access to 
finance, and facilitate private sector participation in the delivery of 
basic services. At the state level, the Bank will bolster service 
provision programs that improve cost recovery and shape regulatory 
systems that will encourage private sector participation. Such policies 
have a poor rate of expanding affordable basic services.\2\
---------------------------------------------------------------------------
    \2\ The Bank often argues that simply increasing access to piped 
water reduces poverty, since the poor are more likely to have no 
connection at all, and are forced to rely on higher-priced (per unit) 
alternatives, such as water from private tankers. However, for cost 
recovery programs to affectively address poverty, they must ensure 
network investment in poor areas, and also include some kind of subsidy 
component for household connections and, where incomes are below 
poverty levels, consumption itself.
---------------------------------------------------------------------------
    Since its adoption of the Private Sector Development Strategy (PSD) 
as the overarching strategy of the World Bank Group in February 2002, 
the World Bank has accelerated privatization of basic services--health 
care, education and water, despite the facts that, for low-income 
countries: 55% of PSD projects were likely to be sustainable; the 
distributional impact of PSD projects were frequently negative; and 
that benefits depend on how well the state regulates private behavior. 
Strong claims are also made that these shortcomings are equally 
apparent in MICs, where poverty and, especially distributional, 
problems are often exacerbated.\3\
---------------------------------------------------------------------------
    \3\ In the last three years, the Bank has tripled lending for the 
water sector, despite the facts that: (a) urban water projects have a 
40% sustainability rate and the water components of rural loans have a 
23% sustainability rate. This means that, by a substantial margin, 
water projects fail after the Bank stops financing them. And, (b) 
according to World Bank evaluators ``substantial room remains for 
targeting the poor and vulnerable populations within water sector 
operations. Of most concern across the Bank is the scant attention 
given to the direct impact of these operations on the poor . . . and 
tailoring project design to meet the needs of target populations.'' 
From ``Bridging Troubled Waters . . .'' OED, The World Bank, 2002, p. 
11.

                                ANNEX 2

         The Country Policy and Institutional Assessment (CPIA)

    Over the period of 1999-2003, Bank lending was concentrated . . . 
with 89.4% of Bank lending going to countries with average or above 
average CPIA ranking.
    The World Bank performs CPIA ratings annually for its 136 borrowers 
that produce an overall performance ranking for each borrowing 
government. The ratings are based on assessments of each country's 
governance as well as its economic, structural, social, and public 
reform policies.
    Poor performance on the part of a borrower is assumed to be the 
borrower's fault rather than the flawed application of ``indicators 
like the CPIA--which are based implicitly on the premise that their 
underlying criteria reflect good policies at all times and in all 
places,'' as the Bank's evaluators put it. (ARDE, p. 41)
    The whole strategy for providing aid to developing countries was 
revolutionized by the claim of ``Assessing Aid'' (2000) by World Bank 
economist David Dollar. Dollar said that aid only produces results in 
good policy environments. In order to prove this, he used a rating 
system--the CPIA--to judge the policy and institutional performance of 
borrowing governments. However, the CPIA is not transparent. The 
ratings and the methodology for all MICs are secret, even from 
bilateral and other multilateral donors. Reportedly, Brazil received 
relatively high CPIA ratings, yet its growth was below average for 
developing countries during the period 1998-2002. But, without access 
to Brazil's CPIA, observers are at a loss to understand the signals 
that the Bank is sending to the country.
    The content, methodology and secrecy in which most of the CPIA is 
shrouded is a matter for hot debate among the World Bank's management 
and Board.\1\ Some Board members claim that the CPIA is a reasonably 
accurate system that rates performance of borrowing countries in 
critical areas--namely, with regard to governance, including the 
effectiveness with which governments disburse and manage Bank loan 
resources--and with regard to economic, structural, social and public 
sector reform policies. Other Board members accuse the CPIA as being a 
one-size-fits-all instrument imposed on governments in a top down 
manner replete with subjective judgments about their performance.
---------------------------------------------------------------------------
    \1\ For a description of the CPIA, see: http://
www.servicesforall.org/html/worldbank/sheep--into--goats.shtml
---------------------------------------------------------------------------
    Interestingly, the ratings of those government that are eligible 
for the U.S. Millennium Challenge Account (MCA) are usually different 
from those of the World Bank's CPIA, sometimes remarkably so.

                                ANNEX 3

   Flexible Country Assistance Strategies (CASs) for Brazil and India

    In the past, the Bank provided scenarios for lending at low, medium 
and high lending levels, dependent upon the degree of borrower 
compliance (or non-compliance) with ``trigger conditions''--that is, 
reforms that the Bank identified as necessary. For MICs with 
certification, the Bank will permit flexibility in the CASs prepared 
for each borrower with respect to the composition of the lending 
program, determination of loan sizes for good performers, and possible 
increases in the volume of lending. Among other things, new policies on 
supplemental financing could expedite enlargement of Bank-financed 
operations. In sum, the CAS would function more as a ``strategic 
compass than a detailed blueprint.'' In the future, the CAS may be 
called a ``Country Partnership Strategy'' (CPS). In the Bank's view, 
the CAS for Brazil (2004-2007) and the draft CAS for India demonstrate 
a desirable flexibility.
    Brazil. Over the 2005-07 CAS timeframe, ``understandings'' between 
the Bank and the Government of Brazil (GOB) will determine the level of 
access the GOB has to Bank financing. Excellent performance will 
qualify the Government of Brazil (GOB) for support over in the range of 
$6 to $7.5 billion over the 3 years with adjustment lending up to half 
of the total amount. Reasonable performance will qualify Brazil for 
access to $4 billion to $6 billion. The CAS does not include trigger 
conditions. The Brazil CAS is a model for forthcoming guidelines to 
staff on ``good practice'' with regard to flexible lending programs. 
The Bank is also giving the GOB greater flexibility in providing 
counterpart funding, to help match the Bank's resources, for 
implementing investment projects. Difficulty in providing counterpart 
funding has been a barrier to lending in the past.
    India. The Bank identifies the ceiling for IBRD lending as $2.15 
billion per year or $6.45 billion in the three-year, 2005-08 timeframe 
of the draft CAS. Access to resources will depend upon how quickly 
India prepares projects and the quality of its project implementation, 
particularly the timeliness of disbursing loan resources. The access to 
loan resources by India's 24 states will depend upon the seriousness 
with which they apply ``self regulating'' reform policies (i.e., 
``trigger'' policies). While the states may ``self-regulate'' their 
adoption of reforms, there will be little ambiguity with regard to the 
types of reforms required by the Bank, as these will be designated in 
the Bank's ``guidelines for engagement.'' In another departure from 
past practice, the Bank's CAS does not designate a specific fiscal 
policy target, or ``trigger.'' Instead, the Bank will periodically 
review India's macroeconomic situation and, particularly, its 
stability.