[Senate Hearing 109-167]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 109-167
 
 A REVIEW OF THE ANTICORRUPTION STRATEGIES OF THE AFRICAN DEVELOPMENT 
 BANK, ASIAN DEVELOPMENT BANK, AND EUROPEAN BANK ON RECONSTRUCTION AND 
                              DEVELOPMENT

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

                                HEARING



                               BEFORE THE



                     COMMITTEE ON FOREIGN RELATIONS
                          UNITED STATES SENATE



                      ONE HUNDRED NINETH CONGRESS



                             FIRST SESSION



                               __________

                             APRIL 21, 2005

                               __________



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                     COMMITTEE ON FOREIGN RELATIONS

                  RICHARD G. LUGAR, Indiana, Chairman

CHUCK HAGEL, Nebraska                JOSEPH R. BIDEN, Jr., Delaware
LINCOLN CHAFEE, Rhode Island         PAUL S. SARBANES, Maryland
GEORGE ALLEN, Virginia               CHRISTOPHER J. DODD, Connecticut
NORM COLEMAN, Minnesota              JOHN F. KERRY, Massachusetts
GEORGE V. VOINOVICH, Ohio            RUSSELL D. FEINGOLD, Wisconsin
LAMAR ALEXANDER, Tennessee           BARBARA BOXER, California
JOHN E. SUNUNU, New Hampshire        BILL NELSON, Florida
LISA MURKOWSKI, Alaska               BARACK OBAMA, Illinois
MEL MARTINEZ, Florida
                 Kenneth A. Myers, Jr., Staff Director
              Antony J. Blinken, Democratic Staff Director

                                  (ii)

  
?

                            C O N T E N T S

                              ----------                              
                                                                   Page

Devine, Tom, legal director, Government Accountability Project, 
  Washington, DC.................................................    49
    Prepared statement...........................................    50
Lugar, Hon. Richard G., U.S. Senator from Indiana, opening 
  statement......................................................     1
Speltz, Hon. Paul, U.S. Executive Director, Asian Development 
  Bank, Manila, Philippines......................................     3
    Prepared statement...........................................     5
Sullivan, Hon. Mark, III, U.S. Executive Director, European Bank 
  for Reconstruction and Development, London, United Kingdom.....     9
    Prepared statement...........................................    11
Withanage, Hemantha, Convenor, Sri Lankan Working Group on Trade 
  and International Financial Institutions and Executive 
  Director, Center for Environmental Justice, Colombo, Sri Lanka.    31
    Prepared statement...........................................    33
    Photo from Sri Lankan Sunday Leader..........................    48

   Additional Statements and Other Material Submitted for the Record

Hart, Elder Akie, the National President of the Mangrove Forest 
  Conservation Society of Nigeria, prepared statement............    68
Perry, Hon. Cynthia S., U.S. Executive Director to the African 
  Development Bank, prepared statement...........................    63
Minutes of the 659th Session of the Senate of the Italian 
  Republic, XIV Legislature, September 28, 2004..................    69
Letters written to and published in the Colombo Daily Mirror:
    January 30, 2003.............................................    76
    October 6, 2004..............................................    77
    October 18, 2004.............................................    78

                                 (iii)

  


 A REVIEW OF THE ANTICORRUPTION STRATEGIES OF THE AFRICAN DEVELOPMENT 
 BANK, ASIAN DEVELOPMENT BANK, AND EUROPEAN BANK ON RECONSTRUCTION AND 
                              DEVELOPMENT

                              ----------                              


                        THURSDAY, APRIL 21, 2005

                                       U.S. Senate,
                               Foreign Relations Committee,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 9:30 a.m., in 
room SD-419, Dirksen Senate Office Building, Hon. Richard G. 
Lugar, chairman of the committee, presiding.
    Present: Senators Lugar and Martinez.

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

    The Chairman. This meeting is called to order.
    The Foreign Relations Committee meets to continue our 
review of U.S. policy toward the multilateral development 
banks. This hearing is the fourth in an ongoing series 
examining ways that the U.S. Congress and our Government can 
contribute to anticorruption and antifraud efforts at the 
multilateral development banks. The committee's work aimed at 
the MDBs is being conducted on multiple fronts. In addition to 
holding hearings, I have directed letters of inquiry on 
individual projects and policies to the respective banks. 
Committee staff members have visited overseas projects and 
conducted interviews with bank employees, nongovernmental 
organization representatives, academies, and others.
    Building on this oversight effort, at the request of the 
Bush administration, I will soon introduce authorization 
legislation replenishing funds for the subsidized windows of 
the World Bank, Asian Development Bank, and African Development 
Bank. This legislation will include reform proposals to bring 
about more transparency and accountability in the operations of 
all five multilateral development banks.
    Today, we are especially pleased to be joined by Ambassador 
Paul Speltz, U.S. Executive Director of the Asian Development 
Bank, and Mr. Mark Sullivan, U.S. Executive Director of the 
European Bank for Reconstruction and Development. We look 
forward to their testimony regarding the anticorruption 
strategies of the banks to which they are assigned. We also 
look forward to the testimony of Hemantha Withanage, Executive 
Director of the Center for Environmental Justice in Sri Lanka 
and Tom Devine, Legal Director of the Government Accountability 
Project.
    In addition, the committee invited two other witnesses to 
testify--Ambassador Cynthia Perry, the U.S. Executive Director 
to the African Development Bank, and Akie Hart, President of 
the Mangrove Forest Conservation Society of Nigeria. Both were 
unable to be with us due to unavoidable conflicts. They have 
provided us with written testimony, which we are very pleased 
to include in the record.
    The United States has strong national security and 
humanitarian interests in alleviating poverty and promoting 
development around the world. The MDBs leverage the resources 
that we can devote to these goals. Since 1960, the United 
States has provided more that $42 billion in direct 
contributions to the MDBs. But we must ensure that our 
contributions are managed well and that the mission of the MDBs 
is not undercut by corruption.
    The U.S. Senate is not alone in its inquiry into 
development bank financing. The Parliament of the United 
Kingdom has undertaken its own inquiry. In addition, the 
Italian Senate issued an Order of the Day last September 
referencing our committee's MDB hearings and calling for 
anticorruption reforms. We will include a copy of the Italian 
order in the hearing record.
    [Editor's note.--The Italian Order mentioned is included in 
the Additional Statements and Other Material Submitted for the 
Record section.]
    Corruption impedes development efforts in many ways. Bribes 
can influence important bank decisions on projects and 
contractors. Misuse of funds can inflate project costs, deny 
needed assistance to the poor, and cause projects to fail. 
Stolen money may prop up dictatorships and finance human rights 
abuses. Moreover, when developing countries lose development 
bank funds through corruption, the taxpayers in those poor 
countries are obligated to repay the development banks. So, not 
only are the impoverished cheated out of the development 
benefits, they are left to repay the resulting debts to the 
banks.
    At our May 13, 2004, hearing, we learned that the MDBs have 
been taking steps to curb corruption, but much more needs to be 
done. Our witnesses provided clear recommendations about how 
the MDBs can minimize leakage in development financing. They 
recommended changing the incentives at the MDB, so that staff 
would have less pressure to lend. Witnesses also recommended 
that the MDBs focus more actively on supervision and auditing 
of MDB lending. They argued for more transparency in MDB 
operations, and an MDB requirement that borrowers improve 
transparency within their governments.
    In our July 21 hearing, we learned that the United States 
Treasury Department does encourage anticorruption efforts at 
the MDBs, and reviews all MDB loans. The Treasury, however, has 
limited ability to investigate the misuse of MDB funds. 
According to Under Secretary John Taylor, and I quote, ``The 
first line of attack, if our staff hears about issues like 
this, is to work through our Executive Directors at the 
institutions.''
    During our July hearing, we also learned the government of 
Lesotho was strained financially during its prosecution of 
corruption relating to a World Bank-financed project. 
Unfortunately, there is no mechanism to assist poor countries 
that want to prosecute corruption related to their loans. It 
was suggested the MDBs harmonize anticorruption policies, and 
mutually recognize blacklists. As it now stands, a company that 
is debarred from the World Bank can still receive contracts 
from the other MDBs.
    The testimony that we will hear today will further inform 
our efforts to develop reauthorization legislation that I will 
introduce shortly. The challenge of preventing waste, fraud, 
and corruption at the MDBs must be tackled with vigor. We 
welcome our distinguished witnesses, and look forward to their 
insights and their counsel.
    It is indeed a privilege to have both of you gentlemen in 
our first panel. As I have mentioned earlier, we will have a 
second panel to follow your testimony. Before that, we will 
pose questions to you. At the time the distinguished ranking 
member joins our hearing, I will recognize him for an opening 
statement. But for the moment we will proceed with testimony in 
the order that I introduced you, and that would mean, first of 
all, the Honorable Paul Speltz, and then the Honorable Mark 
Sullivan.
    Mr. Speltz.

 STATEMENT OF HON. PAUL SPELTZ, U.S. EXECUTIVE DIRECTOR, ASIAN 
             DEVELOPMENT BANK, MANILA, PHILIPPINES

    Mr. Speltz. Thank you, Mr. Chairman. First of all, a 
personal comment. Ambassador Cynthia Perry, who is a close 
friend of all of ours, Representative to the African Bank, her 
husband is extremely ill, dying, and she was here right up with 
us until yesterday, and had to fly down to Houston last night 
to be with her husband.
    The Chairman. Our thoughts will be with her and we 
appreciate the testimony that she has submitted. It will be a 
part of our record.
    Mr. Speltz. Thank you. I'm also pleased to be here with my 
colleague, Mark Sullivan. The last time we were together, we 
were going through Senate confirmation hearings, and sitting in 
the same chairs, so it's a pleasure to be with him.
    With your permission, I'd like to give a short statement, 
and provide my full statement for the record.
    The Chairman. Your written statement will be published in 
full, and that is true also for Mr. Sullivan, so that you may 
summarize and utilize the time effectively here.
    Mr. Speltz. Thank you.
    Mr. Chairman, members of the committee, I thank you for 
your invitation to come and speak with the committee today on a 
subject that is fundamental to poverty reduction in Asia, and 
at the very core of sustainable development. Corruption is 
illegal, unethical, and inefficient. The Asian Development Bank 
must call corruption by its name, and take steps to prevent it 
and punish those who perpetrate it.
    In an environment of scarcity, every dollar lost to waste, 
fraud, and poor governance, is a dollar not invested in health 
care, clean water, education, critical infrastructure, and 
other essential services. My goal is to make the Asian 
Development Bank a more results-driven and accountable 
institution. This means not only rewarding countries for good 
performance, but ensuring that the ADB makes the most efficient 
possible use of donor resources. This means full transparency, 
and protecting the shareholders of this institution, and the 
contributions they've made to it.
    Since becoming U.S. Executive Director to the ADB in 2002, 
I have made internal governance reform, and fighting corruption 
top priorities. This committee may recall in my confirmation 
testimony here in June 2002, in which, when asked by Senator 
Sarbanes, even before I relocated to Manila, I stressed the 
importance of anticorruption efforts at the Asian Development 
Bank. That effort continues to this day. I have also made 
frequent visits to Capitol Hill to meet with congressional 
staff on anticorruption issues, and I hope to continue this 
dialog for as long as I am in my current position.
    I was also pleased to host, at ADB last summer, a senior 
staff from this committee who was looking into these issues, 
and today, I again extend the invitation to any others who want 
to visit the ADB in Manila.
    In the past few years, the ADB has made significant 
progress in opening its operations to outside scrutiny, 
strengthening its anticorruption capability, and promoting good 
governance in borrowing countries. Lending for Good Governance 
grew 50 percent last year, and the weight given to governance 
in the country allocation formula for the Asian Development 
Fund was substantially increased. A growing number of bank 
projects and country papers specifically address the risk of 
corruption and government's ability and willingness to deal 
with it. In 2004, the Bank halted disbursement on two loans for 
Indonesia because of corruption concerns. But these actions, 
while positive, are only the first steps in the right 
direction.
    My Office has been, and will continue to be, at the 
forefront of advancing these reforms. At the institution level, 
we hope the ADBs Integrity Division, which was formerly called 
the Anti-Corruption Unit, become even more proactive in 
addressing allegations of fraud and abuse.
    In the next few days, the Bank will begin implementation of 
a new, public communication policy that fundamentally changes 
the types of information made available about ADB operations, 
and how that information is made available and useful to all 
stakeholders. The new public communication policy will require 
full disclosure of the ADB budget, Board minutes, and Board 
schedule, and will continue the practice of publishing an 
annual report on corruption investigations. This new policy 
also satisfies many other elements of transparency language in 
section 581 of the 2004 appropriations legislation, which this 
committee crafted.
    While this is another step in the right direction, the 
United States will continue to press for even greater 
transparency in the years ahead. At the project level, we would 
like anticorruption safeguards built into more project 
documents, stricter sanctions for those who violate them, and 
more spot procurement audits out in the field. Projects 
recently approved by the Asian Development Bank Board in 
response to the tsunami disaster, contain the most sweeping and 
most advanced safeguards to date. However, these safeguards 
need further integration into all of the Bank's operation.
    Internally, the ADB has bolstered the resources and staff 
available to its Integrity Division, which investigates 
corruption, and has doubled the number of procurement audits. 
As a result of U.S. advocacy, the 2005 budget for the Auditor's 
General Office was increased by 19 percent. As part of these 
efforts, I have served on the Audit Committee of the Board of 
Directors for the last 2\1/2\ years, and have helped turn that 
Committee into a more effective instrument for oversight. The 
Committee meets more frequently--once a month on average--as 
opposed to three times per year, when I first arrived, and when 
appropriate, without the participation of Bank management.
    It reviews the audit report of the Bank's external 
auditors, and monitors management's implementations of its 
recommendations. The Committee works very closely with the 
Office of the Auditor General, of which the Integrity Division 
is a part, and it has helped that Office become a more active 
agent for promoting internal governance. Recently, the Office 
began a review of internal procurement rules, and it has 
sponsored regular corruption and fraud awareness workshops for 
all new incoming staff at headquarters, and for staff, a 
selective resident missions which, for example, in the year 
2004, included instructions in Bangladesh, Pakistan, and 
Uzbekistan.
    All of these elements are critical, but we believe much 
more can be done. We would like to see a more proactive and 
powerful role for ADB's Integrity Division, including a further 
increase in the number of procurement audits. This will require 
more resources, but it is an investment that will yield 
significant dividends.
    Whistleblower protections also need to be strengthened to 
encourage staff to continue to report allegations of fraud. ADB 
can, and should, establish an important deterrent by publishing 
the names of debarred firms and individuals, and by 
automatically disqualifying those firms debarred by other 
financial institutions. We would like ADB to work with other 
MDBs, in the future, on a set of tough, uniform anticorruption 
standards.
    At the country level, we hope to see assistance for good 
governance and anticorruption expanded, and at the project 
level, a greater willingness to cancel loans when corruption is 
detected.
    Mr. Chairman, to reiterate and to close, I am fully 
committed to this agenda, and will continue to exercise the 
leadership and the influence of the United States to ensure 
success. Thank you for your time and consideration this 
morning.
    [The prepared statement of Hon. Speltz follows:]

 Prepared Statement of Paul W. Speltz, U.S. Executive Director, Asian 
              Development Bank (ADB), Manila, Philippines

                              INTRODUCTION

    Mr. Chairman, Ranking Member Biden, members of the committee, I 
thank you for your invitation to come and speak with the committee 
today on a subject that is fundamental to poverty reduction in Asia and 
is at the very core of sustainable development.
    The goal of my office has been, and continues to be, to make the 
Asian Development Bank a more results-driven institution. This means 
not only rewarding countries for good performance, but ensuring that 
the ADB makes the most efficient possible use of its resources. This 
means full transparency and protecting the shareholders of this 
institution and the investments they have made in it. Corruption is 
illegal, unethical, and inefficient. In an environment of scarcity, 
every dollar lost to waste, fraud, and misgovernance is a dollar not 
invested in health care, clean water, education, critical 
infrastructure, and other essential services. This a human tragedy for 
the intended recipients in developing countries and a waste of taxpayer 
money in shareholder countries.
    Since becoming U.S. Executive Director of the ADB in 2002, I have 
made internal governance reform and fighting corruption top priorities. 
The committee will recall my confirmation testimony here in June 2002 
in which, when asked by Senator Sarbanes, even before I relocated to 
Manila, I stressed the importance of anticorruption efforts at the ADB. 
I have also enjoyed my frequent consultations with congressional staff 
on anticorruption issues and hope to continue this dialog for as long 
as I am the U.S. Executive Director. A senior staffer from the Senate 
Foreign Relations Committee, Jay Branegan, visited my office in August 
2004, and I would be happy to extend an invitation to others that might 
wish to visit the Bank in Manila.
    The ADB has made significant progress in opening its operations to 
outside scrutiny, strengthening its anticorruption capability, and 
promoting good governance in borrowing countries. But these actions, 
while positive, are only first steps. My office has been, and will 
continue to be, at the forefront of advancing these reforms. At the 
institutional level, we expect that the ADB's Integrity Division 
(formerly Anticorruption Unit) will become even more proactive in 
addressing allegations of fraud and abuse. The Bank's new public 
communications policy is a step in the right direction, and we will 
continue to press for even greater transparency. At the project level, 
we would like anticorruption safeguards built into more project 
documents, stricter sanctions for those who violate them, more ``spot'' 
procurement audits, and a greater willingness to cancel loans where 
corruption is detected. And at the country level, we want to see 
lending for good governance expanded.
    Let me be more specific.

                         INSTITUTIONAL EFFORTS

    Over the last year, the Bank has made significant strides toward 
becoming more open and accountable at the institutional level.
    As a result of U.S. encouragement, the Audit Committee of the Board 
of Directors is now a more effective instrument for oversight. The 
Committee meets more frequently--once a month as opposed to three times 
per year--and, when appropriate, without the participation of Bank 
management. It reviews audit reports from the Bank's external auditors 
and monitors management's implementation of their recommendations. The 
United States has led efforts to make the Office of Auditor General a 
more active agent for improving internal governance. Recently, the 
Office began a review of internal purchasing rules and it has sponsored 
regular corruption and fraud awareness workshops for incoming staff at 
headquarters and for staff at selected resident missions, which in 2004 
included Bangladesh, Pakistan, and Uzbekistan.
    To combat corruption and thwart possible misuse of resources, the 
ADB recently elevated the status of its Anticorruption Unit to an 
independent Integrity Division within the Auditor General's Office. The 
Integrity Division serves as the initial point of contact for 
allegations of fraud and corruption in ADB-financed projects or ADB 
staff. It also conducts training seminars in forensic accounting and 
other investigative techniques to ensure ADB-funded activities and 
staff adhere to the highest standards of ethical conduct and recently 
launched a series of mandatory code of ethics seminars for all staff. 
The United States is encouraging the Integrity Division to increase the 
number and scope of its procurement audits and corruption 
investigations and is working closely with management to ensure that 
there are adequate resources for the Integrity Division to carry out 
its expanding responsibilities. As a result of U.S. advocacy, the 2005 
budget for the Auditor General's Office was increased 19 percent. The 
ADB was the first MDB to post on its Web site an annual report 
summarizing corruption investigations.
    The Bank recently decided to debar corrupt firms from all ADB-
sponsored activities, not just procurement, and we will press for 
further enhancements in the months ahead. The ADB should also move 
toward publishing a list of debarred firms. We will continue to urge 
the ADB to work with other MDBs on a uniform set of ``state-of-the-
art'' standards encompassing ethics, procurement, and anticorruption.
    Progress is also being made on creating an institutional culture 
that promotes transparency. As a result of strong U.S. advocacy, the 
ADB has drafted a new public communications policy that substantially 
increases the presumption of disclosure and includes several of the 
objectives from the transparency language in section 581 of Division D 
of the FY 2004 Consolidated Appropriations Act, which this committee 
helped to craft. Among other things, the ADB's new policy will make 
public the minutes of Board discussions and summaries of Board 
discussions of policy and strategy papers. But it also goes much 
further. The public will also have access to a rolling, 3-week schedule 
of Board of Directors' meetings, country performance ratings, and a 
full version of the ADB budget.
    Those affected by ADB policies should have a strong voice in the 
policy process. In this light, we are pleased the Bank has taken 
significant steps to become more responsive to the concerns of civil 
society. In 2004, the ADB established a new inspection mechanism to 
address the concerns of persons affected by ADB projects. The new 
mechanism consists of a Special Project Facilitator who will focus on 
informal problem-solving and a Compliance Review Panel, which will 
focus on investigating alleged violations of the ADB's operational 
policies and procedures. The Compliance Review Panel reports directly 
to the Board of Directors. In 2004, the Compliance Review Panel 
initiated new investigations of two projects and monitored 
implementation of remedial measures for affected populations on a third 
project. The 2005 ADB budget includes a 12-percent increase in funding 
for the Compliance Review Panel.
    Accountability is also promoted through the Operations Evaluation 
Department or OED. The OED evaluates the effectiveness of the Bank's 
operations at the project, sector, and country level, and assesses the 
contribution of those resources to a country's overall development. As 
a result of strong U.S. advocacy, a number of important reforms were 
made last year in the operation of the OED. The OED now reports 
directly to the Board rather than through the President and the 
appointment of the head of the OED is a decision of the board, upon 
nomination by the President. The OED's work program is subject to Board 
approval and the OED has unfettered access to all information and 
individuals it deems necessary to fulfill its work program.

                         PROJECT-LEVEL EFFORTS

    The ADB has a number of tools to reduce the risk of corruption in 
project design and implementation.
    On the prevention side, we would like staff to take greater 
advantage of their consultations with executing agencies and local 
contractors to address corruption head-on and recommend improvements in 
design that mitigate fraud. An increasing number of projects include 
strict anticorruption safeguards including, most recently, the 
subregional transport facilitation project in Nepal, the Sri Lanka 
tsunami rehabilitation project, and the Bangladesh independent 
anticorruption commission project. We would like to see more.
    We encourage project staff to be more proactive in reporting 
allegations of corruption to the Auditor General. The Bank uses an 
array of measures to protect the identity and confidentiality of 
whistleblowers including the use of a special telephone line to report 
allegations of corruption and secure fax lines and e-mail addresses for 
staff from the Integrity Division. These protections are helpful, but 
we would like to see ADB management do more to encourage staff to come 
forward with claims of fraud and corruption and to guarantee that those 
who do will be protected. The Auditor General's Office is revising its 
Terms of Reference to further strengthen these protections.
    Encouraging ethical behavior in staff also requires the right 
incentives. The ADB is increasingly using specific targets in project 
documents to measure development outputs and it is our goal that these 
be incorporated in every set of project documents as soon as possible. 
To ensure that results are actually achieved, the United States and 
other major shareholders have pushed strongly for a system that rewards 
staff for the quality, not the quantity, of their work. As part of 
this, staff should not only be assessed on achievement of development 
outcomes, but also on how well they comply with ethical guidelines. We 
will press for these standards to be implemented in the new human 
resources policy.
    Related to this, the ADB has been actively implementing its 
administrative sanctions policy. Under this policy, the Bank rejects a 
proposal for award of contract where corrupt or fraudulent practices 
were used by the bidder, cancels the financing allocated to a contract 
if ADB determines that the beneficiary has engaged in corrupt 
practices, and debars the individual or firm from doing business with 
the ADB in the future. As a result of strong advocacy by my office and 
the Treasury Department, the ADB agreed to add two new professional 
staff to the Office of Auditor General in 2005 to strengthen its 
anticorruption oversight and to double the number of ``spot'' project 
procurement audits. In 2004, the Bank halted disbursement on two loans 
for Indonesia because of corruption concerns. We hope to see a similar 
aggressiveness in investigating allegations of corruption in other 
countries.
    Finally, ADB resident missions in each borrowing country play a 
critical role in providing oversight for project implementation. Our 
goal is to ensure they have adequate resources to provide ongoing 
project supervision and fiduciary oversight over procurement processes.

                         COUNTRY-LEVEL EFFORTS

    Goverance assessments are an integral part of every ADB Country 
Strategy and Program. These assessments measure government performance 
against an array of benchmarks including anticorruption efforts, 
institutional strength, public administration, government interference 
in the economy, and transparency. Recently, there have been greater 
efforts to cooperate with and harmonize these assessments with those of 
the World Bank. During 2004, new assessments were initiated for 
Azerbaijan, Uzbekistan, Nepal, Laos, Afghanistan, India, and Sri Lanka.
    The ADB is providing substantial amounts of assistance to help 
build accountable public-sector institutions and develop national 
anticorruption efforts at the country level. In 2004, lending for good 
governance increased 56 percent from $450 million to $700 million, and 
we expect further growth this year. Let me elaborate on a few of the 
Bank's most notable programs.
    An ADB initiative in Balochistan Province, Pakistan, is designed to 
reduce corruption by mandating third-party assessment of all projects 
and independent audits of district accounts. In Bangladesh, the ADB 
helped the national government to establish an independent 
Anticorruption Commission to investigate and prosecute cases of 
corruption and fraud. The ADB is helping the Government of Vietnam to 
develop a grievance mechanism for handling complaints about corruption 
and to strengthen the oversight role of the National Assembly. 
Technical assistance to Indonesia, Micronesia, Thailand, and Bangladesh 
has helped these countries privatize state-owned enterprises, reducing 
the corruption that often accompanies such companies.
    At the regional level, 23 countries have endorsed and drafted 
action plans as part of an ADB-OECD Anticorruption Initiative for Asia 
and the Pacific. The ADB and OECD are also working with the United 
Nations to help participating countries in Asia and the Pacific to 
ratify the U.N. Convention Against Corruption. In November 2004, the 
ADB provided $250,000 in technical assistance to help regional 
countries comply with the terms of the initiative.
    At the 2003 APEC Summit in Bangkok, leaders supported a proposal by 
the United States to establish a Cooperation Fund for Regional Trade 
and Financial Security Initiative. To date, Australia, Japan, and the 
United States have each committed $1 million to the trust fund, which 
is run out of the ADB and will support technical assistance for 
antimoney laundering, customs modernization, and port security in 
developing member countries. Treasury's Office of Technical Assistance 
has secunded an expert who is working with the ADB to implement the 
trust fund and provide expertise for other Bank programs. These efforts 
will reduce the likelihood that public and private funds will be 
appropriated for illicit purposes.
    Finally, to ensure that countries with good governance are 
commensurately rewarded, the United States and other ADB donors agreed 
last year to substantially increase the weight given to good 
governance--which includes anticorruption--in the performance-based 
allocation system for the Asian Development Fund. This system provides 
a clear incentive for countries to tackle governance issues in order to 
receive greater resources. The ADF allocations that result from the 
performance-based allocation system are made public.

                               CONCLUSION

    To conclude, Mr. Chairman, let me say how seriously I take the 
threat corruption poses to the effective development of poor countries. 
The ADB has undertaken some important initial reforms but the proof of 
success is sustained effort. Reform is needed both within the Bank, to 
ensure that the ADB establishes a zero tolerance culture for 
corruption, and in the Bank's dealings with borrowing countries. The 
ADB must be more willing to call corruption by its name, and punish 
those who perpetrate it. This will require greater ownership from 
borrowing countries and stricter sanctions for those who violate the 
public trust, whether they are ADB staff, consultants, or employees of 
executing agencies. The United States is fully committed to this agenda 
and will continue to exercise our leadership and influence to ensure 
its success.
    Thank you.

    The Chairman. Well, thank you, Mr. Speltz, for your 
testimony. I now call upon the Honorable Mark Sullivan.

 STATEMENT OF HON. MARK SULLIVAN III, U.S. EXECUTIVE DIRECTOR, 
   EUROPEAN BANK FOR RECONSTRUCTION AND DEVELOPMENT, LONDON, 
                         UNITED KINGDOM

    Mr. Sullivan. Thank you, Mr. Chairman. I welcome your 
invitation to appear before you today to report on the efforts 
of the European Bank for Reconstruction and Development to 
combat corruption.
    I share your belief in the importance of this issue, and 
have made it a priority for the U.S. Executive Director's 
Office. Financing for MDBs comes from the taxpayers' of their 
shareholder countries, and those taxpayers are entitled to the 
assurance that the MDBs will use their money in an appropriate 
and efficient manner.
    My testimony today will focus on what was accomplished in 
2004, and what we are pursuing this year. The EBRD's purpose is 
to foster transition of its countries of operation toward open 
market-oriented economies. The Bank currently conducts its 
investment activities in 27 countries that were formerly either 
a part of the Soviet Union, or the Soviet Bloc. Their histories 
have left them with a challenge when it comes to addressing and 
dealing with corruption.
    For reasons set out more extensively in my written 
testimony, the EBRD does not have the leverage with the 
governments that other multilateral development banks, which 
lend directly to governments, have. The major reason is that 
the charger of the EBRD provides that at least 60 percent of 
the EBRD's investment activities must be in the private sector. 
In 2004, 86 percent of all signed projects were in the private 
sector.
    Now, notwithstanding its relative lack of leverage, the 
EBRD actively uses its resources to address the burdens placed 
by corruption on the economies of the region. The Bank 
maintains an active policy dialog with the governments of its 
countries of operations. It publicizes the levels of corruption 
in each country by working with the World Bank on surveys, 
which assess the quality of the business environment in each of 
our countries of operations, and by focusing on that business 
environment, in our country's strategies--which are adopted 
every other year--and in which we focus on the level of 
corruption and on integrity concerns.
    The EBRD also seeks to assist the creation of an investor 
friendly, transparent, and predictable legal environment 
through its legal transition program. In addition, the EBRD 
contributed to the establishment in 2003 of the Business 
Principles for Countering Bribery, and joined with the other 
multilateral development banks last December, on the 
anniversary of the U.N. Convention Against Corruption, and 
reaffirming their shared commitment to the fight against 
corruption.
    In the context of its projects, the Bank requires covenants 
by all of its borrowers relating to compliance with applicable 
laws concerning financial crime and corruption, and the 
maintenance of associated records. Failure to comply with the 
anticorruption covenants is a material breach which will be 
penalized as vigorously as the breach of any financial 
covenant. Urged strongly by the United States, the Audit 
Committee of the Board of Directors has been increasingly 
involved in the process of assessing the systems in place for 
ensuring compliance with those covenants. One result of this 
effort is now, the EBRD must inform the Board of any waiver of 
a material condition of a loan or equity investment agreement 
with the borrower or investee.
    To promote good governance effectively in its countries of 
operation, the EBRD must make sure that its own operations are 
consistent with best practices, and we have seen progress on 
that front. In April of last year, the Board of Directors 
strengthened the Audit Committee with a revised Terms of 
Reference that formally established the Committee 
responsibilities with respect to the integrity of the EBRD's 
financial statements, the soundness of its internal controls, 
the status and performance of its internal functions of 
compliance, internal audit, project evaluation and risk 
management, and the independence, qualifications, and 
performance of the Bank's external auditor.
    While the independence of the internal functions was 
materially enhanced by the new Audit Committee Terms of 
Reference, the question of full independence remains to be 
resolved. But on a positive note, the EBRD's President now 
supports independence of that evaluation function. Where the 
Bank's practices lag the other MDBs, we anticipate the Board 
will approve a change in 2005. We've had two meetings on that 
already, there will be a meeting this Friday, tomorrow.
    In my September 20, 2004, letter to you, I wrote that the 
EBRD's existing code of conduct is outdated, and that we would 
work for the adoption of a new, revised version. The Board is 
now in the process of a new code, we anticipate its adoption in 
2005.
    The EBRD has a new Chief Compliance Officer who has 
considerable experience with FATF and anticorruption NGOs, and 
she has been engaged in integrating the compliance function 
into the every day work of the EBRD. We have proposed, and the 
Bank's President supports, increased involvement by the Chief 
Compliance Officer in project preparation process, and is 
committed to making the necessary resources available to the 
CCO.
    My Office worked with other Directors to develop an 
integrity certification that is required in every project 
document that comes to the Board. The EBRD maintains their 
telephone hotline, and a compliance inbox on its Web site for 
the reporting of allegations of fraud, corruption, and 
misconduct in the Bank's activities, or in its projects. To 
inform the public of its findings, the EBRD management has 
approved, in principle, the publication of an anticorruption 
report, the first of which is expected to be published next 
fall, I have given copies directly to the President of the 
World Banks and the ADBs annual reports, and we would hope that 
we will have, using them as a guide, a better reporting than we 
have to date on those issues.
    The CCO believes the EBRD has in place a viable 
whistleblower protection mechanism. She's made recommendations 
for improvements, and has posted whistleblower information on 
the EBRD's Internet and public Web sites. We've had meetings 
before the Audit Committee on this particular matter, and in 
the next few months the Board, as a whole, will review the 
existing procedures, and will consider areas for improvement.
    With respect to efforts to combat money laundering and the 
financing of terrorism, the EBRD has enhanced its integrity 
procedures by adding checks against the Office of Foreign 
Assets Control, and other U.S. Government lists as a part of 
its due diligence process, and EBRD now has mandatory training 
in this area for Bank staff, and has initiated training for 
bankers and regulators in its countries of operations.
    Beginning in 2003, we urged the Bank to adopt a COSO system 
of internal controls. In May of last year, prior to the annual 
meeting, management agreed to do so and has subsequently 
delivered on its promise. The internal controls are in effect 
for the Bank's 2004 financial statements, and as a part of this 
project, the Bank has also completed an operational risk self-
assessment exercise, and established a framework for the 
continued development of operational risk identification 
measure mitigation and management capacity. I should also note 
that reputational risk, Mr. Chairman, is part of the 
operational risk review and implementation, and finally, the 
Bank is in the process of hiring an operational risk manager.
    The EBRD's public sector operations frequently involve the 
procurement of goods, civil works, and services by governmental 
entities. The EBRD, with the assistance of outside consultants, 
has developed training for new staff in the basic principles of 
public sector procurement. Last month, the EBRD also took 
additional steps to strengthen oversight of its public 
procurement through a greater involvement of the Chief 
Compliance Officer, and through expanded reviews.
    Since my arrival, the U.S. Director's Office has made 
improvements in EBRD governance and anticorruption measures the 
top priority. In the past year we've seen progress, and we 
think there's a foundation in place for further progress this 
year. We intend to push for greater independence of the 
internal functions, increased resources to enable them to take 
on more responsibility, and a continued focus at all levels on 
integrity issues.
    Mr. Chairman, our goal is, and has been, for the EBRD to 
have a corporate culture and environment that features enhanced 
corporate governance, internal controls and compliance, and 
that promotes good governance in its countries of operations. 
My office is committed to continuing our efforts to that end. 
Thank you, Mr. Chairman.
    [The prepared statement of Hon. Sullivan follows:]

   Prepared Statement of Mark Sullivan III, U.S. Executive Director, 
   European Bank for Reconstruction and Development, London, United 
                                Kingdom

    Mr. Chairman, Ranking Member Biden, members of the committee, I 
welcome your invitation to appear before you today to report on the 
efforts of the European Bank for Reconstruction and Development 
(``EBRD'') to combat corruption. I share your belief in the importance 
of combating corruption in the international development system and 
have made this issue a priority for the Office of the U.S. Executive 
Director at the EBRD.
    The Under Secretary of the Treasury for International Affairs, John 
B. Taylor, testified before this committee on July 21, 2004, that the 
administration takes very seriously the fight against corruption and 
that we all have an obligation to help ensure that the multilateral 
development banks (MDBs) undertake effective anticorruption efforts. 
The capital comes from the taxpayers of their shareholder countries, 
and those taxpayers are entitled to the assurance that the MDBs will 
use those moneys in an appropriate and efficient manner. As Under 
Secretary Taylor noted in his testimony, the U.S. Treasury and the U.S. 
Director's Office at the EBRD work together to promote anticorruption 
measures at the Bank. Our Office is committed to advancing integrity, 
anticorruption, and transparency efforts at the EBRD.
    The EBRD's President, Jean Lemierre, sent a July 16, 2004, letter 
to the committee describing the EBRD's anticorruption initiatives. My 
September 20, 2004, letter to the chairman also described some of those 
efforts and reaffirmed our continuing support for the EBRD's efforts to 
combat corruption. My testimony today will touch upon matters referred 
to in my and President Lemierre's letters, focusing on what was 
accomplished in this important area in 2004 and what my Office is 
pursuing this year.
    Our goal is, and has been, for the EBRD to have a corporate culture 
and environment that features enhanced corporate governance, internal 
controls, and compliance and that promotes good governance in its 
countries of operations. While there was progress toward that goal in 
2004, it is clear that there is more that we and the EBRD can do.

                         THE EBRD'S OPERATIONS

    The EBRD currently conducts its investment activities in 27 
countries that formerly were either a part of the former Soviet Union 
or of the Soviet bloc. The Agreement Establishing the European Bank for 
Reconstruction and Development requires that it apply sound banking 
principles in all its operations, and the Bank makes no concessional 
loans. The agreement also requires that at least 60 percent of the 
EBRD's investment activities be in the private sector. Over the 14-year 
life of the Bank, 72 percent of its signed agreements for debt and 
equity financing have been in the private sector, and in 2004, the 
figure was 86 percent.
    The EBRD's purpose is to foster the transition of its countries of 
operation toward open market oriented economies. Eight of the EBRD's 
countries have such economies and are now members of the European 
Union. An additional two countries with open market oriented economies 
are expected to join the EU in 2007, and a third country may join in 
2008. Their histories, and those of the 16 other countries of operation 
have left all the EBRD's countries of operation with a challenge when 
it comes to addressing and dealing with corruption issues.
    Unlike those MDBs that lend regularly to governments and that have 
the option of extending structural or sectoral adjustment loans, the 
EBRD does not have significant leverage with the governments of its 
countries of operation. In addition, some of the countries do not 
engage in sovereign borrowing at this time because of IMF assessments 
of debt sustainability. In other cases, the EBRD's financial operations 
have been restricted to private sector projects only as a result of the 
countries' lack of commitment to the economic and political principles 
set forth in the Agreement Establishing the European Bank for 
Reconstruction and Development. And, of course, there is the Bank's 
unique approach to transition through private sector investment which 
limits direct leverage with the governments of all of the EBRD's 
countries of operations.
EBRD Governance and Anticorruption Efforts at the Country Level
    Notwithstanding its lack of leverage with the governments of its 
countries of operation relative to that of the other IFIs, the EBRD 
uses its resources to work with those governments to address the 
burdens placed by corruption on their economies and the transition 
process. It is the EBRD's view that corruption and fraud cripple 
progress and poison the investment climate and that a corrupted 
investment climate limits the effectiveness of the EBRD's private 
sector focus on transition. Consequently, the EBRD maintains an active 
policy dialog on the subject with the governments of its countries of 
operation and supports that dialog in a variety of ways.
    One method of support comes from publicizing the levels of 
corruption in each country. The EBRD and the World Bank created the 
Business Environment and Enterprise Performance Survey (``BEEPS''), 
which is designed to generate comparative measurements of a range of 
interactions between business entities and the state including 
corruption political influence, and regulation. The initial BEEPS in 
1999 interviewed 4,000 firms in 22 transition countries. By 2002, the 
number of firms interviewed was 6,000, and the BEEPS covered all of the 
EBRD's countries of operation other than Turkmenistan. In 2005, the 
EBRD and the World Bank will conduct a third round of BEEPS that will 
include interviews of 8,000 firms in all of the EBRD's countries of 
operation. This latest round is intended to focus on the poorest 
countries of operation. The results of the BEEPS can be found on the 
Web sites of the EBRD and the World Bank. Following the two earlier 
reports, the EBRD analyzed the results in its annual Transition Report, 
which included a table on the frequency and extent of the ``bribe tax'' 
in each country of operation.
    Additional focus on the problem of corruption resulted from the 
2003 establishment of Business Principles for Countering Bribery. The 
EBRD, working with Transparency International and Social Accountability 
International, other NGOs, business groups and trade unions, led the 
effort to establish the Principles. On the anniversary of the United 
Nations Convention against Corruption in December of last year, the 
EBRD joined with the other MDBs in reaffirming their shared commitment 
to the fight against corruption in their respective operations and 
projects.
    Every other year, the EBRD adopts a Country Strategy for each 
country of operation, which contains a business environment section 
that describes, among other things, the state of corruption and levels 
of governance. The EBRD posts each strategy on the Bank's Web site, and 
in 2004 had the strategies translated into the official native language 
of 14 countries of operation.
    The EBRD continues to operate its Legal Transition Program, which 
addresses corruption and good governance issues and which seeks to 
assist the creation of an investor-friendly, transparent and 
predictable legal environment to improve the investment climate in the 
Bank's countries of operations. By advancing improvements in governance 
and regulatory frameworks, the EBRD helps its countries of operations 
to reduce the opportunities for corruption.
    The EBRD developed and has conducted its Corporate Governance 
Sector Assessment Project since 1999. It assesses the quality of 
corporate governance legislation vis-a-vis the standards set by the 
OECD's Principles of Corporate Governance. The assessment is conducted 
every other year, and the Bank will conduct its third survey this year 
and will publish it in 2006. Country specific reports can be accessed 
from the EBRD's Web site. Good legislation is one thing, and 
implementation is another. Therefore, since 1995, the Bank has annually 
evaluated implementation of these laws in its Legal Indicator Survey. 
This information can be accessed on the Web site. The Legal Transition 
effort extends to a judicial capacity initiative in the early 
transition countries. This year there will be a focus on building 
judicial capacity in Georgia.
    Program activities in 2004 included:

   Hosting a Legal Roundtable on Promoting Fair Competition 
        during its April 2004 Annual Meeting. The roundtable stressed 
        the importance of sound competition policies and institutions 
        to facilitate transition to the market economy and attract 
        foreign investment;
   Publication in April 2004 of the EBRD's annual report, Law 
        in Transition, which focused on competition law and policy; and
   Publication in the autumn of 2004 of an online supplement to 
        Law in Transition, LiT online, which focused on how to 
        establish a favorable legal environment in the early transition 
        countries in the region, namely Azerbaijan, Armenia, Georgia, 
        Moldova, Kyrgyzstan, Tajikistan, and Uzbekistan.

                  THE EBRD'S INSTITUTIONAL GOVERNANCE

    To promote good governance effectively in its countries of 
operation the EBRD must make sure that its own operations are 
consistent with best practices, and 2004 saw progress on the governance 
and anticorruption fronts. In April, the Board of Directors approved 
new terms of reference for the Audit Committee for the first time in a 
decade. The effect of this approach was to strengthen Audit Committee 
authority and responsibility. The United States took a leading role in 
the effort to modernize the terms of reference on the grounds that an 
unregulated institution using taxpayer dollars has a special 
responsibility to examine the state of its own governance measures on a 
regular basis in light of best private sector practices and to adopt 
those practices in the conduct of its own affairs.
    The Audit Committee Terms of Reference formally set out for the 
first time a number of Committee responsibilities relating to:

   The integrity of the EBRD's financial statements and its 
        accounting, financial reporting, and disclosure policies and 
        practices;
   The soundness of its internal controls regarding finance and 
        accounting measures and their effective implementation;
   The status and performance of the Bank's compliance, 
        internal audit, project evaluation and risk management 
        functions, and their ability to perform their duties 
        independently; and
   The independence, qualifications, and performance of the 
        Bank's external auditor.

    Today, the Audit Committee has the explicit authority to take a 
range of actions with respect to the external auditors, from 
participation in the selection process and compensation to the scope of 
each year's proposed audit and the review of the accuracy and integrity 
of the Bank's financial statements and other key financial disclosures 
prior to their release. The Committee is to be a participant in the 
discussion and resolution of any disagreements between management and 
the external auditors. To date, none have arisen. The Terms of 
Reference formally codify the Committee's right to meet with the 
external auditor, the Internal Auditor, the Chief Compliance Officer 
(``CCO'') and the Director of the Project Evaluation Department without 
management being present, and it has exercised that right on a regular 
basis.
    The Audit Committee must periodically review and evaluate Internal 
Audit, Project Evaluation and the Chief Compliance Officer 
(collectively, along with Risk Management, the ``Internal Functions'') 
to assess whether: Their roles are appropriate for the Bank's purposes 
and needs; their policies, procedures, methodologies, budgets, and 
staffing resources are adequate for them to perform their roles; and 
they are performing to expectations. The Committee must be consulted 
prior to the engagement of the heads of the Internal Functions (except 
the head of Risk Management), and the Bank's President can remove them 
only in accordance with the guidance of the Board of Directors given in 
executive session.

          INDEPENDENCE AND COORDINATION OF INTERNAL FUNCTIONS

    While the independence of the Internal Functions has been enhanced 
by the new Audit Committee Terms of Reference, the question of actual 
independence remains to be fully resolved. This is especially the case 
of the EBRD's evaluation function where the Bank lags behind members of 
its peer group which have the function reporting diectly to directors 
who make the decisions as to hiring and removal and the function's 
budget. Then Deputy Secretary of the Treasury, Samuel W. Bodman, 
pointed out in his address to the Governors at the EBRD's 2004 annual 
meeting:

          The Bank's promotion of improved legal structures and good 
        corporate governance contributes to improvements in the 
        business environments of its countries of operation. It seems 
        logical--and, we would argue, is required--that the EBRD itself 
        should adhere to the highest standards of corporate governance. 
        The EBRD, like other international financial institutions, is a 
        steward of the taxes paid by the citizens of its members and, 
        as such has significant and serious responsibilities to its 
        shareholder nations.
          And so, we are pleased that the Bank has committed to 
        establish a strong framework of internal controls and 
        assessment procedures for the 2004 financial statements and 
        beyond. This commitment will serve as a powerful example to 
        other international financial institutions.
          Yet our work is not done. More progress is needed, 
        particularly on the independence of key individuals and the 
        improvement of transparency and disclosure policies.

    My Office has been, and will continue to be, a strong proponent of 
the independence of the Internal Functions. The Bank's President now 
expresses support for independence of the evaluation function, and we 
anticipate the Board will approve a change in 2005. We, and other 
members of the Audit Committee, do not believe that management's 
initial proposals for guaranteeing the independence of the evaluation 
function are sufficient, and we will be working to improve the final 
product. We will continue to push this year, in the Audit Committee, 
for complete independence for the evaluation function and for further 
independence of the other Internal Functions.
    Of course, having good policies and procedures in place is only the 
first step in a comprehensive corporate governance and anticorruption 
program. Coordination of the Internal Functions and making use of their 
individual activities are important. For example, the Internal Auditor 
reported to the Audit Committee that an examination of compliance by 
bankers with the Bank's integrity check requirements found failures to 
comply fully. That has led to a number of improvements which the United 
States has promoted and supported. These include development by the CCO 
of an integrity training program which is required for all directors, 
officers, and employees of the EBRD. I participated in the pilot 
program and in the final program as well. To date, virtually all 
employees, directors, and management have completed the ``Integrity 
Matters'' training course, which is mandatory for all new employees.
Code of Conduct
    In my September 20, 2004, letter to you, I wrote that I, and my 
fellow Audit Committee members, believed that the EBRD's existing Code 
of Conduct was outdated and that we would work for adoption of a new, 
revised version. The Board is in the process of considering a new Code 
of Conduct to replace the existing Code, which was adopted in 1991 and 
which has not been formally amended since. We anticipate adoption of a 
new Code of Conduct in 2005.

                     THE EBRD'S COMPLIANCE FUNCTION
 
   The EBRD's Office of the Chief Compliance Officer (``OCCO'') is 
charged with promoting good governance and ensuring that the highest 
standards of integrity are applied to all activities of the Bank in 
accordance with international best practice. It deals with conflicts of 
interest, corruption, confidentiality, and money laundering.
    The EBRD did not have a compliance officer before 2000, and since 
then the Bank has had three CCOs and an Acting CCO. In June 2004, the 
Bank hired its third CCO after an extensive search lasting more than a 
year from the time the prior incumbent gave notice of his intention to 
leave the EBRD. Notwithstanding the Bank's initial record, there are 
grounds for optimism that the new CCO will build on the record of 
accomplishment of the predecessor Acting CCO and will establish an 
efficient and well run compliance function which is part of the EBRD's 
everyday operations. She has extensive experience in creating a 
compliance function at the OECD where she was head of the Anti-
corruption Division and led the drafting and implementation of a 
mechanism to monitor an international treaty on corruption. She brings 
a long record of experience with the Financial Action Task Force, or 
FATF, and with anticorruption NGOs.
    Since her arrival, the CCO has been engaged in bringing on board 
staff with which to meet the considerable demands on the Office in 
making the compliance function a part of the everyday work of the EBRD. 
The OCCO is now responsible not only for handling all matters related 
to fraud and corruption, but also for the functioning of the Bank's 
Independence Recourse Mechanism which enables individuals outside the 
Bank to submit complaints concerning individual projects. In assessing 
a complaint, the CCO can recommend a compliance review (i.e., has EBRD 
complied with certain policies) or a problem-solving initiative, or 
both or neither. Since it was launched in mid-2004, there has been only 
one complaint submitted, and the CCO determined that it was not covered 
by the IRM procedures.
    At the moment, the CCO reviews some, but not all, projects 
presented to the Board. This review includes checking the integrity of 
the beneficial owners, promoting more transparent ownership structures, 
and reviewing corporate governance standards and practices. We have 
been promoting further CCO participation in the project approval 
process to address any integrity concerns with the persons or entities 
involved in projects. At a recent Board meeting, the President 
supported increased involvement by the CCO in the project preparation 
process. This will require additional resources, and there is general 
support within the Audit Committee--the terms of reference of which 
require it to review the adequacy of resources for the Internal 
Functions--for greater involvement and for providing the necessary 
additional resources to the CCO. Our Office will continue to push for 
that involvement in every project that is submitted to the Board for 
its consideration and will support providing the additional resources 
necessary for that complete involvement to be effective. The Bank's 
President has committed to us that he will make the necessary resources 
available to the CCO, and this commitment was reiterated by the 
management before the full Board when it considered the 2005 budget. 
The Audit Committee will receive a status report from the CCO in May 
and will review the adequacy of OCCO's resources.
    Given our concern that each proposed project should have undergone 
a thorough integrity review prior to its submission to the Board and 
our belief in the importance of accountability, we developed an 
integrity certification and worked successfully with other shareholder 
offices to require the inclusion of the certification in all project 
documents. It says: ``all actions required by applicable EBRD 
procedures relevant to the prevention of money laundering, terrorist 
financing, and other integrity issues have been taken with respect to 
the project, and the project files contain the integrity checklists and 
other required documentation which have been properly and accurately 
completed to proceed with the project.'' The CCO has determined that 
intentionally misleading the Board constitutes misconduct, and a false 
certification certainly should have consequences for those responsible.
    We have urged the Bank management to compile and publish an annual 
anticorruption report and have provided them with copies of the reports 
of the Asian Development Bank and the World Bank. We have requested 
that statistical summaries and case studies of fraud and corruption 
cases pursued by the Bank's investigations unit be part of any such 
report. EBRD Management has approved in principle the production and 
publication of an anticorruption report, and the CCO is currently 
putting together an internal working group which will meet to consider 
the report's scope and format. The first EBRD anticorruption report is 
now scheduled to be published in late fall. Our goal in 2005 is to have 
clear and comprehensive reporting of the Bank's anticorruption efforts 
which is easily available to the public.
    More broadly, we do not believe that the EBRD's public disclosure 
practices meet the test of best practices for MDBs. We voted against 
the Public Information Policy in 2003 for that reason and we continue 
to press for more information to be made public on a timely basis. For 
example, we consistently argue that the Country Strategy Development 
process would be enhanced by making drafts available for public comment 
and that summaries of minutes of Board meetings should be made public 
as well. (U.S. votes on projects are made available on the U.S. 
Treasury Web site.) Our support for enhanced public disclosure is not 
shared by all directors, and we will likely not be able to effect 
material improvements until 2006 when the next scheduled review will 
take place.
    In sum, while important work remains, the requirement for inclusion 
of the integrity certification, directors' support for the new CCO and 
discussion of integrity matters in Board and Audit Committee meetings 
evidence an increased Board interest in integrity issues.

     ALLEGATIONS OF FRAUD AND CORRUPTION WHISTLEBLOWER PROTECTIONS

    The EBRD maintains a telephone hotline for reporting of allegations 
of fraud, corruption, or other misconduct in Bank activities or 
projects. An independent contractor operates the hotline. Access to the 
hotline is toll free, and use is confidential. All matters reported to 
the hotline are referred to OCCO for followup and investigation. The 
EBRD's Web site sets out detailed information about the hotline and 
compliance issues at the Bank, including the access codes for toll-free 
reporting on a country-by-country basis. Collect calls can be made from 
most of the EBRD's countries of operations. The EBRD keeps statistical 
records of the use of the hotline. The contractor provides monthly 
reports on the use of the hotline. The EBRD's Compliance In-Box, which 
can be accessed through the EBRD's Web site, appears to be the 
preferred method of making fraud and corruption allegations. In 2004, 
there were no reports of corruption or misconduct to the hotline; 
however, the In-Box receives about one complaint per month relating to 
internal staff misconduct or to procurement.
    The EBRD has a whistleblower protection mechanism, which is based 
upon three separate, but inter-related, procedures. EBRD employees have 
a duty to report suspected misconduct to the CCO, and it is the CCO's 
responsibility to assess if such allegations warrant further 
investigation. If an investigation into an allegation is warranted, the 
CCO commences a fact-finding inquiry and upon its conclusion, makes a 
recommendation to the Vice President for Human Resources as to whether 
a formal accusation of misconduct should be raised. While EBRD makes 
every effort to protect the identity of a whistleblower, it does not 
guarantee anonymity because disclosure may, in some cases, be required 
in order to proceed with an investigation. Whistleblowers are protected 
against retaliation and the CCO will respond to any employee who acts 
to retaliate against a whistleblower, which has not been needed so far. 
In addition, a whistleblower can pursue an independent course of action 
via the EBRD's Administrative Tribunal.
    The Board recently met with the CCO to discuss the Bank's 
whistleblower protections. The CCO stated that EBRD has in place a 
viable whistleblowing protection mechanism. Nevertheless, the CCO has 
made recommendations for improvements. The CCO has recommended that 
EBRD should be more proactive in making employees aware of their 
reporting duties and protections. EBRD has posted a whistleblower 
statement with questions and answers on the Intranet with links to the 
three relevant procedures and on the Internet. The CCO's view, which we 
support, is that the whistleblower mechanism is evolutionary and should 
be kept under review to ensure it meets best practice. In the next few 
months, the Bank will also review the procedures that form the 
whistleblower mechanism. At that time we will consider areas for 
improvement.

        ANTIMONEY LAUNDERING AND ANTITERRORIST FINANCING EFFORTS

    The EBRD applies measures for combating terrorist financing in both 
its public and private sector operations. These measures are based on 
detailed due diligence procedures and internal training programs. In 
addition, the EBRD promotes more effective antimoney laundering and 
antiterrorist finance practices with both the banks and national 
authorities in the Bank's countries of operation.
    The EBRD has ``know your customer'' procedures, and the 
responsibility for their implementation falls on the Operation Team for 
each of the Bank's investment projects. Operation Teams must perform 
extensive due diligence on the integrity of all prospective clients. 
Integrity checks undertaken before committing any funds include 
verification that no client, or prospective client, is on the United 
Nations Security Council lists of entities and individuals suspected of 
supporting terrorist activities. The use of the Office of Foreign 
Assets Control (OFAC) list is a required part of the due diligence 
process, and the CCO has worked with EBRD's Banking and Risk Management 
division to revise the current procedures in order to ensure that 
several important lists, including OFAC's and those of other U.S. 
Government agencies, are included as part of the due diligence process.
    Because operations with financial institutions pose additional 
risk, the Bank requires additional due diligence before proceeding with 
a financial institutions project. Procedures for financial institutions 
include an Anti-Money Laundering Red Flag Checklist to assist the 
Bank's team to properly assess the client's antimoney laundering 
policies and procedures, including counterterrorist financing 
activities. Key requirements, such as know your customer, staff 
training, reporting suspicious transactions, recordkeeping, and the 
role of the antimoney laundering compliance officer, should be in place 
and properly implemented by the prospective client before any 
disbursement. The nature of the specific requirements for a given 
client is tailored to reflect the perceived risks. Some requirements 
(e.g., training for all staff members) could be fully achieved at a 
later stage of project implementation, such as during the disbursement 
phase, if that would not materially affect the soundness of the 
client's overall antimoney laundering framework.
    Moreover, to address the specific risks emerging in the Bank's 
financial institutions portfolio of operations, the Bank's standard 
loan agreement includes an affirmative covenant committing the borrower 
to institute measures to prevent money laundering/terrorist financing 
when using EBRD funds. After the borrower signs this certification 
potential money laundering/financing terrorism risks are assessed by 
the EBRD at each periodic project review. The Bank typically conducts 
project reviews at least semiannually and does so more frequently if a 
project is on the EBRD's watch list.
    Where there remain unanswered questions after completion of the 
EBRD's standard due diligence procedures, the Bank has four 
investigative firms on retainer under a framework agreement to conduct 
additional investigations. The decision to use an outside firm can be 
initiated by the Credit/Transaction Risk Unit in the Risk Management 
Vice Presidency, the OCCO, or the Banking Department, which can use 
their services not only for AML/ATF purposes, but whenever there are 
integrity or reputational risk concerns. In 2004, the Bank commissioned 
67 investigations. In exceptional circumstances where an investigative 
firm, which is not a party to the framework agreement, has special 
expertise or knowledge, the Bank can retain the services of that firm.
    The EBRD provides antimoney laundering/counterterrorist financing 
(AML/ATF) training for staff as well as for the banks with which it 
does business and governmental authorities. In the past, the Bank's 
Risk Management section regularly organized AML/ATF seminars for staff 
and conducted three seminars in 2004. Responsibility for this education 
effort now lies with the CCO, and during 2005, participation in a new 
AML/ATF training course will be compulsory for all the staff members 
involved in the development of projects.
    The EBRD seeks to improve AML/ATF procedures in its countries of 
operation through engagement with banks and the national authorities. 
The EBRD has two primary objectives. First, the EBRD wants the 
authorities to impose realistic obligations on banks instead of 
extensive reporting requirements with no followup of the suspicious 
transactions reported. Second, it wants bank managements to commit 
their organizations to actively pursue AML/ATF measures rather than 
passively comply with government regulations.
    In late 2003, the EBRD organized three pilot seminars in 
Kazakhstan, Macedonia, and Bosnia-Herzegovina to promote better 
understanding of sound AML and ATF procedures. These seminars indicated 
that training is needed to nurture an almost nonexistent communication 
channel between banks and AML/ATF authorities and to provide them with 
the benefit of lessons learned from Western banks and financial 
intelligence units.
    Following the pilot seminars, the EBRD has designed, with EU and 
Swiss Government support and financing, a =1 million training 
initiative to raise awareness of the importance of a proper AML/ATF 
legal framework at the political level and to help banks to design, 
review, and improve their policies. The training, involving experts 
from large Western banks known for their proactive work on AML/ATF, 
will take place in the region to ensure that the people responsible for 
AML policies in the banks can attend. The CCO expects to roll out 
seminars by July 2005 and will focus on the poorer countries of 
operation, where practices are least developed. Attendance at the 
seminars will not be confined to EBRD clients.

             ADOPTION OF A COSO SYSTEM OF INTERNAL CONTROLS

    Beginning in 2003, we urged the Bank to adopt a COSO system \1\ of 
internal controls over its financial reporting. In May of last year, 
management agreed to do so and committed that the internal controls 
would be in effect for the preparation and publication of the Bank's 
financial statements for 2004. At the May 2004 annual meeting, Deputy 
Secretary Bodman acknowledged management's commitment and said:
---------------------------------------------------------------------------
    \1\ COSO (Committee of Sponsoring Organizations of the Treadway 
Commission) is a voluntary private sector organization dedicated to 
improving the quality of financial reporting through business ethics, 
effective internal controls, and corporate governance.

          . . . we are pleased that the Bank has committed to establish 
        a strong framework of internal controls and assessment 
        procedures for the 2004 financial statements and beyond. This 
        commitment will serve as a powerful example to other 
---------------------------------------------------------------------------
        international financial institutions.

    Bank management delivered on its commitment. It identified and 
tested 847 financial controls. This process, in which both the Bank's 
internal and external auditors were involved, required many hours of 
staff and management time, and the EBRD incurred substantial costs.
    The EBRD completed successfully the testing of its financial 
controls, and its 2004 financial statements, which have been approved 
by the Board, contain a Management statement signed by the President 
and the Vice President, Finance, and audited by the Bank's external 
auditors, PricewaterhouseCoopers, confirming that the Bank maintained 
effective internal controls over its financial reporting as contained 
in the Annual Financial Report for 2004. This is the first time the 
Bank has included such a statement in its Financial Report, and the 
EBRD is one of the first organizations to do so outside the United 
States where this assertion is mandatory for listed companies.
    As part of the COSO project, the Bank also completed an operational 
risk self-assessment exercise and established a framework for continued 
development of an operational risk identification, measurement, 
mitigation, and management capacity. Management, which expresses a low 
tolerance for operational risk, refined key risk indicators and 
identified 239 controls for dealing with operational risk. These 
controls address a variety of risks, including reputational risk. The 
Bank is in the process of hiring an operational risk manager. Starting 
this year, Management will provide the Board with quarterly reports on 
the Bank's exposure to credit, market, and operational risk.
    Management has expressed confidence that the COSO system of 
internal controls is a sustainable part of the culture of the EBRD. It 
believes that the certification process relating to financial controls 
is now entrenched, and the operational risk management process is well 
underway. To maintain intra-Bank co-ordination and facilitation and to 
ensure maintenance of focus and continuity, management has established 
a COSO and Operational Risk Management Unit. This unit reports to the 
Vice President, Finance, with respect to internal financial controls 
certification and to the Vice President, Risk Management, with respect 
to the operational risk management process. On a day-to-day basis, the 
unit will work with the Controller and the Director of Risk Management. 
Moreover, the Certification of Internal Financial Controls Steering 
Committee, which was formed to oversee the process of adopting and 
implementing the new controls system, will continue its function and 
meet several times a year to provide supervision over the certification 
process, while the Operational Risk Management Group will continue its 
role of providing supervision over the operational risk management 
process.

                              PROCUREMENT

    The EBRD's public sector operations frequently involve procurement 
of goods, civil works, and services by governmental entities. In 2004, 
the EBRD's public sector borrowers signed 157 procurement contracts 
with an aggregate contract value of =681 million. EBRD financing of 
these contracts was =559 million. The number of contracts signed by 
borrowers and the aggregate volume represented declines of 13.3 percent 
and 22.5 percent respectively from 2003. In 2004, 77.7 percent of all 
contracts and 96.6 percent of total contract value was procured by open 
tendering.
    The foregoing figures do not include contracts for consultancy 
services. The Bank's Consultancy Services Unit (``CSU'') administers. 
the majority of these contracts. The Office of the General Counsel, the 
Turn Around Management Group, and the Nuclear Safety Department all 
have the authority to retain consultants directly. The total value of 
the 1,620 consultancy contracts issued by the EBRD in 2004 was =118.76 
million. This represented an 8.25-percent increase in value and 1.0 
percent increase in number over 2003. CSU issued 730 contracts with an 
aggregate value of =65.91 million, and 78.04 percent of these contracts 
in terms of the value were awarded following competitive selection 
procedures.
    In connection with the adoption of the COSO system of internal 
controls, the CSU reviewed its controls and procedures with the Bank's 
external consultants and the in-house team. CSU's controls and 
processes were considered to be appropriate and the audit trail 
relating to its compliance functions sufficient to demonstrate the 
proper application of the necessary processes and approvals.
    The EBRD, with the assistance of an outside consultant, has 
developed a course for new staff that provides them with training in 
the basic principles of public sector procurement. The course was 
finalized in 2004, and one seminar was held. Additional courses will be 
held in 2005 for all professionals who have been working at the EBRD 
for at least 6 months.
    During 2004, the EBRD retained the services of an independent 
procurement consultant to review three completed projects to assess 
whether the procurement, contracting, and implementation processes, 
which had been followed, were consistent with the corresponding loan 
agreements and whether the principles of economy and efficiency, 
transparency, and accountability as stated in the Bank's Procurement 
Policies and Rules (``PP&R'') were satisfied. The report has been 
delivered, and the EBRD is assessing which recommendations for followup 
action can be implemented this year.
    The EBRD's Procurement and Technical Support Unit is charged with 
reviewing all proposed contracts above specified levels as an integrity 
check before the EBRD's Banking Department registers its ``no 
objection'' to a proposed contract. Last year, 38 percent of the 
contracts subject to the selective review process were sent back for 
completion, clarification, or improvement before a ``no objection'' 
could be provided. This represents a reduction from the percentage sent 
back in 2003, which was 45 percent.
    The EBRD addresses the problem of potential fraud and corruption in 
these procurements by following the procedures set out in its PP&R. The 
EBRD has established its Procurement and Contracting Committee 
(``PCC'') to review all allegations of fraud and/or corruption in the 
context of the procurement process or when the Bank receives 
procurement-related complaints. If the PCC concludes that the 
allegations are substantiated, it refers the case, together with its 
recommendation, for appropriate measures (e.g., barring firms or 
individuals from future participation in the procurement for EBRD-
financed contracts). With respect to firms or individuals, the EBRD 
will reject a proposal for an award to such firm or individual and will 
declare him or it ineligible, either indefinitely or for a stated 
period of time, to be awarded a Bank-financed project. In the event 
that a representative of a client or a beneficiary of the Bank's 
financing has engaged in fraud or corruption, the Bank will cancel the 
portion of the Bank's financing allocated to the contract in question.
    The Bank does not limit its actions to its own funded projects, but 
has the ability to ``cross bar'' where a client has been found, by a 
judicial process in an EBRD country of operation or other official 
enquiry, to have engaged in corrupt or fraudulent practices. This would 
include enquiries conducted by another MDB. EBRD policy would require 
the names of firms or individuals that are debarred to be published on 
the Bank's Web site. To date the World Bank is the only other IFI that 
requires that names of sanctioned firms and individuals be made public. 
The EBRD receives, on a strictly confidential basis, the ADB list of 
debarred firms. The EBRD examines both the World Bank and ADB lists to 
determine whether any firms or individuals to which the Bank is 
considering providing financing, or that it may be transacting 
business, with are on the lists.
    There were 16 procurement complaints concerning EBRD financed or 
administered contracts in 2004 as compared with 24 in 2003 and 14 in 
2002. The Bank did not uphold any of the complaints in 2004, but did so 
for three complaints in 2003 and two in 2002. Three of last year's 
complaints came through the EBRD's Compliance In-Box and alleged fraud 
and corruption. The OCCO referred them to the PCC, but no evidence 
substantiating the allegations was found. The CSU received one 
procurement complaint in 2004, and after review by the PCC, the 
complaint was not upheld.
    We understand that all allegations of corruption and fraud have 
been investigated according to the Bank's procedures, but these 
investigations have not resulted in debarment of any firm or individual 
or the cancellation of financing in recent years.
    We recently questioned why the EBRD has never debarred a firm or 
individual when the World Bank, the Asian Development Bank, and the 
African Development Bank have. In response to the foregoing question, 
Bank staff outlined plans for 2005 to strengthen oversight of public 
procurement, including a greater emphasis on upfront work to improve 
fiduciary compliance and increased due diligence and monitoring during 
contract implementation. Bank management is sensitive to the fact that 
there have been no substantiated cases of procurement-related fraud or 
corruption in EBRD-financed public procurements in recent years. This 
sensitivity follows naturally from the EBRD's awareness, that many of 
its projects are implemented in a high-risk environment for fraud and 
corruption.
    In March 2005, EBRD took additional steps to strengthen oversight 
of public procurement. The PCC's membership was expanded to include the 
CCO and the Head of COSO and Operational Risk, and the chair of the PCC 
will be the Deputy General Counsel to reduce any perception of 
potential conflict of interest. In addition, the PCC's terms of 
reference were amended to transfer the responsibility for investigating 
allegations concerning fraud and corruption to the CCO from the 
Director, Procurement and Purchasing Department. The process of 
independent procurement reviews will be expanded in 2005. Because the 
EBRD recognizes that ensuring a fair and transparent procurement award 
process is insufficient to prevent corruption that can occur in the 
implementation phase, it will engage in more proactive monitoring with 
early identification of possible implementation red flags.
    The EBRD expresses confidence that its ex-ante approval process at 
various stages of the tendering process is conducive to a fair and 
transparent contract award process. Furthermore, tenderers can and do 
avail themselves of the Bank's complaint procedure as stipulated in its 
PP&R. Third parties can use the hotline or Compliance In-Box to flag 
possible problematic cases. There have been relatively few allegations 
that have been brought to the attention of the EBRD.
Standard Contractual Provisions
    The Bank imposes a number of financial covenants on its borrowers. 
For example, banks to which the EBRD makes loans must comply with an 
affirmative covenant to ``institute and maintain internal procedures 
satisfactory to the Bank for the purpose of preventing the Borrower 
from becoming an instrument for money laundering, terrorism financing, 
fraud or other corrupt or illegal purposes.'' Similarly, nonbank 
borrowers must represent and warrant that they are ``in compliance with 
all applicable laws concerning money laundering'' and that neither they 
nor any of their officers, directors or authorized employees, agents or 
representatives has (i) paid, promised to pay or offered to pay, or 
authorized the payment of, any commission, bribe, payoff, or kickback 
related to the project that violates any applicable law or entered into 
any agreement pursuant to which any such commission, bribe, payoff, or 
kickback may, or will, at any time be paid; or (ii) offered or given 
any thing of value to influence the action of a public official, or 
threatened injury to person, property, or reputation, in connection 
with the project in order to obtain or retain business or other 
improper advantage in the conduct of business. At each loan drawdown or 
interest rate rollover period, each borrower must report that it 
continues to be in compliance with its covenants.
    As a matter of routine, borrowers must maintain procedures, 
records, and accounts adequate to reflect, in accordance with 
internationally accepted accounting standards consistently applied, the 
operations, resources, and expenditures relating to EBRD-financed 
projects. In addition, private sector borrowers must have audited 
financial statements prepared in accordance with internationally 
accepted auditing principles and standards. Typically, the Bank 
requires borrowers to authorize their auditors to communicate directly 
with the EBRD at any time concerning their account and operations.
    The Bank's Operations Administration Unit, which is a part of the 
EBRD's Finance Vice Presidency, monitors compliance with material loan 
conditions including covenants. Failure to comply can lead to 
acceleration of the loan. Bank management confirmed to the Board that 
failure to comply with the Bank's anticorruption covenants is a 
material breach which will be enforced as vigorously as the breach of a 
financial covenant. Urged strongly by the United States, the Audit 
Committee has been increasingly interested in the process of assessing 
the systems in place for ensuring compliance with these legal 
covenants. As a result, the EBRD now must inform the Board of the 
issuance of any waivers of material conditions. The Audit Committee has 
directed the Project Evaluation Department to report on the use of 
waivers, and this report is due to be delivered in 2005.

                               CONCLUSION

    Since my arrival in 2002, the U.S. Director's Office has made 
improvements in EBRD governance and anticorruption measures a priority. 
Last year saw progress, and there is a foundation for further progress 
this year. We intend to push for greater independence of the Internal 
Functions, increased resources to enable them to take on more 
responsibility, and a continued focus at all levels on integrity 
issues.
    Mr. Chairman, as noted earlier in my testimony, our goal is, and 
has been, for the EBRD to have a corporate culture and environment that 
features enhanced corporate governance, internal controls, and 
compliance and that promotes good governance in its countries of 
operations. My Office is committed to continuing our efforts to that 
end.

    The Chairman. Well, thank you very much, Mr. Sullivan, for 
your testimony.
    I'd like to ask you, Ambassador Speltz, to give a mental 
image of what your headquarters looks like. It is located in 
Manila, in the Philippines. Is it a separate building, and how 
many persons are employed in the whole operation? In other 
words, how large of a situation, physically, is this?
    Mr. Speltz. Thank you, Mr. Chairman, and as you and I have 
talked in the past, I certainly do welcome you to come visit us 
sometime, out there in Manila, if you're in Asia.
    First of all, I'd like to state why the Asian Development 
Bank is in Manila; a lot of people ask that. In 1967, when the 
Bank was set up under the period of time under President Lyndon 
Johnson and the United Nations. Many of us, who are in this 
room, remember that the Philippines was the center of economic 
growth in Asia after Japan. Hong Kong was a British colony; 
China was closed; Vietnam was a war; Singapore was just 
starting; Korea was just beginning. Two other countries 
applied--one was Iran--for headquarters, we won't go into that, 
and Japan. So, the selection of Manila took place.
    I'd like to also state that the reason it's still there 
today, people say ``Why is that Bank still in Manila?'' Yes, 
the Bank could be moved, but in fact, I think there's a reality 
check, you know, the Asian Development Bank, as all these 
banks, with your support, are really valuable institutions, if 
they're doing their job right, if they're helping to eliminate 
poverty and build sustainable growth. And nowadays, very sadly, 
the ADB is right smack in the middle of one of the poorest 
cities in the poorest countries in the area. So, when I'm in my 
Office, I look out the window, Jay Branegan has seen it, you 
look out the window, and there's a lot of poverty outside the 
window.
    The building itself on any particular day, an average of 
maybe 4,000 people a day go in and out. We're certainly not as 
big as the World Bank, but it's a pretty good size, and that 
includes staff, professional staffing, I believe, of over 800, 
and the local staff and many consultants, but on an average, 
about 4,000 a day move in and out.
    We are in two tied-together buildings, similar in fashion, 
I think if you could, to the World Bank, on a smaller scale, 
with the IMF across the street. We have offices, regional 
representation offices around the Asian area, so that is the 
physical structure of it. The Board members are housed all 
upstairs on one floor, which I think they do in all of these 
multilateral development banks. I'm not sure whether that's to 
keep us out of the main fire, or whatever, but anyways, we're 
all up there together. I think an interesting aspect of that, 
Mr. Chairman, is that we all have the same offices, same 
furniture, same everything, which is pretty good, because it 
keeps us on an equal basis when we're trying to work with our 
fellow countries, which is so important in coalition building.
    The Chairman. How many countries are there on this floor?
    Mr. Speltz. Today--I'm always trying to keep track--there 
are 63 country members, and of the 63 there are 12 Board 
members. And of the 12 Board members, only China, the United 
States, and Japan represent only our constituents. So, the 
remaining nine Board members have the responsibility--some on a 
fixed basis, and some on a rotation basis, of representing the 
other 59 or 60 countries. The Asian Development Bank, in many 
regards, is a misnomer, because it really covers everything--as 
you know--from the Pacific all the way through to Afghanistan, 
and my overlap with Mark with the EBRD and Khazistan, and then 
the nonregional members, which are all of the European 
countries and Canada, and other areas of that nature.
    The Chairman. Right. Thank you very much for that important 
history, as well as the physical description. Those who are 
working with us in this hearing may have that same impression 
that I do, vividly, from what you have mentioned.
    Let me just say that last year the committee was informed 
that development projects in the Philippines supported by the 
Asian Development Bank had a low success rate. When asked about 
that report, Mr. Roberto Tan, Assistant Secretary of Finance, 
responded, ``The low performance can be attributed to a number 
of implementation problems, including poor contract award 
performance, cost overruns, and delayed provision of 
counterpart funds.'' The logical question I have for you, 
Ambassador Speltz is, What is your assessment of the low 
success rates of ADB development projects in the Philippines?
    Mr. Speltz. Well, it appears that your staff and I have 
also been reading the newspapers last night; I saw the Manila 
Times late last night. The Philippines is a very difficult 
situation. Without getting into all of the details of it here, 
because it's a political matter of some sensitivity, when I 
first came in to the Philippines I believe it was close to $2 
billion in undisbursed loans, of which the Philippines was 
paying a small fee for these undisbursed loans. I wanted to 
know why. What was happening? And we took it upon ourselves in 
our office to begin to activate that question of why? What's 
going wrong? And over the next year, including very much the 
involvement of the President of the Philippines, Gloria Arroyo, 
we began delving into this and found out that, for a variety of 
reasons, including lack of disbursal of third-party funds by 
the Philippine Government, sometimes concerns about potential 
free flow of the appropriate funds, whether or not there was 
potential corruption or not, concerns that that might happen, 
but essentially that many things were not in place. And, we 
advised, up to the President, that they take a look at 
canceling some of these loans, taking them off the books, some 
of them were 10 years old, and rebuilding them, restructuring 
them. And to the credit of the Bank, the Bank worked very 
carefully with the administration of the Philippines, and 
cancelled, I believe, almost a billion dollars in loans. And 
then have been re-structuring.
    I noticed in yesterday's paper, Manila Times, last night's 
paper, that a comment had come out about this. But in that same 
article, it was not criticizing the ADB, it did state that it 
was working with the ADB and trying to restructure these loans. 
It really, much of this, Mr. Chairman, honestly is in the hands 
of the Philippine Government. The Philippine Government must 
take certain steps in order to help us help them.
    The Chairman. Give me some indication. Procedurally you say 
$2 billion of loans were in the hands of the Philippine 
Government. The Board of Directors of ADB, at some point in 
history, loaned the Philippine Government the $2 billion? Or, 
what was the nature of the transaction? How did the $2 billion 
come into play?
    Mr. Speltz. No, first of all, let me make it clear, Mr. 
Chairman, the Philippines don't have $2 billion in their bank 
account, ADB had the $2 billion in the bank account. ADB does 
not disburse funds if they feel there is a program that is not 
going to go ahead on the structure that we've set up, so the 
cash is in our bank. Number two, with regard to the $2 billion, 
that was made up of many different loans. And almost every one 
of them was project loans. It was cleaning up Pasak River, it 
was cleaning up environmental issues, it was working on 
airports in Mindanao, and some of those areas, especially in 
Mindanao, due to the terrorist activities down there, the Bank 
and the Philippines could not go forward with because of 
danger. So, I would say, and I can come back to you on this, 
but clearly, much more than 80 percent of that was specific 
project loans which we just did not disburse.
    The Chairman. So some governmental units are in the 
Philippines. You have mentioned, say, Mindanao. The Bank 
initially then, put--at least a hold--on those funds in your 
vault. They remain there, but the idea was that although you 
had committed to move forward, you haven't disbursed the funds, 
apparently because, essentially whoever was wanting to do this 
decided they couldn't do it right now. Administration was just 
inadequate. I'm just trying to probe all of these projects. Who 
mentioned them? And why did the Bank say, ``That's a good idea, 
we ought to go ahead with it''?
    Mr. Speltz. Your questions are excellent, sir. When I got 
into the Bank, of course, my whole education started. One of 
the things, of course, that I discovered is that there were 
many difficulties of reform which we felt were needed, and we 
pushed forward on it. And I'm pleased today that many other 
constituents in other countries are working with us on reform.
    But I was also pleased to see that there was actually a 
great number of hard-working, good people in that Bank who 
were, in their own way, working on trying to protect the Bank, 
to protect the moneys going out, and I was thunderstruck at the 
amount of money that had been committed in loans, but not 
disbursed. And I started diving into this; why? Why was this 
money not disbursed? And the overriding reason was that those 
countries had not met the regulations of the Bank--before I got 
in--the regulations of the Bank in meeting the qualifications 
which were necessary to proceed with the implementation of the 
loans, or we stopped. In certain cases, we began a project, and 
we stopped. I thought that was bad news that the money hadn't 
been disbursed, but I thought it was good news that the checks 
and balances were in place to stop the money going out.
    Then I wanted to take it to the next step--don't ignore it, 
start working on it--to try to figure out how to either cancel 
those loans, or reactivate them and get them out to the people.
    The Chairman. And as you just mentioned in that second 
examination, you've cancelled about half of the money, $1 
billion of the $2 billion or so, so that those loans are not 
out there. And so in play are something less than a billion 
dollars, apparently, at this point. Is that right?
    Mr. Speltz. It went actually down, I believe, to less than 
a half of a billion.
    The Chairman. Half a billion.
    Mr. Speltz. And if I recall, and perhaps your staff can 
help here, too, if I recall the statements in this morning, 
late last night's Manila Times, a representative from the 
Philippine Government acknowledged the fact that they were 
restructuring these loans, so that is what's going on.
    The Chairman. Good. I appreciate those responses, although 
Manila is far away from Washington. Today you are here and 
others are there. I would just observe that papers in other 
countries, such as The Manila Times, have been interested in 
our hearings, interested in your responses and your appearance 
before this committee. I am grateful that is so, because this 
has brought a sensitivity in the international community on 
these problems that may be helpful to an administrator such as 
yourself.
    Mr. Speltz. Mr. Chairman, if I may, just in closing on 
this, if you'll permit it. I think it's important also, as the 
Senate Foreign Relations, that the President of the 
Philippines, I've met with her on many occasions, and she 
personally has taken this into her own area of concern. She 
particularly is interested in education, in the education 
problems, and the water problems, and the environmental 
problems in her nation, and she was also very concerned and 
upset when she found out some of the bureaucratic holes that 
were not permitting this money to get to her people. And she's 
been working very well, not with me, but with the staff at the 
Bank, to work on this.
    The Chairman. I appreciate that. Let me just say, 
anecdotally that 20 years ago, 1985, in this committee, we were 
hearing testimony from the then much younger Rich Armitage and 
Paul Wolfowitz, with regards to the Philippines. Their 
testimony was riveting. The committee was besieged with 
dilemmas about the governance of the country. Without 
belaboring the history, the fact is that the deliberations of 
our committee, in part, led to an appearance on national 
television of President Marcos calling for a snap election on 
an American Sunday news program, and calling for the world to 
witness that he did have authority and that he would be 
elected. And from that, a number of things followed. I 
especially appreciate your management of the situation, and 
your working with President Arroyo.
    Mr. Speltz. Two other comments, with your permission. First 
of all, I don't think President Arroyo would really appreciate 
me very much if she called for a snap election tomorrow, and 
number two, I do want to stress very much that Ambassador 
Richard Downey, the United States Ambassador to the Philippines 
is, number one, a very close personal friend of mine, but he 
and his staff have also worked with us intimately with these 
problems with the Government of the Philippines, and I very 
much appreciate that support by him and the State Department.
    The Chairman. Well, I'm pleased to learn of that 
relationship. I am not surprised. I commend that support of the 
Philippines and that close relationship. At the end of the day, 
we're hopeful--and that was the purpose of the question 
originally--to inquire if there will be constructive loans and 
a higher success rate, and if there would be movement by the 
government, as well as the rigor that you have imposed with the 
banking regulations.
    Let me ask one more question dealing with the metrics of 
the situation. Since the regional development banks, 
particularly the Asian Development Bank, began implementing 
anticorruption practices, has there been a reduction in corrupt 
activities? Is there any way to measure declines or increases 
in corruption? This is pertaining to the whole portfolio, all 
of the countries, and a very general assessment, but I just 
want to get some idea as to how things are proceeding, or how 
you're able to measure how they're proceeding.
    Mr. Speltz. I assume you're asking me, sir?
    The Chairman. Yes.
    Mr. Speltz. That's hard to measure, and I'd like to answer 
this in parts. I really believe in my heart that the efforts 
that your committee and also many Members of Congress, the 
Hill, the Senate, on both sides, have taken in meeting with me, 
and the Asian Development Bank, with my colleague Mark, with 
Bob Holland, World Bank, his predecessor and so on, I think 
sends a very strong message to those who might consider being 
involved in what we clearly call corruption, that they don't 
necessarily call corruption in their own minds. It gives them 
pause to consider that those days have changed. That's, I 
think, very, very important. I think the trends of the banks in 
general, and I won't speak for Mark's bank here, but I feel 
it's the same way on anticorruption is good, what is needed now 
is more restraints, more measures to carry forward on that, and 
specifically, I had a couple of things I had that I wanted to 
bring up to that.
    It's impossible to measure the amount of corruption that's 
been out there in the past. I've seen testimony by Mr. Rich and 
others, who, I think, are well meaning, in some cases, I 
believe out of date. But, the fact is, there is, has been, 
corruption in the past, but I want to take the positive side of 
it. One of the things that we're dealing with, one of the 
problems we're dealing with, is that many of the countries that 
we work with, in the Asian Development Bank, do not have 
control systems in place for combating corruption, because it's 
not that important to them. And if you don't have a control 
system in place, then it becomes under the decision of an 
individual as to what that individual is going to do. What ADB 
is trying to do, and I applaud them, they are really working at 
this very, very difficult problem, is to work on the education, 
from my opinion, grassroots up. Not the top down, grassroots 
up. The education of the negative effects of corruption, and 
the fact that those very people who need it most are the ones 
that aren't getting the money. They are the ones that are 
getting hurt the worst. And so, we're working with them on 
educating them, we're working through technical assistance 
programs, we're working with government officials, and yes, 
many of these governments are trying to work with us in setting 
up these control systems. Checks and balances on corruption, 
and we're trying to show them how to implement them.
    And then, most importantly, they know that we don't 
disburse the funds, a very good point that you brought up, sir, 
that if we are not satisfied at the Bank that things are not in 
place, we simply don't disburse the funds. So, I would say 
that, at this time, without knowing anything about the amounts 
of money or anything else, the trend has changed, there is very 
significant action being taken place, and I think the efforts 
are generally there, by many countries to try to clear this up.
    The Chairman. I appreciate that testimony, and I appreciate 
the questions and possible answers about specifics year by 
year. The trend, I think, has clearly changed, and it's in part 
because of officers like yourself who have made that change. I 
would say, without being hypercritical of anyone, as we began 
these hearings, that there was a certain amount of skepticism 
as to why we were even involved at all in these issues. 
Essentially, it was a challenge of authority, or the fact that 
we had some oversight capacity. It was just that members don't 
get into this type of thing, and banks take care of the 
situations. In part, for a moment or two, we even had with our 
own Treasury Department, a feeling that, after all, they simply 
don't offer testimony to committees like this, and that they 
have their own procedures. Now, in fairness, they have changed, 
and they're constructive, and they have been helpful. That has 
been true of the World Bank, and that's been true of others 
that may have had some skepticism at the outside, because they 
understand--perhaps informed by another investigation that our 
committee commenced, being the very, very tragic Oil-for-Food 
Program, at the United Nations--that the whole credibility of 
institutions, and the officers, may come into question when 
something is escaping oversight of anyone.
    And, so I would simply say that we want to have strength in 
the banks. We want to have confidence in the American people, 
before we offer the reauthorization legislation. We want to 
make sure to them that we can try to say that some due 
diligence has been exercised on our part, as well as on yours, 
and to give you an opportunity to testify to that effect.
    Mr. Speltz. Thank you.
    The Chairman. Let me ask you, Mr. Sullivan, as a general 
question, do the regional development banks adequately share 
information among themselves, and with the World Bank, about 
firms and individuals that have been sanctioned for corrupt 
violations? In other words, are there lists of firms or 
individuals that are made public at the regional development 
banks as they are at the World Bank?
    Mr. Sullivan. My understanding is that there are other 
lists to which the EBRD has access, the Asian Development 
Banks, the others I do not believe are public. We do look at 
those lists, and I would like to say, generally on the matter 
of procurement, that's been a subject of Audit Committee 
interest in recent weeks; we had a meeting on the 21st of 
March, we will have another. What is clear to me is that there 
is an increased effort to deal with procurement issues, which 
your question addresses apart, the amount of effort that has 
been put into pre-award examination of those who are bidding, 
and the amount of effort that will be devoted to post-war 
implementation, which will be substantially increased.
    I think that you will see, because of institutional 
changes, the involvement of the Chief Compliance Officer in 
these two areas that I've talked about, that we will have much 
better results, and of course, we do take cognizance of the 
lists of others, but to my knowledge, I think it's only the 
World Bank that publishes one. If we were to have someone 
disbarred, that would now be published on our Web site. That's 
a new policy, but it is in place.
    The Chairman. Well, I raise the question for obvious 
commonsense reasons. If there are experiences out there in the 
field with any of the regional development banks, as factors 
are uncovered, it would certainly be essential information. I 
think that the other banks would be so informed, and I 
appreciate the whole governance question who does what and 
what's the responsibility for this? At the same time, I raise 
the question simply because you have some responsibility, as do 
Mr. Speltz and others, to make certain that this information is 
available, so that mistakes are not made inadvertently. And 
that's why I'm curious about the proper spread of information 
in a timely way.
    Mr. Sullivan. I completely agree with your observation. 
They ought to be sharing information. I believe they do share 
information, whether or not it can be improved, I'm not 
certain. I do know that our Chief Compliance Officer and the 
new people who are in charge of procurement at the Bank are 
very cognizant of the importance of going ahead and making sure 
that people do not take advantage of these systems for the 
reasons that Paul has mentioned in terms of the efficiency of 
the money provided.
    We do have a very active program of supporting open, 
public, tenders using standard documentation. I believe last 
year over 96 percent of all procurements by the EBRD were 
subject to open public procurement, and, of course, using the 
standard documentation.
    The Chairman. At least on your own, you're making this 
open. You could also, I suppose, share your observations with 
the other banks.
    Mr. Sullivan. I believe they do.
    The Chairman. Mr. Speltz.
    Mr. Speltz. Mark and I work as a team together. I was 
asking permission to help him out here, just on the ADB side of 
this, because you are talking about all the banks, again, 
you're bringing up a very good point, and somewhat of a 
sensitive one from a legal point of view. The World Bank does 
publish its, we call, ``black list'' and many of the banks make 
a policy of, I believe it's all, of exchanging, at least on a 
need-to-know basis, all the lists of both consultants, 
individuals, and corporations that they are debarring, or 
blacklisting for a period of time, including the ADB. We have 
over 230 companies, as of yesterday, that have been debarred, 
or blacklisted for potential corruption or illegal activities, 
or just that we don't want to do business with them on the 
basis of the way they operate. That list we share with the 
EBRD, we share that list with the World Bank, with the African 
Bank, and the IEDB.
    There is, however, a point that's been brought up by your 
staff that is of a deep concern to them, and I share that 
concern, that is, that within the ADB we do not publish that 
list, and that is something that we are working on, that we do 
believe that that list should be published. But there are legal 
problems within the Philippines, with regard to the publishing 
of these companies names, due to very interesting laws there. 
With regard to the activities of the Bank, though, every 
debarred company is submitted to all the other banks, and very 
interestingly, effective November last year, when we receive a 
list of debarred companies or other companies that have been 
debarred from the World Bank or from EBRD, or others, we look 
right into--our Audit Committee looks into it--and if they 
believe there's justification for also debarring, they simply 
just don't do business with them any more, and they notify 
them.
    And one other very interesting thing to keep these folks on 
their toes--if a company is debarred at the ADB, and 
reapproaches through another channel and tries to bid, the Bank 
further debars them for a longer period of time.
    The Chairman. Well, that's very important information. I 
would just observe that clearly you have to follow legal 
counsel carefully with regard to the laws of the Philippines or 
others. On the other hand, this issue is serious, not just for 
the banks, but in terms of our overall public diplomacy in this 
country. I would say that if this is an issue with the 
Philippine Government, again this is something that probably 
needs to be discussed by our Ambassador, or Mr. Zoellick, our 
Under Secretary, or Secretary Rice. I'm simply raising the fact 
that we, as a country, are determined to make certain that 
anticorruption procedures are literally pervasive, that there 
is publication, and that there is follow-through in the 
Philippines as well as anyplace else. And that the 
ramifications of lack of cooperation here could be very 
substantial.
    The failure to do this is ultimately going to lead to an 
undermining of these programs, with our body politic, that is, 
with the American people, quite apart from what is occurring 
out in banks. The American people have not been that well 
informed about what's occurring out there. Now, they're getting 
better informed all the time. I don't want it to come as a 
terrible shock. I would like it to come through thoughtful 
meetings like this one, in which professionals discuss what the 
facts are, what you are doing about it. There's a strong record 
of recognition, an action that makes a difference, because one 
can say, this is the way the world works. But what we're trying 
to say in these hearings, and what you're saying as 
administrators of these banks, is that the world has got to 
work--at least if money is going to be distributed, taxpayer 
money from our country and from others--in a way that stops 
corruption of the efforts, and does not put extra burdens upon 
the poor people of those countries that are the victims of this 
type of thing. This is preaching to the choir. You have to face 
this out in the field every day. But this reinforces that, and 
that is to say, I hope that you might raise these questions in 
the proper departments, such as the State Department, the 
Treasury Department. And if you do, more power to you. I just 
mention to you that I may raise them, too. This is--as a part 
of American diplomacy--something that you, Secretary Rice, or 
Under Secretary Zoellick need to be cognizant of, because this 
is important in our national image and effort.
    Well, let me just ask one more question. Let me just 
observe, Ambassador Sullivan, that it's our observation that 
there are still limited whistleblower protections at EBRD. 
There is not very much protection for staff testimony and 
independent recourse mechanism proceedings to resolve 
complaints by third parties at the EBRD at the behest of the G-
8.
    Describe what is being done to strengthen the whistleblower 
procedures at the EBRD, and how this general criticism has been 
met.
    Mr. Sullivan. Thank you, Mr. Chairman.
    We have expressed reservations about the current 
whistleblower protection scheme at the EBRD. We've raised it in 
the policy committees and in the Audit Committee, we will, 
we've talked to the Chief Compliance Officer about it. I think 
that the whistleblower scheme was hard to follow for people, is 
now in the process of being consolidated, made more readily 
accessible to people. There are questions and answers now on 
the Web site, notwithstanding what has been done to date, it 
has been agreed that there's more that needs to be done. There 
is concern about not only the protection of whistleblowers 
generally, but on the question of anonymity. The counsel to the 
EBRD advises that in certain circumstances, because the 
European Union Human Rights Convention requires people to be 
able to confront their accusers, that there may be times, as a 
consequence of an investigation, when that anonymity cannot be 
protected. This came up in the Audit Committee twice. The 
Board's belief is that we do need to protect whistleblowers. 
One member of the Board was actually formerly a whistleblower, 
and understands this all very well. I do not believe this 
process is at an end. I do believe that we, as an office, the 
U.S. Office at the Bank, will continue to pursue it until we 
get it right. But your concern is not misplaced. On the other 
hand others share your concern, including the Board of the 
EBRD, and certainly my Office and obviously I, personally, want 
to make sure that it's done correctly. I do think that having 
the new Chief Compliance Officer on Board who comes to the EBRD 
from the OECD where she built up a very strong compliance 
function, is a very positive development for working through 
the successful resolution of these issues.
    As to the IRM, we have at the EBRD, very little experience 
with it. As you know, the United States raised some questions, 
and had reservations about it at the time of its adoption. I 
regard that, too, as a work in progress. We'll have to see how 
it works. There is a report due out later this year on how it's 
done in the first full year of its implementation by the EBRD.
    The Chairman. Well, thank you very much. I appreciate your 
own personal conviction with regard to this, and the steps that 
you are taking, and likewise the compliance procedures that 
you've instituted and that you're supervising. This is an 
important step forward, and we appreciate your being here 
personally to give that testimony.
    I thank both of you for your testimony, your original 
statements as well as the summaries, and the forthcoming 
responses to our questions. Obviously, this is of great 
interest to our committee and our staff. They have appreciated 
your hospitality as they have visited with you, and we are 
hopeful those visits will continue. We're grateful to you for 
encouraging that.
    Mr. Sullivan. Well, thank you Mr. Chairman. We, too, 
appreciate the opportunity to be here, the opportunity to work 
with your staff, and as you and I have discussed, we were 
looking forward to the visit of your staff to the EBRD and I'm 
delighted to learn that that visit has been postponed, but not 
cancelled, and we will look forward to working with you and the 
committee.
    I do believe that it's important, for what we're all trying 
to accomplish that the countries with which we deal understand 
that the United States speaks with one voice on anticorruption 
efforts, and it's very helpful to us to be here today to talk 
with you. Thank you, sir.
    The Chairman. Yes, sir; Mr. Speltz.
    Mr. Speltz. Thank you very much, Mr. Chairman.
    I think you know from both your staff and yourself, 
personally, the passion I have with regard to what you're 
trying to do here. I would like to respectfully request one 
thing for you to consider as you go forward.
    You mentioned at the beginning of this, you're looking at 
putting in new legislation. I think on behalf of all of us who 
are Executive Directors at the Bank, that we hope that you work 
very, very closely with the U.S. Treasury Department with 
regard to those, and what aspects of new legislation would help 
us, and what might potentially hinder us.
    We have a situation which you know very well, sir, in 
dealing with foreign relations, of the sensitivity of dealing 
with so many other countries that don't necessarily always 
share our opinion, and do not necessarily like it if they think 
that we're putting something down their throat. I think all of 
us have built very good consensus and relationships with our 
fellow Board members, and as you look at whatever you're going 
to do, I would only personally request that you work closely 
with our Treasury people in sorting out which ones you agree, 
and Treasury agrees, and we agree will help us, and which ones 
could be misinterpreted, where Board members could sit there 
and say, ``Don't call Speltz, or Sullivan into this meeting 
because we have a document from their Congress that clearly 
says they're not open to discussion, they've mandated it.'' I 
hope you'll understand that.
    The Chairman. I do, and I think that's good counsel. Staff 
has been advised to do just as you've suggested. But at the 
same time, Senators likewise should take that counsel very 
seriously, and we will.
    Well, I thank you both, and we will now call upon our 
second panel of the morning.
    The Chairman. The Chair welcomes Mr. Hemantha Withanage, 
and Mr. Tom Devine. I would ask that you testify in the order 
that you have been introduced. We are appreciative that you 
came. I know both of you have had an opportunity to hear the 
testimony of the first panel. You have already prepared 
statements, and they will be made part of the record in full. 
If you would summarize or proceed in any way you wish, I would 
appreciate that, and then we'll have questions.
    Mr. Withanage.

 STATEMENT OF HEMANTHA WITHANAGE, CONVENOR, SRI LANKAN WORKING 
  GROUP ON TRADE AND INTERNATIONAL FINANCIAL INSTITUTIONS AND 
EXECUTIVE DIRECTOR, CENTER FOR ENVIRONMENTAL JUSTICE, COLOMBO, 
                           SRI LANKA

    Mr. Withanage. The Chairman, thank you very much for the 
opportunity to testify this morning. I am the President in the 
Sri Lankan Working Group of Trade and International Financial 
Institutions, and the Center for Environmental Justice which is 
based in Sri Lanka.
    It's important to note that organizations who focus on 
environment and social welfare are also focused on the 
promotion of environmentally sustainable lending policies in 
the international financial institutions, and on corruption.
    My close monitoring on certain Asian Development Bank 
projects in Sri Lanka shows that rather than alleviating 
poverty, they have often created poverty and corruption. I will 
give you just one example. Southern Transport Development 
Project involves the construction of 428 km long expressway. 
The road crosses through many wetlands, villages, home gardens, 
and more than 5,000 households in all categories will be 
affected.
    About 40 percent of the final roadway is not covered by the 
Environmental Impact Assessment. People wanted the Asian 
Development Bank and the Road Development Authority to follow 
the proper Environmental Impact Assessment process to save 
their sustainable home gardens and respect of their lifestyles. 
They approached all the legal and administrative forums, 
including the Supreme Court of Sri Lanka, and the inspection 
mechanism of the Asian Development Bank, to receive justice. 
The matter is now with the United Nations Human Rights 
Commission, too. The project involves a different type of 
corruption, other than the type of corruption that was 
mentioned before this committee by Mr. Bruce Rich on the 28th 
of September, 2004. Certain people are provided unprecedented 
compensation to convince others, but others are not paid the 
same.
    Three settlement officers asked for bribes to approve 
better compensation packages. Those who disagree and who do not 
pay, they were given rocky lands. Government officers were told 
that if they complete the land acquisition early, they will be 
paid an incentive. Certain politicians, and some political 
supporters also ask for bribes from the construction company.
    After Mr. Rich testified, the contrary presentation of the 
Asian Development Bank explained why Kumagai Gumi, the 
construction company, was included, and he stated that it's a 
slight relaxation. But I wonder, why slight relaxation, only 
for this particular company, and why they did not include some 
others, too.
    There are many bad stories. People who are still fighting 
for their rights were told that 25 percent of their 
compensation will be deducted if they do not leave the land 
early, and in one case, police arrested one woman from a 
village in the southern area, and beat her. She was the single 
parent of her young child.
    In certain plots, one portion was valued for $600, but when 
they valued the other portions, it gave less amounts. So this 
particular case, he was given a rocky land, he was not able to 
buy better land for the compensation he received, and the land 
next to his land was owned by another female schoolteacher, and 
her land was treated as a low-lying land, and paid only $70 per 
perch, which is one of the local units for the land 
measurement.
    And I have a picture in this newspaper, appeared in the 
front page of the newspaper which shows that one woman lived, 
until the photo appeared in the newspaper, in this kind of 
small hut, and this has been submitted for the record.
    When people complained to the Asian Development Bank Anti-
corruption Unit, they wrote back and said, ``We received 
allegations, and we did not find any evidence, and we are 
closing the case. When people wrote back and asked for a copy 
of the report, anticorruption specialists wrote back and asked, 
''Would you please provide us more evidence.`` I don't 
understand why those high-level officers lie to the lay people.
    Since I don't have enough time, I will not go into the 
corruption issues related to other projects which are explained 
in my statement, Mr. Chairman.
    Finally, I want to touch tsunami, which devastated lives of 
many coastal communities. It is not my intention to explain the 
damage which you all have seen in the media. I thank all of the 
people and governments who performed their duty to support 
affected people and countries at this unfortunate moment. Sri 
Lanka also received a large amount of funds, this is not only 
donations, but a major portion of them are loans. Having bad 
experience of bad fund management and corruption, I believe, 
receive enough large amounts of funds, easily lead to 
corruption and mismanagement. We should have better monitoring 
on the ground. Asian Development Bank is talking about the 
monitoring and better coordination, but unfortunately the 
ground situation is not very good. No monitoring and better 
compensation among the agencies.
    Just one example, fisherman in Batticaloa, which is a city 
in the east coast, received boats and fishing nets more than 
palatable for the lagoon and for the fishery resources. Some 
aid agencies think it will devastate the fishing resources soon 
if they put all the boats and nets to the waters. We believe 
that tsunami-affected people should have the right to 
participate in the decisionmaking, which is not the case on the 
ground.
    When I complained about the corruption related to the Bank 
projects, one senior staff member told me, ``They are not 
corruptions,'' but they call them as commissions. But I believe 
this was public funds from your government, and we people in 
borrowing countries pay them back, therefore, nobody can make 
commissions. It's the general notion in Sri Lanka that Asian 
Development Bank money involves with corruption one way or 
other. I have explained in my statement how large amounts of 
money goes for the other purposes which have no direct benefits 
to the people.
    Mr. Chairman, to conclude, as a person who represents this 
hearing from the receiving end of the fund, I believe that the 
Asian Development Bank's development effectiveness is highly 
eroded due to many types of corruption and fund mismanagement. 
They misuse the Bank's immunity to the legal system to escape 
from any allegations. It is apparent that because the Asian 
Development Bank is not fully committed to accountability or 
transparency, it, in effect, enables and encourages corruption, 
which in turn delivers unsustainable projects. Therefore, it 
would be irresponsible to authorize hundreds of millions of 
dollars for this institution without a clear idea how they 
combat corruption. In my testimony, I have made a series of 
recommendations, I hope it will help you to reconsider the 
involvement of the Asian Development Bank in our countries and 
combat corruption.
    With your permission, I want to propose some other 
recommendations. One would be having a better policy, and 
policy implementation is very important in this regard. 
Stopping the loan disbursement if there is a reasonable 
corruption allegation, is very important, and educating people 
on how corruption policy works is also very important. And 
also, I believe consider the corruption track record of 
agencies in project design is also very important. And also 
make a corruption risk checklist to understand possible events 
and activities which are vulnerable to corruption of the 
particular type of project at the design stage, and continuous 
monitoring is also important. And also, I believe, sending 
independent ADB missions from anticorruption divisions to the 
site during the implementation, and consulting the public, also 
very important. Thank you very much for this opportunity.
    [The prepared statement and photo submitted by Mr. 
Withanage follow:]

Prepared Statement of Hemantha Withanage, Convenor, Sri Lankan Working 
Group on Trade and International Financial Institutions, and Executive 
     Director, Centre for Environmental Justice, Colombo, Sri Lanka

                            1. INTRODUCTION

    Mr. Chairman, Senators of the committee, thank you very much for 
the opportunity to testify this morning at the hearing on ``Combating 
Multilateral Development Bank Corruption: African, Asian and European 
Regional Development Banks.'' The chairman and the committee are to be 
commended for organizing these hearings, which address one of the most 
critical but hidden threats to the proper use of Bank funds that 
hinders sustainable development.
    As of December 31, 2004, the ADB had approved US$3.476 billion in 
loans to Sri Lanka for some 128 projects and programs. However the 
development effectiveness of many of these loans and their role in 
poverty reduction is highly questionable, even according to the ADB's 
own statistics.
    A presentation made by Mr. Bruce Murray of the Asian Development 
Bank (ADB) Operations Evaluation Department (OED) to the NGO FORUM on 
the ADB on March 31, 2005, showed that over half of completed ADB 
projects (59 percent) were rated highly successful (HS), generally 
successful (GS), or successful (S). Thirty-one percent of completed ADB 
projects were rated partly successful and 9 percent were rated 
unsuccessful by this internal evaluations unit. For Sri Lanka, OED had 
evaluated 36 projects and 47 percent were considered HS/GS/S, 45 
percent were rated partly successful, and 8 percent unsuccessful. In 
this context, the performance of projects in Sri Lanka ranks third from 
the bottom of ADB borrowers, with only Papua New Guinea and Bangladesh 
generating lower ratings. The rating of Partly Successful seems to be 
generous for many projects, considering that it was given to projects, 
such as Lunugamwehera, which are actually dismal failures and creators 
of poverty on-the-ground. If we take the ADB's self-evaluation at face 
value, more than half of Sri Lanka's ADB debt accumulated over three 
and a half decades is from projects the ADB itself considers to be less 
than successful.
    The World Bank Poverty Reduction Strategy Paper (PRSP) presented to 
the Sri Lankan Development Forum in June 2002 says that poverty in Sri 
Lanka had not decreased over the last 10 years, and continues to be 
around 40 percent of the population. It is admitted that the actual 
figure for poverty in Sri Lanka would be higher if the conflict areas 
were taken into consideration.\1\ In fact, the poverty level used in 
Sri Lanka of Rs 1500/month (equivalent to US$15/month) is much lower 
than the internationally recognized poverty level of US$1/day/person.
---------------------------------------------------------------------------
    \1\ ``Poverty in South Asia 2003, Civil Society Perspectives,'' 
SAAPE, October 2003, Katmandu, p. 185.
---------------------------------------------------------------------------
    Neither GDP growth nor its distributive effects have been 
sufficient to bring about a marked reduction in the poverty level in 
Sri Lanka. In other words, the benefits of economic growth have not 
automatically trickled down to the poor and the economic strategy 
adopted in Sri Lanka has not succeeded.\2\ The PRSP acknowledges this 
in relation to the decade of 1990s. But this failure was even more 
apparent in the previous one and a half decades.\3\
---------------------------------------------------------------------------
    \2\ Sri Lankan Development Forum 2002.
    \3\ ``Poverty in South Asia 2003, Civil Society Perspectives,'' 
SAAPE , October 2003, Katmandu.
---------------------------------------------------------------------------
    Mr. Chairman, Senators of the committee, Sri Lanka has been a 
client of the Asian Development Bank since 1968. ADB is involved in 
project financing as well as in macroeconomic policy development. 
Poverty alleviation has been a major focus of ADB-financed projects 
since the new mandate of the ADB was established. However, it is very 
clear that the ADB and the Sri Lankan Government have failed to realize 
their mission to reduce poverty and increase growth.
    Contrary to the ADB's mandate, certain ADB-funded projects and 
macroeconomic policy changes have actually created poverty. In the next 
few pages of my testimony, I will discuss a number of projects that are 
controversial due to the destruction of people's sustainable 
livelihoods and the related failures of the ADB and local implementing 
agencies to control corruption.

       2. ASIAN ENVIRONMENTAL ORGANIZATIONS THAT MONITOR THE ADB

    The Sri Lankan Working Group on Trade and IFIs (International 
Financial Institutions) is a network of civil society organizations 
that monitors the impacts of projects and policies of the IFIs on local 
communities, their livelihood, natural environment and resources. Its 
secretariat is located at the Centre for Environmental Justice in 
Colombo, which is a local environmental organization, working toward 
good governance and environmental justice.
    The Sri Lankan Working Group of Trade and IFIs is an evolution of 
the Sri Lankan Working Group on ADB, which was established in 1998. 
There are 15 member groups who are concerned about ADB's involvement in 
development projects and in promoting macroeconomic policy changes. 
Recently we assisted people affected by the Southern Transport 
Development Project (STDP), a major road project funded by the ADB, to 
bring their inspection claim to the ADB's Special Project Facilitator 
and Compliance Review Panel. We have also helped people to develop 
their complaints to the ADB regarding the loss of their rights to water 
due to water transfers under the ADB-financed Water Supply and 
Sanitation projects through the Water Supply and Drainage Board. Our 
network member, Green Movement of Sri Lanka, helped affected 
communities from the Kirindi Oya Irrigation and Settlement Project 
(1986), the Upper Watershed Management Project (2002), and the 
Protected Area Management and Wildlife Conservation Project (1999) \4\ 
to raise their concerns with the ADB and local implementation agencies.
---------------------------------------------------------------------------
    \4\ This project is jointly funded by the ADB and the World Bank.
---------------------------------------------------------------------------
    I was the elected International Convener for the NGO FORUM on the 
ADB for the period of 2001-2003. Recently I accepted the Executive 
Director position of the NGO FORUM on the ADB (Forum) and will take up 
my new position in May 2005. The NGO Forum on the ADB is a network of 
more than 300 civil society organizations based in ADB borrowing 
countries and donor countries that monitor the projects, programs, and 
policies of the ADB. Its Secretariat is based in Manila, Philippines, 
and it is governed by an international committee comprising members 
from both borrowing and donor countries.
    The Forum was established in 1989 by Philippine NGOs and NGOs from 
the United States. Since then it has lobbied the ADB to develop 
necessary safeguard policies and address the failures of its projects 
and programs to provide benefits to the local communities. The Forum 
has been involved in the campaign for accountability at the ADB, which 
resulted in the establishment of the first Inspection Mechanism in 1995 
and the new Accountability Mechanism in 2004. The Forum has also been 
involved in campaigns around gender, environment, involuntary 
resettlement, indigenous people, and disclosure at the ADB, many of 
which have led to the adoption and/or strengthening of ADB policies. 
Forum activities also involve assisting local communities to bring 
their concerns to the ADB.
    Mr. Chairman, Senators, it is important to know that these 
organizations, who are primarily focused on the environment and social 
welfare, and are focused on promoting environmentally sustainable 
lending policies in the international financial institutions, are also 
concerned about corruption. They are very concerned about the negative 
impacts on the social, environmental, and economic sectors coming from 
projects with ADB involvement They are also concerned that although ADB 
is a development bank with anticorruption, social, and environmental 
responsibilities, its staff and management often seem to have 
relatively little concern for these issues.

          3. ADB: SUSTAINABLE DEVELOPMENT OR POVERTY CREATION

    As stated by Mr. Bruce Rich in his testimony on September 28, 2004, 
at the hearing before this committee

          . . . the ``culture of loan approval'' and ``pressure to 
        lend,'' which has been documented in the World Bank and other 
        MDBs for more than a decade, has often also contributed to 
        failures in the implementation of policies designed to mitigate 
        adverse environmental and social impacts of MDB lending.

    Close monitoring of some recent ADB projects, such as the Thailand 
Samut Prakan Wastewater Management Project, Melamachi Water Project in 
Nepal, and the Chashma Right Bank Irrigation Project in Pakistan, shows 
that the ADB's stated mission is in trouble.
    My close monitoring of certain projects in Sri Lanka, namely the 
Kirindi Oya Irrigation and Settlement Project (1977), Sri Lanka 
Southern Transport Development Project (1999 to date), Upper Watershed 
Management Project (2000 to 2006), and Protected Area Management and 
Wildlife Conservation Projects (1998 to date) shows that rather than 
alleviating poverty, ADB projects have too often created poverty for 
local communities and fostered corruption.
    Mr. Chairman, Senators of the committee, I would like to address a 
few Sri Lankan case studies to illustrate this point.

                               4. CASE I

ADB's Poverty Creation at Lunugamwehera in the Southern Dry Zone (1977) 
        (Kirindi Oya Irrigation and Resettlement Project)
    Kirindi Oya is a river that flows to the ocean in the southern 
province of Sri Lanka. The Kirindi Oya Irrigation and Settlement 
Project (KOISP) was started in 1977 with US$60 million in loans from 
the Asian Development Bank. The project involved the construction of a 
large earthfill dam and irrigation canals in the dry zone of Sri Lanka. 
Nearly 5,000 families were settled in the area as part of the project.
    Water distribution in Kirindi Oya began in 1986, but there was not 
adequate water for rice paddy cultivation. Many settlers were given 
land before irrigation water was provided and then had to be 
``sustained by food assistance under the World Food Program for longer 
than anticipated.'' \5\ The river was dammed in the wrong place and 
more people were resettled in order to satisfy needs of the 
politicians. Both the Irrigation Department and the ADB failed to 
design the project to cater to the river flow. In most years, not a 
single plot is cultivated in the new development area. According to the 
ADB's OED report, ``Destruction of livestock land, shrimp lagoons, and 
wildlife habitats adversely affected the livelihoods of some groups in 
the project area and led to increased conflicts between settlers and 
herdsman.'' \6\
---------------------------------------------------------------------------
    \5\ ADB, Operation Evaluation Office. ``Project Performance Audit 
report on the Kirindi Oya Irrigation and Settlement Project in Sri 
Lanka.'' December 2000, quoted in ``Asian Development Bank: In Its Own 
Words,'' Fried, Lawrence, Gregory, 2002.
    \6\ Ibid.
---------------------------------------------------------------------------
    Mr. Kumarasinghe, Secretary to the Federation of the Integrated 
Farmers Organisation-Kirindi Oya, said

          We were given only one hope that we will be provided with 
        water for both ``Yala'' and ``Maha'' seasons. But today it has 
        become only a dream. Farmers have been indebted day by day and 
        it has developed to an extent that some farmers commit suicide.

    According to the ADB's evaluation report, the Kirindi Oya project 
was considered to be politically expedient as the Sri Lankan Government 
sought to address civil unrest in the impoverished area and promote 
``more balanced development.'' This same political imperative meant 
that less expensive project alternatives were not adequately 
considered.\7\ Social tensions and inequality increased in the area 
because of the project, and ``many settlers brought in from outside the 
project area appear to have obtained their allotment by political 
influences.'' \8\
---------------------------------------------------------------------------
    \7\ Ibid.
    \8\ Ibid.
---------------------------------------------------------------------------
    Kirindi Oya had time overruns of more than 100 percent and, despite 
its high cost, was not ``relevant'' to the development needs of the 
local population.

          The expenditure of close to $100 million to benefit a 
        relatively small number of settlers can be considered of 
        limited relevance in the context of overall development needs 
        and poverty alleviation in the southern dry zone.'' \9\
---------------------------------------------------------------------------
    \9\ Ibid.

    The Green Movement of Sri Lanka and Oxfam Community Aid Abroad 
produced the report ``Too Little Too Late'' in 2001, which addressed 
the grave problems in the Kirindi Oya project. This report and a letter 
from the Federation were presented to ADB President Chino during the 
ADB Annual General Meeting in 2001. Although a response to the letter 
was received from ADB, there were no steps taken to correct the 
problems.
    Although the Federation had hopes that the ADB will provide a new 
water source, assistance did not materialize. Mr. Jayaweera says

          Newly settled families have now doubled. Since the population 
        in the project is increasing they have no income for living. 
        There is no education for the children. Although ADB is 
        responsible for this poverty creation we have no access to the 
        ADB.

    Furthermore, our information revealed that land allocation in the 
Kirindi Oya project was full of corruption. According to villagers, 
both politicians in the area and the government officers were involved 
in requiring bribes from the people who were not their political 
supporters in exchange for their land allocation. This is one reason 
more lands were cleared and developed than could be irrigated by the 
reservoir. Although we presented documents and evidence to prove the 
allegations of corruption in a letter from villagers to the ADB 
President in 2001, ADB failed to address these issues. They responded 
to the people's letter and sent a consultancy firm to the project area, 
but there were no changes on the ground.
    While the destruction caused by the Kirindi Oya project, which was 
funded more than 25 years ago, still needs to be corrected, ADB 
continues to provide funds for new projects. The Southern Transport 
Development Project is a recent example of violations of social, 
environmental, and human rights and inadequate controls to guard 
against corruption.

                               5. CASE II

ADB's Accountability Experiment through the Southern Transport 
        Development Project (STDP) 1999
    The Southern Transport Development Project (STDP) is one of the 
most controversial projects of recent times. But it is a dream for some 
politicians. The project has been characterized by mismanagement, 
corruption, social unrest, delay, disregard of social and environmental 
concerns, and in some cases, police abuse and threats. Sri Lankan 
Government bureaucrats as well as the lending institutions (both ADB 
and the Japan Bank for International Cooperation [JBIC] in this case) 
and consultants are responsible for these injustices.
    STDP involves the construction of an Expressway connecting Matara 
(a southern city) and the outskirts of Colombo by a 128 km road. The 
road crosses through 4 river basins and over 100 small and large 
wetlands and paddy fields. It also passes through many villages, home 
gardens, and demolishes over 1,300 houses. In total, 8,745 land lots 
are planned to be crossed by the Expressway. In 2002, estimates showed 
that 5,683 households of all categories will be affected. Resettlement 
cost for STDP would be US$29.75 million.\10\ The total project cost is 
33 billion rupees or approximately US$230 million. The local 
implementing agency is the Road Development Authority (RDA), which 
comes under the Ministry of Transport and Highways.
---------------------------------------------------------------------------
    \10\ Resettlement Implementation Plan, October 2002.
---------------------------------------------------------------------------
    ADB's Environmental Policy requires the consideration of 
environmental problems since this is an environmental Category A or 
high-risk project with significant impacts. The Environmental Impact 
Assessment (EIA) was done for a 3-4 kilometer-wide corridor, with 
detailed studies for a corridor of 200 meters for housing, but as it 
turned out, it did not address the actual impacts of parts of the road 
trace that was subsequently chosen. In fact, as described in more 
detail below, about 40 percent of the entire final trace of the road 
financed by the ADB was not covered by the EIA. As a result, numerous 
groups of people and households have had their livelihoods and quality 
of life affected without adequate compensation. The EIA was subject to 
heavy criticism, as it had not properly addressed these environmental 
and social impacts.
    The project is guided by the Sri Lankan National Environmental 
Policy and the Resettlement Policy as well as the ADB safeguard 
policies such as Involuntary Resettlement, Environment, Information 
Disclosure and the Inspection Policy. However, these policies are being 
breached and the project has serious social, environmental, and legal 
issues.
    Since 2001, people have been exploring legal redress through the 
local judiciary. They went to the Local Human Rights Commission, 
Appeals Court, and to the Supreme Court. Although the Supreme Court 
decided that human rights have been violated in the STDP project, it 
did not make any changes in the project's design, or influence the 
attitude of the ADB and the RDA.
    Construction in the ADB-financed area started in 2003. Many people 
were displaced. Numerous social and environmental issues were created.
    The committee has heard testimony of Mr. Bruce Rich last September 
28, 2004, on the allegations of corruption in this project concerning 
the bidding process and contract award, which I will give an update on. 
But the corruption and irregularities in management in this ADB project 
permeate down to the level of the poor and displaced, which I will 
first describe in the following section.

            5.1  Forms of corruption at the local, implementation level

    Many people, who have received compensation for their land which 
was taken for the project, are not happy. But the Land Acquisition & 
Resettlement Committee (LARC) for the project provided unprecedented 
compensation for a few individuals. This is one type of local 
corruption and abuse of power that happens under the STDP. Many people 
thought that they would get the same compensation. But they never did. 
Initially people were paid the market price. But now they are given 
only the very low government value plus 25 percent.
    The affected people do not have access to the Resettlement 
Implementation Plan. Displaced people have never seen a copy of the 
plan. RDA does not give a copy. Those who have been displaced people 
have moved out without proper guidance or knowledge of their 
entitlements. They were told to leave before receiving compensation. 
Many people were intimidated into removing their roofs, they were told 
they would get no compensation if they did not do so immediately. Often 
they got only Rs 50,000 (US$500) as a rent allowance and nothing more. 
Their neighbors do not even know where they live now.
    According to the villagers, Divisional Secretaries (government 
officials below the provincial level) were told by the RDA that they 
will be given Rs 250,000 (US$2,500) for early clearance of the trace. 
Divisional Secretaries instructed Grama Niladhari (Village Officers) 
and certain villagers who were provided better resettlement packages to 
demonstrate to the ADB officials that there were many satisfied people. 
This is the second type of local corruption.
    RDA resettlement officers ask for bribes from the affected people 
to approve better compensation packages. This includes better land for 
the new house. Those who disagree are given rocky lands. This is the 
third type of local corruption.
    People living in Gelanigama, which is a village located close to 
Kalutara, say

          . . . we went to all the authorities including the Inspection 
        Panel of the ADB, but with no success. We were threatened with 
        arrest by the Parliamentary Member of the area, if we do not 
        allow the road to be constructed.

    They said surveyors came to their village with police officers from 
five police stations. They cry for justice.
    Affected people in Akmeemana say that road trace was changed to 
protect land owned by a rich businessman. They said

          . . . our politician took bribes to protect those lands and 
        change the trace. We now have no faith in them.

    They went to all available judicial mechanisms in Sri Lanka. They 
also wrote to the Inspection Panel of the ADB with no success. The 
first Inspection request in 2001 was denied by the ADB, which 
misconstrued facts and pretended that the affected people were all 
within a 3 km corridor. This was proved false at that time, but it was 
only in 2004 that the ADB admitted this.
    The surveying of the road was accompanied by police abuse and 
threats in some areas. The surveyors came with police. Gelanigama 
people say they came to their village and threatened that they would 
arrest them. Police arrested one woman from Akmeemana and detained her. 
She was the single parent of a young child.
    There are many unresolved issues. The design process is full of 
intimidation, bribery and corruption, betrayals and displacements.

            5.2  Corrupt contract award--can ADB wash its hands?

    The consultants involved in the design are Wilbur Smith Associates 
in association with Resource Development Consultants (WSA & RDC). The 
EIA report was done by the consultants of the University of Moratuwa. 
The EIA process is full of errors. About 48 kilometers (40 percent) in 
both JBIC and ADB sections in the Final Trace are not covered by the 
EIA. The design was changed to a new trace by the RDA without authority 
and without any studies or a new EIA. The Supreme Court ruled that the 
process of approval had not been followed.
    The construction contract for the Southern 62 km has been awarded 
to Kumagai Gumi, a Japanese construction company.
    As stated by Bruce Rich in his testimony on September 28, 2004

          Allegations regarding contracting irregularities emerged in 
        Sri Lankan newspapers in 2001 and 2002, which were confirmed by 
        a parliamentary Committee on Public Enterprises. In the bidding 
        process for the project, 29 companies applied, and three met 
        the prequalification bidding procedures, based on a number of 
        considerations, including the financial condition of the 
        prospective contractors. A Japanese company, Kumagai Gumi, did 
        not meet the prequalification criteria,\11\ and in fact had a 
        negative financial worth. Kumagai hired an agent, Access 
        International, to help win the contract. As is typical with 
        this sort of arrangement, Access would win a hefty fee if it 
        paved the way, as it were, for a successful contract award for 
        its client. Sri Lankan newspapers reported that Access had 
        influential political connections, including in the Prime 
        Minister's Office.\12\ Access is alleged to have bribed the RDA 
        project official, for example by installing a new diesel 
        generator in his home, giving him the use of a new SUV, and 
        promising financial rewards if Kumagai won the contract.\13\ 
        This use of agents as motors of corruption to win contracts in 
        some respects recalls the case of the Lesotho Highlands 
        Project, discussed in the committee's July 21, 2004, hearing.
---------------------------------------------------------------------------
    \11\ To prequalify, companies had to score 60 points in an 
evaluation framework assessing their financial stability, technical 
capacity, etc. The prequalifying companies had scores of 95, 79 and 75. 
Kumagi's score was 54.
    \12\ Frederica Jansz, ``COPE Shoots Down Southern Highway,'' Sunday 
Leader (Sri Lanka), October 27, 2002; Frederica Jansz, ``Of Highways 
and Backroom Access,'' Sunday Leader (Sri Lanka), November 1, 2001.
    \13\ Ibid.
---------------------------------------------------------------------------
          After the prequalification process was complete, the ADB 
        reportedly sent a letter to the Sri Lankan Treasury requesting 
        that Kumagai Gumi nevertheless be considered as a bidder on the 
        project. Three companies, including Kumagai, participated in 
        the final bidding; only Kumagai was allowed to submit a second 
        alternative bid. Kumagai knowing the lowest bid of the other 
        two companies, was naturally able to submit another, lower bid, 
        and win the contract. All of this is recounted in two Sri 
        Lankan newspaper articles, which I have submitted for the 
        record. In the aftermath, the bidder that would have under 
        normal procedures won the contract, protested, repeating the 
        same allegations, and threatened to bring legal action.
          The Sri Lankan parliamentary Committee on Public Enterprises 
        (COPE) conducted an investigation, and concluded that both 
        national government procurement guidelines and those of the ADB 
        had been violated.\14\ The Attorney General of Sri Lanka, when 
        asked how Kumagai could have won the contract in violation of 
        national and ADB tender guidelines, reportedly stated: 
        ``Kumagai Gumi had been accommodated purely on a suggestion by 
        the ADB on February 13, 2001, particularly since it is an ADB 
        funded project and the guide on prequalifications specifically 
        provides [in such cases] for ADB approval.''\15\
---------------------------------------------------------------------------
    \14\ Ibid.
    \15\ Ibid.
---------------------------------------------------------------------------
          When the ADB Anti-Corruption Unit undertook its first mission 
        to perform spot procurement audits in a borrowing country last 
        year, it went to Sri Lanka, but did not look at the Southern 
        Transport Development Project.\16\ According to ADB staff, they 
        do not wish to pursue anticorruption claims against a project 
        where an Inspection Panel claim may be underway or pending. 
        This is truly a perverse and counterproductive approach, since 
        not only does the Inspection Panel not appear to investigate 
        corruption, it is likely that projects with Inspection Panel 
        claims underway may be precisely the ones where corruption 
        abuses may be better documented.
---------------------------------------------------------------------------
    \16\ The Anti-Corruption Unit examined another project, and no 
corruption. It found weak financial controls which could have been 
exploited for corruption if corruption were present in the project.
---------------------------------------------------------------------------
          Meanwhile, the STDP project proceeds and Kumagai remains the 
        contractor. Neither ADB management nor the ADB Board appear to 
        be interested in investigating the extremely serious 
        procurement irregularities and cost overruns in this case.

    Responding to this claim, which also appeared in the Sri Lankan 
newspaper, the Daily Mirror, on October 2, 2004, Mr. Alessandro Pio, 
Country Director of the ADB resident mission in Sri Lanka states that

          During the hearing, allegations were made about the Southern 
        Transport Development Project in Sri Lanka, which were not new. 
        In fact, ADB had addressed many of the issues relating to the 
        project, in your own publication in May 2002.
          On the prequalification process highlighted in your article, 
        the objective was to ensure that sufficient and appropriately 
        experienced and resourced companies were eligible to tender for 
        the ADB-funded project, thereby achieving a cost and quality 
        effective outcome.
          Three companies were originally prequalified and another--the 
        fourth company referred to in your article--met the basic 
        financial, experience, and resource requirements but fell 
        slightly short of a passing mark when these criteria were 
        combined.
          Since the objective of the process was to maximize 
        competition, and because the deficiency was of a technical 
        nature only, the company was permitted to participate in the 
        tender process. It is important to note that the company became 
        eligible simply to tender for the work, in competition with the 
        originally prequalified companies. There was no question of the 
        company being awarded the contract as a consequence of the 
        prequalification process.\17\
---------------------------------------------------------------------------
    \17\ Alessandro Pio, Country Director, ADB Resident Mission, ``ADB 
Clarifies Inaccuracies on Corrupt Project in Lanka,'' Daily Mirror, 
October 6, 2004.

    Although this response rejects the allegations, it proves that ADB 
has interfered with the bidding process which means the process is not 
transparent. According to Alessandro Pio, this was a ``slight 
relaxation.'' \18\
---------------------------------------------------------------------------
    \18\ ``ADB Chief Refutes Charges,'' The Sunday Leader, October 10, 
2004.
---------------------------------------------------------------------------
    A subsequent article appeared in the Sri Lankan newspaper, the 
Sunday Leader, on October 10, 2004, reiterating the ADB's involvement 
and stating that

          . . . after the prequalification process was complete the ADB 
        reportedly sent a letter to the Treasury requesting that 
        Kumagai Gumi nevertheless be considered as a bidder on the 
        project. The Attorney General of Sri Lanka, when asked how 
        Kumagi could have won the contract in violation of national and 
        ADB tender guidelines, reportedly stated: ``Kumagi Gumi had 
        been accommodated purely on a suggestion by the ADB on February 
        13, 2001, particularly since it is an ADB funded project and 
        the guide on prequalifications specifically provides [in such 
        cases] for ADB approval.''\19\
---------------------------------------------------------------------------
    \19\ Federica Jansz, ``Southern Highway--The Access to 
Corruption,'' The Sunday Leader, October 10, 2004.

---------------------------------------------------------------------------
    This article also states that

          Secretary to then Prime Minister Ranil Wickramasinghe, 
        Bradman Weerakoon articulated similar sentiments stating 
        Kumagai was awarded the contact after the ADB intervened to 
        ensure the project went to the Japanese firm.\20\
---------------------------------------------------------------------------
    \20\ Ibid.

    Responding to Mr. Pio's article, Sarath Athukorala and Heather 
Mundy of the Joint Organization of the Affected Communities on Colombo-
---------------------------------------------------------------------------
Matara Highway state that

          Mr. Pio says ``There has been a general misunderstanding that 
        the project cost increased from 11-12 billion rupees to 27 
        billion rupees, because of the alignment changes. However this 
        is actually a misleading comparison between the cost of the ADB 
        financed section and the total project cost, which includes the 
        section financed by the JBIC.''
          This is totally untrue. Mr. Alessandro Pio is either unaware 
        of what he is commenting on or he is deliberately misleading 
        the people of Sri Lanka. The major documents of the project 
        include the cost for the entire road in the range Rs 11-15 
        billion, not as Mr. Pio indicated for only a section of it. 
        \21\
---------------------------------------------------------------------------
    \21\ Sarath Athukorala, Heather Mundy, ``ADB--The Truth Behind the 
Highway,'' Daily Mirror, October 18, 2004.

    The response of the affected people also addresses Mr. Pio's 
explanation with regard to the prequalification. Affected people state 
---------------------------------------------------------------------------
that

          With regard to the points allocated at prequalification, 
        there has been more than enough publicity of the computations, 
        all recognize that the disqualification was not of a technical 
        nature. Kumagai Gumi, has financial problems, its Bank had to 
        write off an enormous amount of debt in 1997 and again in 2000. 
        More recently its executives have also allegedly been involved 
        in bribery, illegal political donations, and money laundering. 
        See Mainichi Newspaper about Imajo in Japan in 2002, and again 
        in 2003 and Papua New Guinea Post Courier about 1995 to 2000. 
        So much for Mr. Pio's ``deficiency of a technical nature.''

    The ADB's main explanation for its pressing for the involvement of 
Kumagai Gumi despite the company's failure to prequalify is not 
convincing: ``The objective was to ensure that sufficient and 
appropriately experienced and resourced companies were eligible to 
tender for the ADB-funded project, thereby achieving a cost and quality 
effective outcome.'' If this were the case, why did the ADB intervene, 
not to increase the number of prequalifiers, but to urge that one 
specific company, and one company only, be included, one indeed that 
had failed the prequalification tender because of its risky financial 
condition? And after this same company was finally chosen, the 
project's cost has increased by over 100 percent.
    The ADB's anticorruption unit (the Integrity Division), in response 
to the submission from affected communities regarding these corruption 
allegations in the STDP, simply replied, ``We have conducted an 
investigation on the concerns that were raised. We did not find 
evidence of fraud or corruption, as defined by ADB, or that ADB's funds 
were misused. Thus, we are closing the case.'' When the affected 
communities requested more information on the investigation, they were 
told that no report was produced. The ADB's Integrity Specialist then 
asked that the communities provide evidence of ``who received the 
payment, how much was paid, when the payment was made, how the payment 
was made, which contract were you referring to, any corroborating 
evidence to indicate the allegation, any information that you may have 
that would help us to determine if further investigation is warranted, 
etc.'' \22\
---------------------------------------------------------------------------
    \22\ E-mail from ADB Integrity Specialist to Joint Organisation of 
the Affected Communities on Colombo Matara Highway, March 2005.
---------------------------------------------------------------------------
    The ADB cannot wash their hands of the corruption either because of 
the involvement of its own staff and due to the failure of its own 
policy implementation. Since this project is a joint-funded project of 
the ADB and the JBIC, the selection of a Japanese construction 
contractor could have been a prerequisite or a factor leading to undue 
influence and pressures to choose a Japanese company.
    We have seen similar pressure from the Japanese Government during 
the selection of the construction company for the Upper Kotmale Hydro 
Power project, which is a very controversial project funded by JBIC. 
This project will have negative impacts on six beautiful waterfalls 
located in the hill country of Sri Lanka.

            5.3  STDP destroys environment and sustainable livelihoods, 
                    too
    The STDP Expressway crosses four major rivers in the southwestern-
southern part of Sri Lanka, viz KaIu Ganga, Bentara Ganga, Gin Ganga, 
and Polwatta Ganga.\23\ The Expressway traverses through 60 percent 
high ground and 40 percent wetlands. Due to its undulating nature and 
for easy filling material, the road will be constructed by cut and 
fill. This will create some major environmental problems.
---------------------------------------------------------------------------
    \23\ These four rivers create severe flooding in the southwest 
monsoon annually.
---------------------------------------------------------------------------
    It has many negative social and environmental impacts as it crosses 
through many rural villages where people still have sustainable 
livelihoods. Villagers say

          We don't need many inputs from the cities. The villages are 
        surrounded by paddy fields owned by us, which gives rice in two 
        seasons. Jak, bread fruit, green vegetables come from our home 
        gardens. We have plenty of water and fertile lands. Our cattle 
        are grazing in the nearby field. The temple is in the vicinity. 
        Our relatives are living around us. What else do we want? Who 
        wants to leave such a heaven? This is a sustainable life.

    When the road is constructed it will destroy this natural 
environment. The agriculture will be destroyed. The paddy field will be 
filled with soil. Stagnant water will destroy the remaining fields. No 
more good soil or lands for agriculture will be available. There will 
be no more home gardens or lands for grazing. Flooding will increase. 
Wetlands will be destroyed.
    The compensation is not sufficient to complete the replacement 
houses they have started constructing. They were not given enough 
compensation to maintain, let alone improve, their living standards as 
the project promised. No one has been given the market value of their 
land or assets.
    Rice is the staple food of the Sri Lankans, but it seems all major 
and minor development projects destroy paddy fields day by day. 
Agriculture is the main economic activity of the affected people and 
the affected area of STDP. Paddy is one of the main crops. However, 
299.9 hectares of paddy lands will be acquired for this project. This 
is about 31.53 percent of the total land acquisition for the STDP. 
While these plots are directly affected, hundreds of acres of other 
paddy lands will be destroyed due to soil erosion, water clogging, etc. 
No paddy lands will be developed under this project. Therefore those 
farmers will lose their employment.
    It was estimated that 265 people would lose employment in paddy 
sector for the combined road trace which the ADB loan was originally 
granted for. The area this road trace would cross had large tracts of 
abandoned paddy fields. For the combined trace, the total annual 
estimated economic loss in terms of paddy cultivation is Rs 5,990,484. 
For large parts of the current trace, which traverses through villages 
and cultivated paddy lands, there are no studies to estimate the total 
value of lost paddy lands. Isn't this a destruction of sustainable 
livelihood?
    Yes, the road will give access to major cities. It may increase 
industrial development, too. There will be benefits to the general 
public. It will give more jobs to some people who now depend on 
agriculture. But this all could be achieved at much less cost and 
without needlessly impoverishing hundreds of households, if corruption 
and mismanagement did not permeate this ADB project.
    Although those who are engaged in agriculture will be temporary 
laborers for the road construction when their fields are destroyed, 
what will happen to them afterward? The temple and the school will be 
separated from the people by an Expressway. Relations will be 
separated. Community will be dispersed. There will be no village 
anymore. Sustainable livelihood will be destroyed.

            5.4  ADB's accountability mechanism failed

    In 2002, four cases concerning the project were filed in the Sri 
Lanka Court of Appeal. The Court appointed a Judicial Committee of 
Retired Supreme Court Judges to investigate the position. Their Report 
stated ``the alterations are of a significant nature and should be 
approved afresh.''
    Instead of ordering an EIA and Social Impact Assessment (SIA), the 
ADB did just the opposite. It declared the loan effective on a 
Resettlement Implementation Plan which said there were only 31 
objectors when there were actually 51 petitioners still in the Court of 
Appeal. At the same time, the ADB acknowledged receiving over 150 
letters objecting to the unstudied change of road trace.
    Nevertheless they pressurized the Sri Lankan Government to sign the 
contract with Kumagai 2 months later, 5 months prior to the verdict in 
the Court of Appeal. These very signatories to the letters continue to 
protest, causing delay to the project which is costing the Sri Lankan 
Government.
    In 2004, 2 years after the contract had been awarded to their 
favoured contractor, Kumagai, and work had progressed, affected people 
approached the ADB's new accountability or inspection mechanism through 
its ADB's Special Projects Facilitator (SPF) process and Compliance 
Review Panel (CRP). The Special Projects Facilitator has recently been 
added to the ADB accountability mechanism as an initial step to promote 
consultation or mediation between the affected people, the government 
implementing agency, and the ADB's operations department. The 
Compliance Review Panel investigates the affected people's claims of 
ADB policy violations that have caused them harm.
    Belatedly, the ADB SPF admitted that the 3 km argument which was 
used by the ADB to deny the first inspection request in 2002 was not 
valid. The SPF acknowledged that indeed neither an EIA or an SIA exist 
for the final road trace.
    However, subsequent delays by ADB in carrying out its own 
accountability process had the effect of buying time for the contractor 
and RDA to advance their activities to a point of no return. The SFP's 
investigation of the complaint was delayed from the required 49 days to 
over 100 days. The pretext was to allow the report of a committee 
appointed by the Prime Minister and an ADB Safeguards Review Report to 
be published. Neither of these reasons are in line with the ADB's own 
Accountability Mechanism Procedures. The complainants have not been 
allowed access to either of these reports to date.
    In December 2004, the SPF appointed an international mediator who 
spent half a day with the complainants. Without further discussion, he 
and the SPF suddenly closed the mediation process in January 2005, 
claiming that he could not reach consensus on the dispute that had been 
going on for over 3 years. The refusal of the implementing agency 
(RDA), with the backing of ADB, to study their road trace changes was 
allowed to block the facilitation.
    Whilst the CRP is still investigating ADB policy violations, the 
SPF decided to close the mediation or consultation process.
    The ADB thought fit to hasten the signing of a contract with 
Kumagai when it was patently obvious that strong protests would 
continue, as, in fact, they are. The ADB continued to ignore the 
protests of the people from 2001 onward, and made every effort to 
hasten the commencement of the project which violated its 
environmental, social, and economic policies. During this entire 
period, the project was under a growing cloud of corruption and bidding 
irregularities widely publicized in all of Sri Lanka.
    One can define corruption in various ways. In the view of many Sri 
Lankan civil society groups, there is institutional corruption when ADB 
management uses--or rather misuses--ADB accountability processes like 
the Inspection Panel, the SPF and CRP, and the Safeguards Review Report 
to allow loans which violate ADB policies and covenants to continue. 
This may be because money is changing hands or because, as Mr. Rich has 
pointed out, the ethic at ADB is loan disbursement, not development 
effectiveness.
    The ADB is the largest multilateral lender to Asia; there is a real 
threat of some Asian countries becoming another economic burden like 
Africa if institutions like ADB are not forced to become more 
transparent and accountable and made to remember that they are not 
responsible and accountable only to themselves.
    As ADB is increasingly using cofinancing in projects, it is even 
more important that they work strictly within policies and guidelines, 
since the ADB through cofinancing leverages multiples of its own 
financial contribution often based on confidence in the integrity of 
its procedures and financial management.

            5.5  What is questionable?

    Corruption is manifest throughout the Southern Transport 
Development Project (STDP). It is not limited to the transactions 
described in the testimony to the Senate Foreign Relations Committee by 
Mr. Bruce Rich on September 28, 2004. It is underpinning and 
contaminating the whole project.
    Why is it that the Implementing Agency--RDA--has worked so hard to 
avoid any sort of study of the changes to the road trace they have 
made? Why have they sought to proceed with a plan that harms more than 
double the families that were on the recommended trace for the 
Expressway? Why has the cost more than doubled? Why did they choose 
some of the most difficult places for construction to build the 
Expressway?
    Why is it that the ADB has sought to block any investigation? Why 
is it happy to ignore breaches of Loan Covenants? Why is ADB happy to 
ignore the many breaches of its Safeguard Policies?
    We think the most plausible answer can be found in the gains to 
individuals throughout the process. For ADB personnel, possibly it is 
to keep their record clean and increase their portfolio, though one of 
the individuals involved did so much to substantially alter the project 
from its original concept that one cannot help but question whether 
there was not some personal gain somewhere.
    Corruption does not mean that only money is passed from hand to 
hand, it means ignoring major safeguard policies that are designed to 
protect local communities. It also means a lack of transparency and 
accountability. It means using Accountability Mechanisms that are 
supposed to solve problems to buy time so that projects with gross 
irregularities proceed past the point of no return and foreclose the 
benefit of correction.

                              6. CASE III

Upper Watershed Management Project: Another Example for Corruption and 
        Irregularities
    Upper watersheds for the main rivers in Sri Lanka (Kalu ganga, Uma-
oya, and Kirindi-oya) are badly affected by soil erosion that has taken 
place due to the cash-crop plantations started in the British period, 
subsequent population growth and land use for new agricultural 
development. As there are many adverse changes in the waterways and the 
surroundings in the area at present, the ADB with the assistance of the 
Government of Sri Lanka has inaugurated a project under the Ministry of 
Forestry and Environment to conserve the upper watersheds of above-
mentioned rivers.
    The ADB-funded Upper Watershed Management Project of Ministry of 
Forestry and Natural Resources has an estimated total cost of US$23.7 
million, which consists of 70 percent from the ADB, 25 percent from the 
Government of Sri Lanka and 5 percent from the beneficiaries. The 
project started on May 5, 1998 and was to be completed by December 31, 
2004.
    The investigation done by the Green Movement of Sri Lanka, a local 
environmental organization, shows that the project has many 
irregularities, including slow project performance, the absence of a 
consultative process for affected people, failure to implement the 
participatory fire prevention plan developed by the Provincial 
Secretariat, failure to integrate the involvement of the village-level 
government officers (Grama Sewakas) and village-level officers of the 
government poverty alleviation program (Samudri), field and provincial 
officers, in the Project even after their request, failure to take 
action on the reported irregularities that have taken place in the 
replanting process by officers. There are a number of financial 
irregularities relating to purchases of the rubberized coir pots, plant 
material, etc., that is necessary for the project.\24\
---------------------------------------------------------------------------
    \24\ Forest in Trouble, Green Movement of Sri Lanka, 2003.
---------------------------------------------------------------------------
    The Project failed to address soil conservation measures. The 
project failed to reach some important areas but carried out work in 
areas that are not that important. Some of the findings and 
observations on financial management and policies in the project are 
also cause for concern. All the above-mentioned activities of the Upper 
Watershed Management Project have led to financial and administrative 
irregularities. The Project money was used for printing religious books 
for certain politicians in the area, and constructing roads across the 
forests to satisfy local politicians. The Project had deviated from its 
original basic concept and objectives. The rest of the Project staff 
made a complaint to the authorities about the irregularities, but no 
action was taken.\25\
---------------------------------------------------------------------------
    \25\ Ibid.
---------------------------------------------------------------------------
    The money loaned from the ADB is being utilized haphazardly in an 
irresponsible way under this Project. The Project Management has 
grossly violated the institutional fundamentals and ethics of the ADB. 
The citizens of this country are paying this loan and will be paying in 
the future, too.
    The Green Movement of Sri Lanka requested the ADB to evaluate the 
present situation by an independent body, and to take appropriate 
action to control these financial misappropriations under the Project 
before it is too late. The report prepared by the Green Movement was 
sent to the ADB Resident Mission, Government agencies, and the relevant 
Minister. This was also raised with the ADB mission who visited to 
study the performance of the project in late 2004. According to the 
Green Movement no action to date has been taken to solve the problems.

                7. LACK OF ACCOUNTABILITY AND CORRUPTION

    The above three cases show that ADB-financed projects are facing 
serious accountability problems. The projects can go wrong in (a) 
design stage, (b) contracting stage, and (c) implementation stage. The 
problems in the Kirindi Oya Project and STDP are at the design, 
contracting, and implementation stages. The problems in the Upper 
Watershed Management Project is at the implementation stage.
    Although the ADB has a number of safeguard and accountability 
policies, it exercises inadequate scrutiny over the implementing 
agencies for its loans in Developing Member Countries (DMCs). While 
some irregularities may be unavoidable, the problems in the bidding 
processes have, in some cases, been caused by the ADB itself, such as 
in the STDP project detailed above.
    According to Mr. Jak Jabes, the Director of ADB's Governance and 
Regional Cooperation Division, corruption in Asia can cost up to one-
sixth of a country's GDP. He also states that governments pay between 
20 percent and 100 percent more for goods and services due to corrupt 
procurement practices.\26\ The ADB is aware of the corruption in its 
borrowing members.
---------------------------------------------------------------------------
    \26\ Daily Mirror, May 25, 2000.
---------------------------------------------------------------------------
    The above three cases show that the corruption in ADB-financed 
projects is on several levels. At the first level, government officers 
involved at the local implementation level may ask for bribes in 
exchange for compensation for villagers' lands or assets which are 
taken for the project. The second level involves the local politicians 
and their supporters who ask for bribes to allow for construction or 
project implementation. They also ask for subcontracts and jobs for 
their supporters. This includes misuse of project assets. The third 
level of corruption is related to big companies, which can involve 
high-level Government Officers, Project Designers, and possibly ADB 
officials.
    For example, hiring of Government Officers for ADB projects and 
paying them multiples of their normal salary is a practice which 
encourages corruption. Furthermore, employing foreign experts and 
paying them salaries more than 50 times the amount paid to the equally 
qualified and experienced local employees is also a practice that 
encourages irregularities and corruption in ADB projects.
    Mr. R. Dissanayake of Kotte, Sri Lanka stated

          I was appalled to read in the newspapers recently that an 
        enormous amount of money is to be spent on a water resources 
        management project with a loan obtained from the ADB. A 
        breakdown of the Rs 1400 million project budget indicates that 
        Rs 62 million is to be spent for import of vehicles, Rs 182 
        million for purchase of equipment, Rs 248 million for employing 
        foreign specialists, and Rs 492 million for training. I venture 
        to predict that this project will also end up with very limited 
        benefits to the people of this country but will bestow ample 
        benefits to the lender, the politicians and state official's 
        associated with the project.\27\
---------------------------------------------------------------------------
    \27\ R. Dissanayke, Kotte, Foreign funded project rackets, Opinion 
page, The Island, January 30, 2003.

    It is the general perception among the public in Sri Lanka that 
ADB-funded projects are often involved with some kind of corruption. 
There is a wide belief that these projects somehow give fewer benefits 
to the people while significant amount of funds seep to corrupted 
officials and politicians. There is also a popular perception that 
senior government officers design projects to earn very high income 
before they retire.
    There has been, for example, serious fights between officers for 
the project manager post for the ADB Upper Watershed Management Project 
and the Protected Area Management and Wildlife Conservation Project. 
The result is the implementing agencies divide and one group does not 
allow other groups to implement the project.
    Mr. Chairman, Senators of the committee, the ADB is not accountable 
to the people in the borrowing countries or in the donor countries. 
They are only dealing with the governments. ADB is also immune to any 
legal action. ADB management and the staff take this as a freedom to 
design and fmance projects that may destroy local communities, their 
livelihood, environment, and natural resources. ADB's lending target 
(culture of loan approval) approach and the internal evaluation of 
performance based on how much money has been released through the ADB 
is a killing approach.
    This is one reason for the staff to approve destructive projects 
that destroy the sustainable livelihoods of local communities. But also 
many ADB staff strongly believe that they will not be punished for any 
of their wrong actions. The only penalty is that they will be 
transferred to another division. I strongly believe that this approach 
should be changed.
    The people forcibly resettled under Lunugamwehera are still 
suffering after more than 25 years for the wrongs done by the ADB, 
local staff, and politicians. In the STDP, resettled people are 
suffering because of the wrong actions of ADB and the Sri Lankan RDA. 
Those who complain or seek justice through local courts and the 
Inspection Mechanism of the Asian Development Bank are threatened with 
reduction of compensation or delay of compensation. The case of the 
Upper Watershed Management Project shows that the country suffers from 
the many irregularities of the project managers and the ADB staff. We 
strongly believe that this culture of the Bank and the attitude of its 
implementation partners need to change very quickly. The above case 
studies show that the Bank often exercises no control or monitoring 
over the local implementation agency after the loan agreement is 
signed.
    If loan covenants are violated, the ADB has to stop disbursements. 
The STDP case shows that RDA continues to violate loan covenants but no 
action has been taken by the ADB.
    I strongly believe any measure to address the institutional 
problems relating to corruption at the ADB would also improve overall 
project quality with respect to environmental and social impacts as 
well as enhance overall economic performance.

                       8. TSUNAMI RECONSTRUCTION

    Mr. Chairman, Senators of the committee, I would also like to 
address one more issue at this hearing. It is none other than the 
tsunami which affected several Indian Ocean nations including Sri 
Lanka.

            8.1  Consequences of the tsunami

    In Sri Lanka, the tsunami killed approximately 30,740 people; 3,858 
people are still missing. About 15,683 are injured; 833,780 people 
belonging to 178,886 families have been displaced. According to UNICEF, 
about 30 percent or 12,000 of the dead and missing people are children. 
More than 800 children in Sri Lanka are left with no mother or father. 
About 88,022 houses have been completely destroyed and 25,737 have been 
half destroyed; 200 schools have been seriously damaged.
    Several beach hotels, houses, and other commercial buildings 
vanished. Vehicles with passengers were also washed out to sea. The 
railway line and roads were also damaged. A train with eight coaches 
was totally destroyed, adding 1,800 lives to the death toll; 65 percent 
of the fishing fleet has been destroyed. Ten out of twelve fishery 
harbors located in these areas have been destroyed. Sea waves destroyed 
a 200-meter to 5 km wide zone. In places such as Mulativue Sea, waves 
went more than 5 km inland. It has destroyed the biodiversity in the 
area. The Coast Conservation Department states that more than 600 
million Rupees (US$6 million) damage has been done to the coastal 
revetments which were constructed using boulders to block the waves.
    The natural environment was also destroyed by the tsunami. 
Environmental experts are now studying the affected coasts in tsunami-
hit countries to assess the damage caused to the environment. The scale 
of the tsunami's environmental damage is readily apparent, as the 
coastline has changed almost beyond recognition.
    The damage to the marine environment is equally devastating. The 
debris that flowed into the sea from the land smashed coral reefs. Some 
initial research shows that 50 percent of the coral has been damaged 
due to the harbor waves and debris. The natural environment of many 
marine organisms changed in a just a few hours. Toxic materials 
including PCBs would have entered the sea at many points, further 
affecting marine life. The amount of silt, sand, and organic matter 
mixed with the water will also smother them. On land, wells and 
freshwater streams have been contaminated with seawater, posing more 
problems.
    According to the Central Bank of Sri Lanka, the total loss for the 
country is about 150 billion Rupees (US$1.5 billion). This does not 
include the human losses and the environmental damage. According to the 
Central Bank, Sri Lanka needs 550 billion Rupees (US$5.5 billion) for 
reconstruction of the infrastructure damaged by the tsunami.
    There are many reasons for the high level of damage. These include 
a lack of awareness and information, the high population density in the 
coastal zone which is about 4.88 million people within only 4 percent 
of the land area, as well as a disrespect for the law such as the Coast 
Conservation Act No. 57 of 1981, as amended, No. 64 of 1988, a lack of 
a relevant authority and expertise, and destruction of natural barriers 
such as coastal sand dunes, mangroves, green belts, etc.
    Sri Lanka is now aiming for a shoreline conservation zone of 100 
meters in all areas and 200 meters in the Eastern province. But this 
needs proper and equal examination under the law. A proper 
environmental restoration plan is an urgent exercise. The Sri Larikan 
Government needs support for an accelerated environmental restoration 
plan. Civil society awareness and participation must be brought into 
this restoration. Civil society organizations, especially environmental 
organizations, can play a major role in this exercise.

            8.2  Scale of proposed donor support and need for greatly 
                    improved monitoring and coordination of use of 
                    funds

    After a Needs Assessment, the ADB, JBIC, and the World Bank 
announced that Sri Lanka needs US$1.5 billion for Tsunami Recovery and 
Reconstruction.\28\ The Donor Needs Assessment further states
---------------------------------------------------------------------------
    \28\ Joint Press Release ADB, JBIC, World Bank, February 2, 2005.

          . . . the assessment, prepared in close cooperation with the 
        Government of Sri Lanka, sets out clear guiding principles for 
        the reconstruction strategy, with an important emphasis on the 
        inclusion of affected communities in the planning and process 
        of rebuilding. It estimates the overall damage to Sri Lanka at 
        US$1 billion with a large proportion of losses concentrated in 
        housing, tourism, fisheries and transportation. Total losses 
        are estimated to equal 4.4 percent of GDP with about US$500 
        million in external financing required in the short term for 
---------------------------------------------------------------------------
        2005.

    Alessandro Pio, Country Director of the ADB, said

          The human impact has been even more staggering than the 
        damage to infrastructure. In some coastal communities, entire 
        families, livelihoods, and social networks have simply 
        disappeared. Reconstruction efforts must be very sensitive to 
        this human dimension, and do everything possible to help 
        restore communities, mitigate the psychological, emotional and 
        economic loss and restore hope, while working to rebuild 
        shelter and physical infrastructure.

    The Donor report stressed the need for strong monitoring, 
transparency, and accountability to ensure that the millions of dollars 
of external assistance reach their intended sources and are utilized 
efficiently. Also, the monitoring of the sustainability of the 
reconstruction work and plans is very important. Civil society 
movements have to monitor this. Otherwise transparency, participation, 
and accountability will be neglected when the country receives foreign 
aid.
    The three Donor Country Directors emphasized that nothing is more 
demoralizing for the people in need, and for those trying to help them, 
than to hear that funds are being siphoned off or wasted. It was, 
therefore, imperative that all key stakeholders in this--the 
government, the International Community, Civil Society, and the 
Liberation Front for Tamil Elam (LTTE)--agree upon a transparent 
monitoring and accounting system for all the resources that will be 
deployed in the reconstruction effort.
    The Needs Assessment identified the guiding principles for the 
recovery and reconstruction strategy as:

   The allocation of resources, both domestic and 
        international, should be strictly guided by the identified 
        needs and local priorities, without discrimination on the basis 
        of political, religious, ethnic, or gender considerations;
   Reconstruction activities are carried out by the appropriate 
        level of government, with an emphasis on decentralization where 
        feasible;
   Communities are empowered to make their own decisions during 
        recovery;
   Communication and transparency are present in decisionmaking 
        and implementation;
   Reconstruction avoids rebuilding existing vulnerability to 
        natural hazards; and
   A coordinated approach is used to prevent duplication in 
        activities.
   To translate the principles into reality, the assessment 
        team recommended a vigorous process of public consultation, a 
        communications program, and development of district-based 
        reconstruction plans for the affected areas.\29\
---------------------------------------------------------------------------
    \29\ ``Sri Lanka 2005 Post-Tsunami Recovery Program: Preliminary 
Damage and Needs Assessment,'' Asian Development Bank, World Bank, 
JBIC, January 2005.

    However these principles are too often not being carried out on the 
ground. The biggest challenge is better coordination among the relief 
agencies. In certain areas, the number of boats donated by the agencies 
is a few times higher than the actual number required. This is the 
situation with fishing nets as well. Many fisherman and experts think 
that the fish will soon be depleted if all the boats engage in fishing. 
This is only one example.
    The construction of housing is the biggest challenge. With the 100 
m no-construction zone, a severe land problem was created. Due to the 
unavailability of lands, the housing development designs have been 
delayed and still most of the people who live in relief camps have no 
hope that they will be given a house in the near future.
    Although the ADB, the World Bank, and JBIC state the importance of 
empowering communities to make their own decisions during recovery, as 
well as the importance of communication and transparency in 
decisionmaking and implementation, this is not a reality on the ground. 
People are not aware of the plans of the government.
    The slow reconstruction process leads to uncertainties about their 
future among affected people.
    Mr. Haruhiko Kuroda, ADB President said

          Given the scale of the recovery, even with our best efforts 
        at coordination, the potential for gaps, overlaps and 
        duplications is significant We need to develop tools that can 
        assist us in identifying gaps, and avoiding duplications.
          It is largely for this purpose that a draft tracking 
        mechanism has been developed for your consideration at today's 
        meeting. Adoption of the tracking mechanism will allow us to 
        coordinate, monitor and manage the overall rebuilding effort. 
        But it is so meaningful, it must be ``owned'' by the countries 
        involved.\30\
---------------------------------------------------------------------------
    \30\ Harmonization and partnerships for Effective Recovery ADB 
Press Release, March 18, 2005.

    It is too early to understand whether the ADB's monitoring tool is 
effective. But we don't see either coordination or monitoring on the 
ground.
    The large amount of funds that will be quickly disbursed by the ADB 
and World Bank for tsunami relief also underscores the need for 
immediate reforms of performance incentives for ADB and World Bank 
staff, and greatly improved anticorruption measures at the Banks.

                             9. CONCLUSION

    In the final analysis, it is apparent that because the ADB is not 
fully committed to accountability or transparency, it in effect enables 
and encourages corruption, which in turn delivers unsustainable 
projects. It is our experience in Sri Lanka that the ADB is not 
concerned whether its safeguard policies are complied with, nor is it 
even interested whether its loan covenants are met.
    Whilst it is not possible for me to show that ADB personnel are 
corrupt in receiving money or benefits personally, what is clear is 
that the corruption in our country and of the overseas contractors is 
in practice assisted and empowered by the ADB's practices and lack of 
priority in addressing this issue. The ADB currently has only very weak 
tools or mechanisms to control this corruption.
    Our experience in the STDP case is that the ADB Accountability 
Mechanism consultation phase listens only to the Government and the 
Executing Agency and does not try to stop the breaches of safeguard 
policies or corruption.
    Mr. Chairman, Senators of the committee on behalf of the 19 million 
citizens of the teardrop in the Indian Ocean which is Sri Lanka whose 
lives are affected by such careless lenders, we appeal to you to use 
your hold over the purse strings of ADB to pressurize them to care 
about development and respect the sustainable livelihoods, to care 
about the affected people, to stop the ADB feeding corruption.
    As Mr. Bruce Rich of Environmental Defense stated before this 
committee last September 28, we also believe the record of the ADB in 
addressing corruption is so poor that it would be irresponsible to 
authorize hundreds of millions of dollars for this institution without 
a clearer idea as to the steps ADB is taking to implement reforms that 
will effectively address corruption.
    In this regard I would like to make the following recommendations.

   The ADB should strongly implement its Anti-Corruption 
        Operational Procedures to explicitly assess corruption risk in 
        its country strategy programs, project appraisal, and project 
        performance evaluation reports.
   The ADB should improve transparency and information 
        disclosure. We are very unhappy about the present draft version 
        of the ADB's Public Communication Policy which says ADB also 
        understands that full disclosure of information is not always 
        possible for legal and practical reasons. It also says that ADB 
        must safeguard the privacy of its staff and protect 
        confidential business information of private projects sponsors 
        and clients.
   The ADB should halt loan disbursements when government 
        borrowers are not addressing corruption.
   There should be a mechanism to control borrowing government 
        implementing agencies when they violate the ADB's safeguard 
        policies.
   The ADB should get serious about enforcing its loan 
        covenants.
   We also ask for a proper investigation on the corruption 
        charges in the STDP and the Upper Watershed Management Project.
   Finally, we ask ADB involvement in finally correcting the 
        problems to help the affected people in the Kirindi Oya 
        Irrigation and Settlement Project.

    Thank you very much for this opportunity.
                                 ______
                                 

          From the Sunday Leader, Sri Lanka, October 24, 2004



    The Chairman. Thank you very much for that testimony. I 
would simply observe, as you've pointed out, that you have 
submitted for the record an extensive statement with a number 
of case histories, at least from your observation, that 
certainly beg investigation, as well as the conclusions that 
you have reached. We'll raise some more of that during our 
question period, but I'd like to call now on Mr. Devine for his 
testimony before we get into questioning both of the witnesses.

      STATEMENT OF TOM DEVINE, LEGAL DIRECTOR, GOVERNMENT 
             ACCOUNTABILITY PROJECT, WASHINGTON, DC

    Mr. Devine. Thank you, Mr. Chairman. Thank you for this 
invitation, and also thank you for this forum. It just doesn't 
get any more responsible than this committee's preparation.
    The Chairman. Thank you.
    Mr. Devine. Whistleblowing is the human foundation of 
transparency reforms against corruption, and other betrayals of 
MDB institutional issues. What we can contribute comes from 27 
years of experience in this field. In particular, last summer 
the Ford Foundation sponsored an in-depth research assessment 
of the whistleblower policies at multilateral development 
banks. We published the first four assessments of Changing the 
Culture of Secrecy, coauthored by our first International 
Director, John Fitzgerald, to assess those institutions. We 
held off from the African Development Bank, because they said 
release of the whistleblowing policy was imminent there, so we 
thought we'd give them a chance. That's what they said this 
year also, some time after we sought to finalize an assessment 
included as an attachment to my testimony.
    The bottom line was that we could not responsibly recommend 
the policies of any institution as safe channels to make the 
difference. That's very unfortunate, because it deprives 
whistleblowers of the opportunity to work within the system if 
they don't want to be silent observers. That just can't be 
healthy for the checks and balances of these institutions. 
Since then we've heard from numerous whistleblowers responding 
to our report, and the actual practices are far worse than the 
paper policies.
    The policies and practices of these banks must reflect the 
values of transparency and the respect for human rights that 
they expect for the rest of the world. As the first witness 
pointed out, there are severe consequences. I can second his 
experiences from a One World Trust Conference last fall, where 
there was dramatic visual evidence of how corruption in the 
Asian Development Bank turned irrigation projects into 
basically a desert, in the area they were supposed to be 
benefiting.
    Communities that are supposed to benefit from venture 
capitalism see their water supplies poisoned when the funds are 
diverted to large corporations that are constructing gold 
mines. There are very serious grounds, in terms of the human 
consequences, as well as the fiscal.
    There are also real grounds for hope. We have not seen 
grounds for optimism, but we're excited that there are grounds 
for hope. The dynamic at every institution, except the Inter-
American Development Bank has shifted from stagnant to dynamic 
in terms of their environment, their rhetoric.
    For example, at a One World Trust Conference last fall, the 
EBRD's Deputy Compliance Chief teamed up with us at GAP to 
recommend consensus principles for reform. But so far there has 
been no action. And in response to this morning's testimony we 
could say that one thing they could do right away is give 
witness protection rights to people who testify at their 
Institutional Review Mechanism. That would be a good sign of 
good faith. And with respect to their concerns about the 
European Union, they're not insurmountable. The EU has their 
own whistleblower protection system, and those could be 
coordinated.
    In particular, there's a potential for great spillover 
effect from a project at the World Bank, which has commissioned 
highly respected professor Robert Vaughn of American University 
Law School to prepare a report recommending an overhaul of its 
whistleblower policies. We're hoping this can be a precedent 
for the regional banks as well. And we feel that this 
committee's oversight vigilance will make a major difference, 
whether Professor Vaughn's work is a foundation for 
whistleblower reforms with widespread application, or becomes 
another example of objective professional expertise that 
gathers dust.
    Quite clearly, the magic formula for results will be 
persistence, persistence, persistence. This is the time to 
intensify our efforts, because we're seeing some cracks in the 
wall. It is particularly true for the Treasury Department, 
which is responsible to monitor implementation of the 
McConnell-Leahy amendments to last year's appropriations law. 
They have to issue progress reports on whether the banks were 
implementing whistleblower rights, external audits, publication 
of loan agreements and other reforms for transparency. Last 
September's report was little more than a rubber stamp of the 
status quo. The March report was a far more serious effort. 
Treasury started to use its assignment as a bully pulpit to 
press the banks. That's very encouraging, but they need to go 
farther.
    For example, at two banks without whistleblower policies 
they credited reforms that seem to be getting stale because 
they haven't been implemented. They failed to disclose or 
assess the empirical track records of any MDB policies, and 
they didn't offer specific recommendations.
    We have four areas of specific recommendations in our 
testimony. I'm glad to discuss them in response to any 
questions. But we do want to commend you for your work. 
Yesterday, Secretary Snow testified that the United States can 
give increased funding to these banks because of institutional 
commitments to reform. Our experience indicates that in terms 
of empirical results, those assertions are largely a bluff. 
Stepped up vigilance will make the difference between bridging 
the gap from rhetoric to reality.
    [The prepared statement of Mr. Devine follows:]

    Prepared Statement of Thomas Devine, Government Accountability 
                         Project Washington, DC

    Mr. Chairman, thank you for this invitation to speak before the 
committee. My name is Tom Devine and I am the legal director of the 
Government Accountability Project (GAP). I commend Chairman Lugar and 
the other members of the committee for your serious commitment to 
congressional oversight of the multilateral development banks (MDBs). 
It just does not get any more responsible or thorough than this 
committee staff's broad-based, indepth research as a foundation for 
reform.
    Whistleblowing is the human foundation for transparency reforms 
against corruption or other betrayals of the MDB's institutional 
missions. What we can contribute comes from our own oversight of 
whistleblower policies at the regional development banks and the World 
Bank. Our credentials to assess whistleblower policies are grounded in 
some 27 years of experience. GAP is a nonprofit, public interest 
organization dedicated to helping whistleblowers exercise free-speech 
rights to challenge abuses of power that betray the public trust. Our 
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. With colleagues from American University Law 
School we coauthored a model whistleblower law approved by the 
Organization of American States (OAS). Although as GAP's legal director 
I am presenting this testimony, it is a composite work product from our 
international team that also includes its leader, director Melanie Beth 
Oliviero, and coordinator Sophia Sahaf.
    Citizens in countries around the world aspire to the same freedom 
of expression and the right to know information that will protect them 
from unsafe and wasteful practices by government and private companies, 
as do the American people. The multilateral development banks are 
critical agents for other governments to meet these rights of their 
citizens. We wholeheartedly support these organizations' development 
missions but are acutely aware they are under threat from corruption, 
waste, and abuse of power. We also remain mindful that the United 
States has contributed billions of taxpayer dollars as donations and in 
the form of private investor funds to these institutions. We have a 
right to know if our money is being used to advance the welfare of poor 
people worldwide in a responsible, accountable manner. This committee's 
pioneering oversight work has demonstrated that conclusion would be a 
fantasy.
    We also know, because GAP has been investigating policies and 
practices of the African Development Bank, the Asian Development Bank, 
the European Bank for Reconstruction and Development, the Inter-
American Development Bank, and the World Bank regarding whistleblower 
protection. In 2003 the Ford Foundation sponsored our indepth research 
to assess the procedures on which MDB whistleblower policies are based. 
Last summer we released the first four volumes for ``Challenging the 
Culture of Secrecy,'' our assessments of those institutions. We held 
off on the African Development Bank, because their leaders said a 
whistleblower policy was in the final stages of preparation. That is 
what they told the Treasury Department this year. So far, nothing has 
happened. As a result, we are finalizing a report on the current 
reality faced by African Development Bank whistleblowers. Unless there 
is dramatic improvement soon, a summary of our anticipated findings is 
enclosed as exhibit 1.
    The results of our audit of paper procedures were summarized in 
written testimony last July 26. It is enclosed as exhibit 2. The bottom 
line was that we could not responsibly recommend the policies at any 
institution as safe channels to make a difference, instead of bypassing 
the institutions with leaks. Since then we have learned from over two 
dozen whistleblowers, that as practiced, actual practices are far worse 
than paper policies. Their anticorruption claims are more rhetorical 
than real. While there is no doubt that some light has been shone on 
corrupt practices, the banks are too eager to direct that light on 
client countries.
    It is imperative that the policies and practices of the banks 
themselves reflect the values of transparency and respect for human 
rights that they expect by the rest of the world. That is because these 
practices can have life and death consequences. For example, at a One 
World Trust conference last fall on organizational accountability, we 
saw dramatic visual evidence how corruption in Asian Development Bank 
irrigation projects functionally have turned the area they are supposed 
to benefit into a desert. Whistleblowers have told us how pipeline 
projects are severely undermining the lives of beneficiaries supposedly 
helped by increased energy access. Communities supposed to benefit from 
venture capitalism see their water supply poisoned, when the funds are 
diverted to large corporations that spend it on gold mines.

                            GROUNDS FOR HOPE

    We have not yet seen grounds for optimism, but we are excited that 
there are grounds for hope. Particularly with respect to whistleblower 
rights, the dynamic at every institution, except the Inter-American 
Development Bank, has shifted from stagnant to dynamic. At the One 
World Trust conference last fall, the new leader for EBRD whistleblower 
investigations teamed with GAP to recommend consensus principles for 
whistleblower reforms. But so far there has been no action at that 
Bank, which still does not have a specific policy. It is not credible 
for the Bank to continue asserting that protection can be inferred from 
composite procedures.
    In particular, the World Bank has commissioned highly respected 
Professor Robert Vaughn of American University Law School, a coauthor 
of the OAS Model Law, to prepare a report recommending an overhaul of 
its whistleblower policy. Unfortunately, the Bank so far has declined 
to release his work, creating the procedural equivalent of another 
oxymoron--secret transparency reforms. This committee's oversight 
vigilance will make a major difference whether Professor Vaughn's work 
is the foundation for whistleblower reforms that could be applicable to 
all MDB's, or becomes another example of objective professional 
expertise gathering dust.
    The magic formula for results will be persistence, persistence, 
persistence. We have come this far largely due to this committee's 
steadily increasing vigilance. Now is the time for all of us to 
intensify our efforts.
    That is particularly the case for the U.S. Treasury Department, 
responsible to monitor implementation of the ``McConnell-Leahy'' 
amendment to last year's appropriations law. That provision requires 
the United States to use its voice and vote to implement transparency 
reforms by this coming June 1, including whistleblower policies 
consistent with U.S. and international norms. The law required Treasury 
to issue September 1 and March 1 progress reports to Congress. Last 
September's Treasury report was little more than a rubber stamp of the 
status quo that could have been written by the Banks, and actually may 
have been to some degree. The March report was a far more serious 
effort, and Treasury used its assignment as a bully pulpit to press the 
banks. However, at two banks without whistleblower policies, the AfDB 
and EBRD, Treasury credited promised reforms that have been pending 
long enough to become stale, failed to disclose or assess empirical 
track records, or offer specific recommendations. There is a long way 
to go before Treasury's optimism is grounded in reality. GAP's comments 
on the September and March Treasury reports are enclosed as exhibits 3 
and 4.

                            RECOMMENDATIONS

    Last summer we made a series of reform recommendations, which below 
have been further refined and expanded from the lessons whistleblowers 
have taught us since.

   Create a baseline for protected speech based on dissent 
        against misconduct that threatens the institutional mission, 
        rather than institutional self-interest.
   Protect direct disclosures to external authorities such as 
        the U.S. Congress, Treasury Inspector General or other law 
        enforcement agencies 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.
   Break through the conflict of interest in internal appeals 
        adjudications. This can be accomplished by offering alleged 
        reprisal victims the opportunity to seek justice through third-
        party, independent, binding arbitration by a decisionmaker 
        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 provision of attorney 
        fees and the right to reinstatement as necessary to maintain 
        national residency rights.
   Establish independent autonomy and performance standards 
        consistent with the U.S. Inspector General Act of 1978 for bank 
        investigative agencies, to eliminate the conflicts-of-interest 
        that too often have turned those offices into legalized 
        retaliation units instead of credible institutional checks and 
        balances for accountability.

    The conceptual basis for these recommendations is summarized below:

    1. Align all personnel, lending, and project policies--staff rules, 
environmental and social safeguards, policy review strategy papers 
(PRSPs), country assessment strategies (CAS), and the like--with pre-
existing universal standards embodied in U.S. and international law, 
starting with whistleblower protection.
    U.S. constitutional and statutory law, and international human 
rights norms all confer fundamental rights to freedom of expression, 
the right to receive and impart information and the right to due 
process before a fair and impartial tribunal. Within the United States, 
the Sarbanes-Oxley standards for whistleblowers at public corporations 
now set the international pace for whistleblower rights. Within the 
last few years the United Nations, Organization of American States 
(OAS), and Council of Europe all have reinforced a mandate for 
whistleblower protection through their anticorruption treaties. The OAS 
has approved a detailed model law that is a composite of international 
and U.S. norms.
    There also is a long-established body of universal standards 
enshrined in enforceable international instruments such as the 
International Labor Standards of the International Labor Organization 
(ILO), and the protocols and conventions that enable enforcement of the 
Universal Declaration of Human Rights.
    Witnesses to misconduct and abuse at the Banks live in fear of 
coming forward. Our evidence demonstrates that their fears are well 
founded. The Banks routinely victimize the messenger rather than hold 
accountable those who defraud donor countries and recipient countries 
alike. For any MDB to be accountable it must provide safe channels for 
reporting corruption, fraud, and harassment.
    When senior staff such as public health specialist, Dr. Sunil 
Chacko, challenged MIGA (the Multilateral Investment Guarantee Agency) 
policies that result in dislocation of communities, and environmental 
degradation that undermine sustainable economic development, he found 
himself harassed. His duties were diminished and then his job 
terminated. Despite winning an appeal that validated his contention of 
reprisal and the written assurances of World Bank President James D. 
Wolfensohn that he would be reinstated, Dr. Chacko has never been 
offered a contract.

    2. Adopt and enforce modern rules of procedures for the systems of 
justice and conflict resolution within the MDBs. The various appeals 
and tribunal mechanisms can only ensure due process if they are free 
from conflicts of interest, if all parties have access to legal 
representation (not just the Bank) and genuine relief, and if 
resolution includes recourse to third party alternative dispute 
resolution.
    All of the Banks' appeals processes and administrative tribunals 
are tainted by conflicts of interest that render them no better than 
suspect grievance procedures. Quite simply, they lack independence. At 
most, the systems are thinly camouflaged procedures where a reprisal 
victim can ask an institutional bully to change its mind. They could do 
that without a whistleblower policy. In the EBRD, for example, the Bank 
president has discretionary authority to terminate employees. Since it 
is the Bank's president who also selects the Tribunal president, this 
``justice'' mechanism is fatally flawed. In the case of the AfDB, the 
Appeals Committee makeup has seven members chosen by the president, 
including the Chair and Alternate Chair, versus five members chosen by 
the Staff Council.
    Further, the adjudicators in these justice mechanisms are not 
professionally equipped, and recordkeeping is inconsistent. Often there 
are no transcripts of proceedings. Even worse, in other instances 
transcripts and hearings are secret. Secret trials and justice are 
oxymorons. Petitioners have no rights to face their accusers and are 
generally not entitled to bring a lawyer with them to their hearings. 
Nor do rules permit the recovery of legal fees when the findings uphold 
their cases.
    Persons seeking to challenge retaliation for reporting wrongdoing 
endure further abuse and institutionalized defamation for exercising 
their rights. For example, Dr. Yang-Ro Yoon, a senior World Bank 
economist, reported a 40-percent overrun ($15 million) in a 1996 loan 
for schools in that nation. In return for her service to the Bank's 
mission in reporting misappropriation of project funds, she has been 
harassed, humiliated, had her duties diminished, her office 
``downsized,'' been terminated, and when she finally won reinstatement, 
it was to a lesser assignment.
    Dr. Yoon's attempts to resist this reprisal have led her through a 
3-year nightmare of the Bank's conflict resolution system. Despite 
``winning'' her case, she lost salary, benefits, and adjustments, such 
as not factoring in inflation, She has been compensated for only one-
third of her legal costs, burdening her with $30,000 in personal 
expenses and placed in a position beneath her capabilities and 
credentials. She has been exiled from her former work and her 
expertise, to new duties irrelevant to her background. When she filed 
new appeals to enforce her initial ruling, the same Administrative 
Tribunal turned on her with decisions published on the Bank's Web site 
that most graciously could be called judicial defamation. She has been 
warned that it is misconduct for her to continue seeking enforcement of 
her paper victory.
    In order for the MDBs to provide the right to a fair hearing, new 
procedures must be adopted that provide equal access to legal 
representation, witnesses, and documentation. There must be 
independence for decisionmakers, at least from the supervisory chain of 
command and more preferably from the institution, which can be 
accomplished through independent, mutual strike arbitration. 
Adjudicators must be selected in a fair and objective manner. Genuine 
``make whole'' relief in the form of compensation for lost income, 
benefits, and reimbursement of legal fees is required.

    3. Extend requirements for independent external auditing of 
managerial and financial controls, and the range of appropriate 
authorities to which staff may report wrongdoing.
    All the MDBs operate within a closed loop of responsibility. Staff 
are not permitted to report corruption directly to Board members. 
Management can and has misrepresented information to Boards. In cases 
we have investigated this amounts to hundreds of millions of dollars. 
Only external oversight can assure accountability. External audits of 
both managerial and financial controls, such as are currently contained 
in the Sarbanes-Oxley legislation in the United States for all publicly 
held companies, should be applied to the MDBs.
    Similarly, the Banks' current policies deny free-speech rights to 
whistleblowers by limiting disclosures through prior restraint. 
Although whistleblower protection is supposed to further freedom of 
speech, the Bank policies could not be more Orwellian. Every Bank 
whistleblower policy is an Official Secrets Act, gagging employees from 
disclosing anything outside institutional walls that could undermine 
the interest of the relevant Bank, regardless of the impact relevant 
misconduct could have for the Bank's mission. All the regional MDBs ban 
external whistleblowing, even to national and international law 
enforcement agencies, Ministries of Finance and legislative bodies, 
including the U.S. Congress. Their own inspection panels for redress by 
aggrieved ``beneficiaries'' of Bank loans are treated as external 
bodies. Amazingly, employees are vulnerable to discipline for 
testifying at a relevant Bank inspection panel with the same evidence 
that would be officially protected when disclosed to a supervisor or 
in-house investigator. In recent years we have seen enough scandal 
resulting in massive waste and betrayal of the pubic trust to recognize 
that external oversight is a fundamental prerequisite for 
accountability.

    4. Create truly independent investigative units with modern legal 
burdens of proof.
    The existing investigative units to which allegations of corruption 
are referred--such as the Inter-American Development Bank's Office of 
Institutional Integrity (OII) are handicapped at best, and at worst, 
abused as tools of reprisal. It is not surprising that they do not have 
a significant track record of accomplishments from working with 
whistleblowers. We have seen evidence of investigations being 
instigated against whistleblowers in retaliation for their disclosures 
to these bodies. We have even seen investigations initiated as a tool 
for mass intimidation of whole office staffs. Requiring these units to 
report to external oversight bodies could significantly improve 
legitimacy. This would be consistent with the model of departmental 
inspectors general in the United States. One option would be for them 
to report directly to Bank Boards of Directors. The committee's own 
series of oversight hearings on the MDBs and the recently launched JEC 
study of MDB accountability are testament to the need for this systemic 
reform.
    Beyond independence of these investigative units, there also is a 
demonstrable need for standard, modern investigative procedures to 
ensure fair, impartial, and replicable treatment of all credible 
allegations. Employees working with these units, voluntarily or 
involuntarily, have no rights against investigators who turn on them, 
which is frequently the case from our review. Hotline procedures and 
standards vary drastically. Confidentiality procedures are 
inconsistent.

                               CONCLUSION

    Yesterday Treasury Secretary Snow testified that the United States 
can justify increased MDB funding based on their institutional 
commitments to reform. Our experience indicates that in terms of 
empirical results, these assertions are largely a bluff. Whistleblower 
policies are in a time of transition, but so far those commitments 
largely have been a bluff with little positive impact. This committee's 
stepped-up vigilance will be extremely significant in bridging the gap 
between the rhetoric and reality of accountability through transparency 
reforms like whistleblower protection.

    The Chairman. Thank you very much, Mr. Devine.
    Let me begin, Mr. Withanage, by just observing that on page 
three of your written testimony, you mentioned that Asian 
Development Bank, ADB, had approved over $3.4 billion in loans 
for 128 projects and programs over the years, and you charged 
that many of these loans and their role in poverty reduction 
are highly questionable. In fact, you offer illustrations in 
which the results led to negative setbacks, quite apart from 
progress in Sri Lanka.
    If we take ADB's staff evaluation at face value, more than 
half of Sri Lanka's ADB debt now, accumulated over three and a 
half decades, is from projects the ADB itself considers ``less 
than successful.'' This makes the point that I was trying to 
make in my opening statement, that the consequences, sometimes, 
for developing nations, of maladministration of these loans is 
not only disappointment that things did not occur for the 
benefit of people, but worse still, that debt ensures for the 
people--in this case, quite a bit of debt in Sri Lanka, left 
over from unsuccessful efforts. And therefore, when we're 
talking about history--and that's important in reviewing why 
what we're doing now is urgent--we must seek ways to reverse 
that history.
    The question still will remain, how strenuous are those 
efforts? How comprehensive? As we just heard from Mr. Devine, 
not all the returns are in even from the African Development 
Bank, as to what they're going to do, quite apart from 
evaluating how well it is going. That's somewhat discouraging, 
at least if you were an African country and potential recipient 
of one of those loans, and particularly if you were a rather 
powerless, defenseless citizen of one of those situations, 
depending upon the integrity of those in power--not only in the 
government--but also those dispensing funds who have some 
authority. They have revenues that can make a difference in 
this.
    Both of you have stressed transparency, and the ability for 
the people in the country, and for the world, and for everybody 
else who may be interested, such as the U.S. Treasury, our 
State Department, and so forth, to peer in and see what is 
going on. At the same time, there are different cultures, 
different traditions and so forth. We understand from previous 
hearings, as well as this one, that people in the opposition 
would say, in quotes, ``this is not the way the world works, 
this is the American view, and who are you, as Americans, to 
assert that there ought to be this degree of openness?'' The 
world press, as well as the local press, have the opportunity 
to raise questions on the scene. I wonder, where are there 
enough study commissions out there in the world to take a look 
at all of these projects, to come up with some evaluation that 
might make some difference for us as we have some chance to 
look at all of this today? You, sir, have looked at some 
projects in detail. Will you take this opportunity to describe 
in more detail some of what you found, and why this is 
important, and what the bank that was involved in making the 
loans might have done differently, so that the results would 
have been more constructive?
    Mr. Withanage. Thank you, Mr. Chairman.
    I think one of the big problems is people who are living on 
the grounds; they are not part of any decisionmaking with 
regard to the projects. In most of the cases, people know best, 
not the consultants and not the government officers who come 
from other places, they don't have any idea about the local 
situations. Now one of the examples which I explain in this 
one, which happened in 1977 which is a dam project, a 
construction of a dam, across one of the big rivers, and all 
the local scientists and the local people, they said, ``Okay, 
if you construct this dam in a--it's a short dam, but it's a 
small reservoir--it will be more sustainable.'' But because of 
the political reasons, the Asian Development Bank and the local 
agencies, which is the irrigation department, they constructed 
the bigger dam, and they cleared more lands and brought so many 
people. So, if they heard the people and the local scientists, 
they would not have had this kind of end results. So, this is 
one of the major problems.
    The Chairman. Why did the dam construction result in 
difficulty? Could you make a case that it would help more 
people if you build a larger dam?
    Mr. Withanage. The issue is there is not enough water for a 
larger reservoir.
    The Chairman. I see.
    Mr. Withanage. So, the river, it should be dependent on the 
river attachment, if the attachment is not adequate enough, 
then having the big reservoir is just a waste of funding, and 
also they cleared a lot of lands to allow more people to come 
to this site, and that also devastates the whole habitats.
    The Chairman. So there's less water, there are more people, 
and there is a misalignment between the amount of water and the 
size of the dam. Your testimony, therefore, is that if you had 
been having local town meetings or some sort of hearings on the 
site and so forth, and people had indicated what the situation 
was, the decision might have been better than back at 
headquarters with whoever was planning this project.
    Mr. Withanage. I think the biggest problem here is now 
there's no adequate water and the people are suffering there, 
and the Asian Development Bank has a right to do something to 
correct this problem. So, this is my message, bringing this 
case to this forum.
    The Chairman. So, you're saying now, in addition to the 
fact that after the ADB evaluates the thing and says, ``Well, 
this is partially successful, or unsuccessful,'' what have you, 
still this is 1977 you're talking about, that's now 28 years 
ago. There ought to be some mechanism for correction of these 
errors, as opposed to simply chalking them up and indicating, 
``Sorry it all turned out badly for these thousands of 
people.''
    Mr. Withanage. Yes, Mr. Chairman, because we are still 
paying this money back to the Asian Development Bank, so still 
we have a right to ask for them to correct this project, 
because the people in the field, they don't have water, and for 
the last several years, they didn't cultivate a single acre of 
paddy in that area, and people are suffering and because of the 
Asian Development Bank should spend their money and they have 
the funds to correct this problem, and give a better life for 
these people.
    The Chairman. Now, this occurred in Sri Lanka, is that 
correct? This dam that you're discussing? This project occurred 
in the country of Sri Lanka?
    Mr. Withanage. Yes.
    The Chairman. You know, sometimes, let's take a case in the 
United States. If such a thing occurred here, and there were 
material losses for lots of people, my quess is that a class 
action suit of some sort might have occurred. Specific farmers 
or landowners who were dispossessed and so forth might have 
filed lawsuits. What happens in Sri Lanka? Is there any 
recourse to people who believe that they have been either 
dispossessed, or badly damaged, or continue to be damaged? How 
does the legal system work at that point?
    Mr. Withanage. With regard to this project, there was no 
lawsuit, but Southern Transport Development Corridor, which I 
explained earlier, it's a case that went to the Appeal Courts, 
it's a case that went to the Supreme Court also, and the 
Supreme Court decided human rights have been violated, but it 
did not change the rule. So, the people are still fighting to 
change the rule, because the Supreme Court decision did not 
change the whole trade, so certain--in several other issues, 
there is a lot of public interest litigation in Sri Lanka with 
regard to mining cases--but in this particular case there was 
no such a case. But, it's happening, in Sri Lanka, that's one 
of the best case holders came because of the public interest 
litigation.
    The Chairman. That was 1977. This is now. What is your 
observation currently about the ADB as it takes a look at civil 
society efforts to bring about better results, as well as to 
combat corruption? In other words, did you note improvement? Is 
there, out there in the field, a sense that times are changing?
    Mr. Withanage. In my opinion, in 1977 there was no policy 
for the Bank.
    The Chairman. No.
    Mr. Withanage. Now, since 1995, Asian Development Bank has 
a lot of policy safeguards, policies accountability mechanism 
and access to information, various policies. But the two cases 
I want to state in this statement, because that's the same 
situation after having so much of policies within the Bank. We 
have the public affected people, so they have gone to the ADB 
asking justice from the inspection mechanism, and they wrote 
several letters with regard to the safeguard policies, but the 
Bank's response is the same, that they don't find any evidence. 
In one other case, with regard to the corruption, people got 
the same response after sending all of this information, they 
say they haven't got enough evidence, and at first they 
reacted, and later they say, ``Send us more evidence.'' So, why 
are we having all of these policies, if they are not 
implementing at the ground? So, this is the question today that 
we have.
    The Chairman. I thank you for that response. We've been 
joined by the distinguished Senator from Florida, Senator 
Martinez, who is the chairman of our African Subcommittee. 
Senator, I'd like to give you the opportunity to make a comment 
or raise questions of our witnesses.
    Senator Martinez. Thank you, Mr. Chairman. I really would 
just want to, first of all, say thank you to you for holding 
this important hearing, I think that some of the things that 
have been going on in this exchange--in a very different way--
but I think in also a very common way, remind me of some of the 
work I did at HUD, and how difficult it was, and as you know, 
as a former mayor, we share that in common, how difficult it is 
to be in a department of government whose purpose it is to 
encourage and promote better housing for America, and then see 
that some of those very-needed funds are diverted for purposes 
that are not appropriate, and so fighting that very thing here 
in our country with domestic funds through well-intended 
entities that are formed for that very purpose. I always felt 
that it was really not taking from government, but it was 
really taking from a family that might be wanting to improve 
their housing, or a single mom with a couple of young children 
who's trying to give them a nice, stable place in which to 
live. And so, in a way I also feel the frustration and the 
sense of loss when projects like you've been discussing occur 
in the international arena, well-intended funds that, and in 
this instance, not only--as you so well pointed out--that are 
not only diverted from the purpose to which they were intended, 
but that now create a tremendous burden on the country with 
debt. And so, I think this is a very important topic and a very 
important hearing, and I want to commend the witnesses for 
being here.
    And I very much would like for the record to reflect, 
unfortunately because of another hearing, I missed the 
testimony of Director Sullivan who is a dear and wonderful 
friend, and a great public servant, and I know he, I saw him 
outside as we were coming in, and I'm very sorry I missed his 
testimony, but I know he's doing a great job of serving our 
country in an interesting place, and doing a great job with the 
European Bank of Reconstruction and Development.
    So, Mr. Chairman, I just simply want to thank you for 
holding the hearing, and wanted to come by to, at least, glean 
a little bit of the import of this moment, and encourage those 
that are working in this international institution to continue 
to do the good work not only of the financial transactions that 
provide wherewithal for international development, but also to 
be vigilant about the appropriate usage of funds, the 
appropriate usage of projects, and as we see, so much need 
around the world. It is unfathomable that some of the misuses 
of the money would only add to the misery that we often, too 
often see, for lack of development. So, thank you, Mr. 
Chairman.
    The Chairman. I thank the Senator, and particularly given 
your long experience in government and the responsibilities you 
have mentioned, as a Cabinet member and as a mayor, you have 
seen at the local level, as well as the macroeconomic level, 
the effects of what we're talking about today. I appreciate 
your endorsement of our efforts.
    I'd like to ask you, Mr. Devine, you come as Legal Director 
of the Government Accountability Project, and you have been 
studying these situations in that role as well as during the 
totality of your career. What advice can you give to the U.S. 
Treasury or to the Congress, to us, in these areas of fraud and 
corruption related to development banks? You have made some 
recommendations in your testimony, but amplify these a bit 
more, in your own words. As a veteran of the trail of auditing 
these responsible officials, what do you think should be the 
priorities if you were in our situation?
    Mr. Devine. Thank you, Mr. Chairman. I think with respect 
to Congress, one of the first things I could suggest is to do a 
lot more of what you're doing with my colleague this morning, 
making a record of the human consequences from the corruption. 
Groups like ours go to international conferences with NGOs and 
we hear the victims talking to each other, and it's very 
powerful testimony. It needs to be funneled into the oversight 
and legislative permanent record as a foundation for reform. 
Even if it's just written statements that are collected.
    The second is following through with the temporary 
legislative mandate last year from the McConnell-Leahy 
amendments, and that's why our group is so appreciative and so 
available to help with your legislative initiative.
    The third is to try and restore GAO's mandate for oversight 
within the institutions. They've been getting the whistleblower 
treatment since their hard-hitting reports at the end of the 
1990s.
    The Chairman. What do you mean by that? What sort of 
resistance is GAO getting?
    Mr. Devine. Well, we've been understanding from talking 
with them that there are severe obstacles, procedural obstacles 
to releasing information to them.
    The Chairman. From the banks?
    Mr. Devine. From the banks. Yes, sir. The GAO contributions 
have been very thorough, sound, good faith, they might as well 
be working with your staff, the work that they do, and they 
deserve to be re-enfranchised, in our opinion.
    The Chairman. What grounds do the banks have for resisting 
GAO? What are the arguments that lead to this resistance?
    Mr. Devine. My understanding is that it's, we'd need to go 
into more specifics, but it's a clearance process that was 
established after the 1999 audit that GAO made of the World 
Bank. This has been spreading to some of the other 
institutions, and the clearance process has functionally 
resulted in their denial of timely information necessary to 
keep doing follow up, to find out what progress has been made 
since their earlier hard-hitting audits.
    As far as the Department of Treasury, the first thing we 
think that they need to do is set some standards for these 
institutions, tell them what's expected. That was referred to 
briefly in my testimony. They're supposed to be making specific 
recommendations, and they skip that step in the McConnell-Leahy 
amendments. To illustrate, we had a very inspiring meeting with 
the Assistant Secretary of the Treasury, where he was calling 
for the NGOs to rally behind U.S.-led reform efforts and help 
get grassroots support. But then when we contacted his office 
to find out what reform efforts we should be recruiting people 
to rally behind, we couldn't get our phone call returned. They 
need to set down some standards that they're pressing for.
    A second thing would be to unleash their Office of 
Inspector General. They have a ``hands-off'' policy there. But 
these are U.S. taxpayer funds which are at risk, it should be 
part of their work. That's an example of what we think the 
Treasury could do.
    Another way they could do this is by calling the rhetorical 
bluffs at the bank. For example, if the IG can't go in and 
gather information then demand that the banks provide proof of 
results behind their rhetoric. It seems like too many things 
are just taken at face value. If there's a good meeting, the 
problem gets credit for being solved. And we need proof. I 
think for all of us, there's a few steps that could really 
help. And the first is to pin down the track records of these 
institutions in terms of actions, not just program 
descriptions. What we're learning is, despite all of the 
reports and procedures, nobody's been helped by the 
whistleblower systems, or almost no one has been helped, or no 
one in this millennium. That's really the point of all of this.
    A second would be to support the pioneering work of 
Professor Vaughn at American University Law School. This has 
the potential to be a beachhead for transparency reform.
    The Chairman. What is he doing?
    Mr. Devine. He was commissioned by the World Bank to 
recommend an overhaul of their whistleblower system, and what 
we've learned over and over is that they're setting the pace 
for the regional development banks. And Professor Vaughn was a 
coauthor of the model whistleblower law to implement the OAS 
Inter-American Convention against Corruption, and he's state of 
the art in terms of academic expertise for standards.
    I think another thing that we might consider doing, all of 
us, is encouraging Mr. Wolfowitz, the new World Bank leader, to 
adopt whistleblower rights as a flagship issue there in the 
hope that that can be contagious at the regional institutions.
    The Chairman. Well, that's an excellent suggestion. Mr. 
Wolfowitz is starting out in that new responsibility and has 
had a very strong organizational track record. And in fairness, 
Mr. Wolfensohn, whom he is replacing, and with whom I visited 
personally, and has offered assurances and some evidence, just 
as you're suggesting, of additional steps that the World Bank 
has been taking, and the seriousness that they have with this. 
So there seems to be some momentum there. I add just to offer 
an encouraging word in light of otherwise rather dispiriting 
evidence elsewhere.
    But, it's a new phase. Let me just be very candid. Most of 
the international development banks are not used to questions 
such as the ones that we're raising today, certainly not in 
public forums. There is almost a feeling of temerity, with 
people raising these questions. After all, there's a big world 
out there and it's all very interesting for parochial people to 
be raising these questions esoterically, but I think bit by bit 
people understand the point that I'm making without being 
repetitious, and that is that there are American taxpayer funds 
involved in these banks. Revenues don't just simply come out of 
the blue, and there's going to be responsibility for those 
funds, whether the banks like it or not.
    So, as a result, as I suggested to the first panel, if our 
American officers of these banks are running into some 
resistance from others, whoever they may be, our Secretary of 
State needs to know that, our Under Secretary needs to know 
that, maybe I and members of this committee need to know that, 
because there will be consequences from that. And I think, 
without being tedious, that needs to be understood. What you 
are saying today is a serious matter.
    Now, the fact that they have not been explored very 
extensively in a public forum for a while is too bad, but 
nevertheless, they are being explored here, now. This is the 
fourth hearing we've had in a series in which, it seems to me, 
things are beginning to happen. I cited a few in my opening 
statement. Other countries are taking more seriously their role 
as legislators, because they have funds, too, they have 
taxpayers, and they have press and open democracies. You wonder 
who is blowing the whistle, who has accountability for all of 
this?
    Now, finally, at the end of the day, there can be honest 
differences on projects. That is why I get back to more 
scholarly research, as you were pointing out, Mr. Withanage. 
Out in Sri Lanka, you have 128 projects. Some studies have been 
made. You've made some yourself. You have made some assertions 
about whether they work, whether they don't. In fairness, the 
Asian Development Bank made evaluations. They can be questioned 
as to whether they were too sanguine about what they saw. You 
allege that in some cases we were really not very successful at 
all. There was a failure in costs, including debt for Sri 
Lanka, but at the same time, there have been some efforts. This 
will be something that our committee will want to explore even 
more. What kind of scholarly effort is there with these large 
sums of money involved? Just for Sri Lanka alone, $3.4 billion 
is a lot of money. And the ramifications for that country have 
been substantial, for better or for ill. But this is just one 
part of a very large number of countries and people that are 
involved here. This is the reason I ask you the question, Mr. 
Devine, because your group has attempted to get into this.
    Now, what kind of funding or support do you have? Who is 
behind you? Why would they be interested in all of these 
issues?
    Mr. Devine. I think the only funding we've had so far, and 
I might be wrong on this, is from the Ford Foundation.
    The Chairman. The Ford Foundation hasn't been a grantee to 
you.
    Mr. Devine. Yes, sir; they've made a commitment to this 
issue as one of their cornerstones for their civil society 
initiatives. I just second so much the statement that you made 
about the taxpayer funds. Our usual work is trying to have 
taxpayer accountability. And one of the things that got us into 
this was that Treasury, for so long, had been giving a free 
lunch to the banks and they were using that funding to buy junk 
food that might as well have been contaminated with E coli and 
Salmonella. It was putting good money after bad, and we can say 
that this is a time when, maybe, the stagnation is ending.
    Just from personal experience, about a year ago our group 
went to the EBRD to follow through on our research and they 
told us that they only talk to governments, and we weren't, so 
goodbye and nice of you to drop in. Last fall, the EBRD's new 
Deputy Compliance Chief teamed up for a consensus whistleblower 
principles. We feel that now is the time to really step up our 
efforts, because they're starting to get results.
    The Chairman. Well, this is good news, and we are grateful 
for your recognition and that the Ford Foundation grants and 
perhaps other foundations in our society outside of government 
will be seized with this issue, too. It is a humanitarian issue 
of great proportion, as you gentlemen are illustrating today. 
Because debt occurs for countries, and we're concerned about 
that, sometimes, when we're seized with the problem we forgive 
debts, wholesale, debts that were created in the same process. 
Ultimately our committee is enthusiastic about international 
relationships. We are proponents of that, advocates of that 
situation. Some Americans have less enthusiasm for that. Our 
country goes through periods of protectionism and isolationism, 
and I don't stress those sad times, but we've been through some 
of that, and frequently there's attention as to what we should 
be concerned about.
    We're, prospectively, trying to raise in this committee, 
the courage, the will, maybe the wherewithal, for people to do 
better who want to do better in our international banks. Those 
include very fine American administrators who were confirmed by 
this committee, and by this Senate as a whole, and have 
responsibility, frequently, for these situations. So, this is a 
long editorial, but it is to reinforce some of the efforts that 
you are making, and a recognition of the time and effort you 
have given to preparing your testimony.
    Now, it's an encouragement to do more. So, before we have 
any more hearings, and in the interim period, as you might 
accumulate additional information, and you might have studies 
that would be relevant and helpful for the committee and the 
American people, please be forthcoming. Because that, I think, 
will help the people who are out there in the world to 
understand that these banks are attempting to help, and that a 
large majority of all the civil servants of all the countries 
involved are attempting to help, but they may need our help in 
order for this transparency, these checks and balances, this 
thoughtfulness to occur.
    Let me ask the two of you if you have any final comments 
before we conclude the hearing.
    Mr. Withanage. Thank you very much. It's the public funds 
going from these funds to do something, do development in my 
country, or any other third world country, it's the name of the 
Asian Development Bank, which means the development. Why the 
money from the public funds goes in the name of the development 
in my country to destroy the existing resources, to destroy the 
sustainable life of the people. So, this is the question we had 
when we were starting all our advocacies with the international 
financial institutions. That is why we got together, and that 
is why we are raising these questions, together with the donor 
agencies, the private foundations in the United States and 
other countries, and with the Civil Society Organization in 
these countries to bring this voice to the relevant agencies, 
the decisionmakers of the international financial institutions. 
So, this is the very basic issue, and the people living out 
there in the villages, in the communities served, they are 
suffering day by day because of various ill-effects of the 
nonproperly planned, nonproperly designed projects.
    Although we have these various new policies, safeguard 
policies, that doesn't affect, or that doesn't give any support 
or protection to the people living there. So, this is, we are 
expecting something from this particular committee that if you 
are able to change the views of these visions, and the 
implementation procedures of these international financial 
institutions, we hope, at least, that will give some more 
benefits to the people. So this is what we are asking, and the 
corruption should be totally, really removed from all of these 
efforts, so the corruption has various different level which is 
from the local agencies up to the big companies, and the big, 
maybe the international financial institutions, although I 
cannot pinpoint these other particular people, but this is 
there, and we need to somehow remove all of these corruption 
issues, which hinders the real development in our countries.
    Thank you very much for giving this opportunity.
    The Chairman. I appreciate that. Mr. Devine, do you have a 
final thought?
    Mr. Devine. Yes, Mr. Chairman, I have two. One is the 
cornerstone for legitimacy of the whistleblower policy at any 
of these banks, and that is to end the underlying premise of 
all of them currently, which is, they're serving as official 
secret sects. In reality the policies all are institutionalized 
gag orders that theoretically protect free speech within 
institutional walls, but make that a firing offense if 
employees commit the truth outside of the banks. For example, 
if a bank employee who is protected for making a disclosure 
internally, bears witness with the same evidence before this 
committee or before the inspection panels that are responsible 
to redress citizen grievances, that would be a firing offense. 
There is a very significant precedent that the United Nations 
just adopted with the active participation of this committee. 
That's the first time in my experience there's been a 
breakthrough on public free speech rights, and we hope that 
beachhead can be expanded.
    My second comment is to say, thank you for your leadership. 
Without it, we'd all be on the road to nowhere, and you can 
count on us to do our share on the follow through.
    The Chairman. Well, thank you very much for your testimony, 
both the written statements and your forthcoming responses. We 
are grateful to you. My invitation to give us some more is 
ongoing. We thank you and the organizations that support you. 
Having said that, the hearing is adjourned.
    [Whereupon, at 11:32 a.m., the hearing was adjourned.]
                              ----------                              


   Additional Statements and Other Material Submitted for the Record


   Prepared Statement by Ambassador Cynthia S. Perry, U.S. Executive 
                Director to the African Development Bank

    Mr. Chairman, Ranking Member Biden, members of the Foreign 
Relations Committee, thank you for inviting me to discuss the efforts 
of the African Development Bank Group (the Bank) to combat corruption.
    Let me at the outset emphasize that corruption on the African 
Continent remains a major impediment to economic growth and poverty 
reduction. Far-reaching changes are required to reduce it dramatically. 
As the premier development institution in Africa, the Bank is at the 
center of our efforts to combat corruption and improve aid 
effectiveness in African countries.
    The United States has advocated and pressed strongly for greater 
transparency and improved governance at all levels of the Bank's 
operations and management, and we will continue to do so. While the 
Bank has made significant progress in terms of institutional 
accountability, transparency, and operational controls, further efforts 
are needed. I would like to focus my statement, today, on the Bank's 
efforts to combat corruption and strengthen governance in three related 
areas: At the institutional level, the project level, and the country 
level.
    The Bank's anticorruption efforts aim to reduce the risk of 
corruption in its operations and increase the amount and quality of 
assistance to its regional member countries in support of good 
governance. The Bank is also actively promoting good governance through 
a number of partnerships with regional and international organizations, 
which I will highlight for you.

                         INSTITUTIONAL EFFORTS

    At the institutional level, the Bank has made good progress toward 
mainstreaming anticorruption efforts into its functions as a 
development finance institution. The Bank's Policy on Good Governance, 
approved in 1999, emphasizes combating corruption as one of the pillars 
of the Bank's mandate to promote good governance in member countries. 
The Bank's Strategic Plan for 2003-2007 also underscores the linkages 
between good governance, including combating corruption, and the Bank's 
poverty reduction mandate. To strengthen these linkages, the Bank has 
put in place effective internal controls and procedures intended to 
deter, detect, and punish corrupt practices.
    The most important institutional reform that the Bank is currently 
undertaking is to establish a Anti-Corruption and Fraud Division 
alongside the existing Internal Audit Division, both of which will 
report to a new Office of the Auditor General. The Anti-Corruption and 
Fraud Division will be the focal point for investigating allegations of 
fraud and corruption with respect to the Bank's operations and staff. A 
high-level Oversight Committee on Corruption and Fraud will provide 
oversight on policy compliance. The proposal to establish the new 
institutional structures is working its way through the Board's audit 
committee, and we are hopeful that the Board will approve it shortly 
after the Annual Meetings in May. My office is focusing on this 
initiative as its current number one priority.
    Once it is established, the Anti-Corruption and Fraud Investigative 
Division will also manage the implementation of a formal whistleblower 
protection program designed to protect the identity of those disclosing 
information or reporting allegations concerning fraud or corruption.
    In the past year, the Bank has developed a Code of Conduct for Bank 
staff, Guidelines for Preventing and Combating Corruption and an 
Information Disclosure Policy, all designed to increase transparency, 
enhance the professionalism of Bank staff, and standardize the Bank's 
interactions with its clients.

   The Code of Conduct for staff is a statement of basic 
        ethical principles to guide Bank staff in the fulfillment of 
        their duties. Failure to abide by the Code of Conduct results 
        in sanctions, as specified in the Bank Staff Rules. As with any 
        large organization, not all staff abide by the rules and laws. 
        In recent years, the Bank has disciplined, and in some 
        instances terminated the services of staff after determining 
        their involvement in corrupt or unethical practices related to 
        Bank operations.
   At the insistence of the United States, we are in the 
        process of reviewing the Financial Disclosure policies of the 
        Bank for its staff and management so that we can improve 
        information collection and dissemination in order to avoid any 
        conflicts of interest with Bank operations. Currently, all 
        staff are required to submit a disclosure to Bank management 
        and update it annually.
   Building on the Bank's good governance policy, the 
        Guidelines for Preventing and Combating Corruption outline 
        where and how corruption and fraud may occur in the Bank's 
        operations, modalities for its prevention, and procedures for 
        Bank staff to follow in responding to incidents of corruption 
        and fraud in Bank operations. One of the key features of the 
        Guidelines is the Bank's zero tolerance position with regard to 
        fraud and corruption. In line with the Code of Conduct for 
        staff, the zero tolerance position means that staff proven to 
        have engaged in corrupt or fraudulent practice will be 
        disciplined in accordance with Bank Staff Rules.
   With regard to transparency, the Board of Directors, with 
        our strong support, approved a new Information Disclosure 
        Policy last year, which will significantly enhance the 
        transparency of the Bank's operations by making a wide range of 
        Bank documents publicly available. As the U.S. Executive 
        Director, I have been the strongest advocate in the Board for 
        greater transparency, and will continue to lead this effort in 
        order to achieve the goals specified in section 581 of Division 
        D of the FY 2004 Consolidated Appropriations Act.
   At our urging, the Bank maintains strict recruitment 
        procedures and is strengthening its capacity to combat 
        corruption and promote good governance through staff training 
        programs. In addition, the Bank continues to take steps to 
        build its institutional capacity.
   In the area of recruitment, the Bank's procedures explicitly 
        forbid nepotism or favoritism on the basis of nationality or 
        group identification. Staff members who fail to comply with 
        these rules are subject to reprimand, dismissal, or legal 
        sanction.
   Internal staff training has been organized to promote the 
        Bank's good governance policy and to familiarize operations 
        staff with new diagnostic assessments such as the Country 
        Governance Profile and new instruments such as Policy-Based 
        Loans for Governance. Enforcement of the Bank's zero tolerance 
        position will require strengthening the Bank staff's capacity 
        to deter, investigate, and penalize corrupt activities. The 
        Bank intends to increase the number of staff experts assigned 
        to anticorruption activities, and enhance the technical skills 
        of Bank staff through specialized training in areas such as 
        forensic auditing, detection of money laundering, and financial 
        investigation techniques. For example, in 2004 the U.S. 
        Treasury Office of Technical Assistance conducted a training 
        seminar for Bank staff on antimoney laundering and intends to 
        continue its cooperation with the Bank in this field. Last year 
        the Bank also conducted a very well attended two-day training 
        workshop for Bank staff on the implementation of Country 
        Governance Profiles and Policy-based Loans for Governance. In 
        the Board of Directors and in dialog with Bank management, I 
        will continue to stress the need for strengthening the capacity 
        of staff working on governance and anticorruption activities in 
        the Bank.

                         PROJECT-LEVEL EFFORTS

    The Bank has instituted a range of controls to help mitigate the 
risk of corruption in its projects. These controls include auditing, 
supervision, the use of special accounts for higher risk lending, due 
diligence on private sector borrowers and cofinancers, and strict 
procurement procedures. The Bank requires annual audits of its projects 
and enforces contractual audit provisions in its loan and grant 
agreements. Through active participation in the discussions of the 
Bank's Audit and Finance Committee, my office reviews internal audit 
reports of Bank projects.
    The Bank's Internal Audit Department safeguards the Bank's assets 
by certifying compliance with its policies and ensuring that auditing 
standards are met. A critical function of the Internal Audit Department 
is to assess the strength of internal controls and institutional 
arrangements in regional member countries and to assist national audit 
institutions with outsourcing audit functions until adequate national 
audit capacity can be developed. The Bank's Operations and Internal 
Audit departments evaluate the quality of independent audits of Bank 
projects, and implement the Bank's audit policy, which may include 
suspension of disbursements to some projects. Two projects (in Mali and 
Kenya) were investigated for fraud and corruption in 2004 and one (in 
Mozambique) is currently being investigated for fraud and corruption. 
Last year, the Bank terminated its involvement in four projects because 
of concerns about corruption. So far this year, the Bank has canceled 
one project due to similar concerns. Preliminary assessments have 
revealed some improvements in the submission of annual audit reports of 
Bank-funded projects, but the Bank needs to remain vigilant in its 
oversight to ensure project audit reports are completed consistently 
across projects in a timely manner.
    Supervision missions focus on good financial management of projects 
as a way to eliminate opportunities for corruption. When compliance 
with financial management standards is lacking, the Bank proposes 
corrective measures and may impose sanctions. The Bank's ability to 
conduct supervision missions was significantly impaired by the 
temporary relocation of the Bank's operations to Tunis in 2003. The 
Bank is now fully operational at the temporary relocation site, and 
more frequent supervision missions have resumed. This year, in response 
to efforts by my office to implement the provision of section 581 of 
Division D of the FY 2004 Consolidated Appropriations Act pertaining to 
internal controls, the Operations Evaluation Department of the Bank 
will undertake an independent evaluation of the Bank's supervision and 
monitoring systems.
    The Bank's procurement regulations were last modified in January 
2000, to be more explicit in their treatment of fraud and corruption. 
As a result, the Bank will now cancel at least part, if not all, of a 
loan or grant for a project if the procurement process for the project 
was tainted by acts of fraud or corruption. Firms proven to engage in 
corrupt or fraudulent practices can be declared ineligible from 
participating in future Bank-funded activities indefinitely or for a 
period determined by the Bank. Over the past few years, about 30 
tenders have been cancelled--4 last year alone and 1 so far this year. 
The Bank maintains a list of sanctioned or debarred firms and the 
United States believes it should publish this list. The Bank also 
shares information on sanctioned firms regularly with other MDBs 
through a network of senior officials responsible for procurement and 
anticorruption. The Bank is currently revising its procurement policies 
to bring them into line with the MDB harmonization agenda. The revised 
policies should be presented to the Board of Directors by the end of 
the year.
    The Bank's Procurement Review Committee of senior managers and 
operations directors appointed by the President receives and 
investigates complaints from bidders who are not satisfied that their 
bid was handled in accordance with established Bank procurement rules. 
The committee is an independent body whose decisions, which can include 
cancellation of a procurement process, are final and binding.
    To help improve corporate governance, particularly in private 
sector projects, the Bank has prepared a Corporate Governance Strategy, 
which will be discussed by the Board in the coming months. The Bank 
conducts due diligence assessments on potential borrowers to ensure 
full compliance with corporate governance principles for Bank-supported 
projects. The Bank also provides direct assistance to private sector 
investors to endorse and implement corporate governance principles as a 
precondition for Bank financing.
    Within the overall framework of promoting good governance, the 
Board of Directors has approved the establishment of an Inspection 
Function, a combined compliance and problem-solving mechanism. Prior to 
its approval, the proposal was posted on the Bank's Web site for 
several months to invite comments from interested stakeholders. 
Recruitment for the Director of the Compliance Review and Mediation 
Unit is underway, and the Bank expects the mechanism will become fully 
operational by the end of the year. My Office has been at the forefront 
of the effort to establish this inspection mechanism at the AfDB, which 
will reinforce the Bank's accountability for the impact of its project 
operations.

                         COUNTRY-LEVEL EFFORTS

    The Bank provides financial and technical assistance to regional 
member countries in their fight against corruption. Requests for 
assistance are determined on a case-by-case basis and subject to a 
clear and credible demonstration of commitment to principles of good 
governance and combating corruption.
    Since 2001, the Bank has approved more than $1.5 billion in loans 
and grants for governance-related activities in over 35 regional member 
countries. Following the successful completion of the Tenth 
Replenishment of the African Development Fund (ADF), the concessional 
window of the Bank Group, in December 2004, we expect this trend to 
continue.
    Good governance is a key factor in determining country allocations 
of ADF resources during a given replenishment cycle. The Country 
Performance and Institutional Assessment (CPIA) is based on formulas 
that place nearly 60 percent effective weight upon the quality of 
governance in ADF-eligible countries. With the prospect of greater 
allocation of concessional resources, countries are encouraged and 
rewarded for making progress toward good governance.
    Policy-based loans for governance (PBLGs) are an instrument that 
the Bank will use to support institutional reforms to consolidate 
macroeconomic stability and a favorable environment for sustained 
growth in its regional member countries. PBLGs will be used to support 
governance-related reforms in areas such as judicial and legal 
frameworks, trade policy, public finance, fiscal and monetary policy, 
public sector management, financial sector policy, and competition 
policy. The United States provided substantial input into the PBLG 
Guidelines, approved in 2004, to ensure that this instrument would be 
used only in appropriate policy environments. Since the approval of the 
guidelines by the Board, two PBLGs, for Malawi and Tanzania, have been 
approved. My Office will continue to monitor the Bank's use of this 
instrument very closely.
    The Bank collaborates closely with the World Bank in conducting 
various diagnostic assessments of public financial management systems 
and recommends actions for implementation. To date, this collaboration 
has produced 12 Country Financial Accountability Assessments (CFAAs), 
in Burkina Faso, Chad, Gambia, Malawi, Mali, Madagascar, Mauritania, 
Senegal, Tanzania, Uganda, Togo, and Zanzibar. Since 2002, the Bank has 
also collaborated with the World Bank to carry out six Country 
Procurement Assessment Reviews (CPARs), in Benin, Senegal, Cote 
d'Ivoire, Angola, Togo, and Guinea. It is my hope that these 
collaborations will continue and strengthen in the years to come so 
that the two institutions can leverage off of each other's comparative 
advantages.
    The Bank also conducts Financial Management Reviews of its 
projects. The Financial Management Review is an AfDB innovation 
designed to improve the financial management and audit functions of 
specific projects. The Bank has successfully carried out Financial 
Management Reviews in five countries (Cameroon, Madagascar, Malawi, 
Uganda, and Zambia), covering four key sectors (agriculture, transport, 
public utilities, and the social sector).
    Another important and innovative diagnostic tool, employed by the 
Bank since 2002, is the Country Governance Profile. Country Governance 
Profiles are used to identify key governance issues in regional member 
countries, including corruption, and to develop a common understanding 
of the strengths and weaknesses of country governance arrangements. 
These profiles allow the Bank to better assess risks to Bank funds and 
to help countries develop governance reform and capacity building 
programs. The Country Governance Profile is the key instrument for 
mainstreaming governance priorities into Bank operations. The new cycle 
of Country Strategy Papers for 2005-2007 will address governance issues 
based on the governance profiles. To date 14 Country Governance 
Profiles have been completed (in Nigeria, Ghana, Mauritania, Malawi, 
Zambia, Chad, Cameroon, Benin, Kenya, Tanzania, Burkina-Faso, 
Swaziland, Senegal, and Gabon), and an additional 5 Country Governance 
Profiles are scheduled for completion in 2005.
    Institutional capacity in regional member countries is critical for 
effectively combating corruption and complying with the anticorruption 
safeguards in loan agreements with the Bank. For countries ranked low 
in the CPIA governance factors and where the risk for corruption is 
deemed high, the Bank will undertake more rigorous assessments through 
Country Governance Profiles, CFAAs, and CPARs, and propose corrective 
measures. Government officials from regional member countries will 
benefit from selective and specialized governance- and corruption-
related training organized through the Joint Africa Institute, housed 
at the AfDB, in partnership with the World Bank and International 
Monetary Fund. Such training will be country specific and based on 
areas of weakness identified through assessments.

                              PARTNERSHIPS

    The AfDB is actively engaged in partnerships with a number of 
institutions, to combat corruption on the continent. The Bank is an 
active member of the MDB Working Groups on Financial Management, 
Procurement, and Environment. The Bank is also collaborating on good 
governance promotion activities with the Economic Commission for 
Africa, and has conducted a series of workshops on developing national 
strategies and action plans for combating corruption in collaboration 
with Transparency International (TI), the World Bank Institute, and the 
Global Coalition for Africa. In 2005 the Bank hosted delegations from 
two specialized agencies mandated to combat corruption: The United 
Nations Office on Drug Control (UNODC)--the arm of the United Nations 
responsible for fighting corruption, and TI. The purpose of these 
visits was to explore possible modalities for cooperation with the Bank 
on combating corruption at the country level. Through ongoing 
discussions with such institutions, the Bank will endeavor to develop 
joint strategies and programs to complement its anticorruption efforts.
    The Bank was the lead institution involved in developing the 
standards and benchmarks for banking, financial regulations, and 
corporate governance for the New Partnership for Africa's Development 
(NEPAD) initiative. It is providing technical assistance to the African 
Peer Review Mechanism (PRM) component of the NEPAD and will also 
participate in the first PRM scheduled for Ghana this year. The AfDB 
was also a key partner of the African Union in finalizing the Africa 
Convention on Combating Corruption. More specifically, Bank sector 
experts are participating in the peer review exercise in the areas of 
economic and political governance, banking regulations and standards, 
and corporate governance.
    Responding to the call to tighten antimoney laundering controls 
after September 11, 2001, the Bank is actively supporting existing 
institutions such as the Financial Action Task Force (FATF), African 
regional FATF-style bodies, and specialized subregional antimoney 
laundering taskforces. The Bank cross references its development 
partners with the United Nations list of entities designated as 
terrorist organizations, and we are working with Bank management to use 
Treasury's Office of Foreign Assets Control (OFAC) list so that no Bank 
funds are abused by terrorists or money launderers. There has been, and 
will continue to be, very close cooperation between the Bank and the 
U.S. Treasury on finding solutions to end financial abuse. In addition, 
an internal Bank working group is exploring how the Bank can work with 
member countries to develop appropriate legal and regulatory systems 
and regimes to address the problem of financial abuse.
    The Bank's participation as an observer in FATF meetings has 
allowed it to get acquainted with FATF rules, and to present updates on 
the Bank's efforts on a number of issues concerning financial controls 
in Africa. The Bank is also working with a number of African financial 
sector regulatory boards to inform its AML/CTF strategy, now under 
preparation. The Bank has secured financing from France to fund the 
development of this strategy on AML/CTF, which will include Guidelines 
and a Plan of Action and is expected to be completed this year. The 
Bank is also working to build a network with regulators, experts, 
bilateral partners, and IMF and World Bank specialists to strengthen 
its institutional capacity in the AML/CTF field.

                               CONCLUSION

    Despite these significant and ongoing efforts to combat corruption 
and improve governance at the institutional, project, and country 
levels, the African Development Bank itself recognizes that additional 
efforts are required, particularly with regard to implementation and 
enforcement of existing policies and procedures, and strengthening the 
Bank's internal capacity to fight corruption. As the Bank works to 
build and strengthen the appropriate skills mix to carry out its good 
governance promotion initiatives, I will continue to press the Bank to 
review periodically its organizational arrangements, procedures, and 
policies to ensure an appropriate enabling environment and strategy for 
combating corruption.
    The Office of the U.S. Executive Director will continue to 
challenge and support the Bank to further strengthen its anticorruption 
efforts, enhance the transparency of its operations, and realize its 
objective of becoming the lead institution on good governance in 
Africa.
    Thank you.
                                 ______
                                 

 Prepared Statement of Elder Akie Hart, the National President of the 
            Mangrove Forest Conservation Society of Nigeria

    The highly respected and distinguished chairman, Senate Foreign 
Relations Committee of the United States of America, other 
distinguished Senators, and NGO Committees of the United States, here 
present.
    We, the Civil Society Community of Nigeria (CSCN) hereby commend 
the United States Senate for its active oversight role of multilateral 
development Bank in the collective mission of fighting poverty and to 
improve the living conditions of the developing countries.
    The issue of ``Combating Multi-Lateral Development Bank 
Corruption,'' in Africa, Asia, and European Regional Development Bank, 
today is another milestone of the democratic dividends of America to 
the developing world.
    The African Development Bank is one of the sponsors of the 4th and 
5th train of the NLNG (Nigeria Liquefied Natural Gas) project called 
NLNG PLUS, and this project as well as previously related trains 1, 2, 
and 3 have impacted negatively on the physical and human environment, 
development, and progress of Bonny Island, Rumuji, Soku, Ogba, Ayambo, 
Oguede, Peterside, Iwoma, Kalaibiama, etc.
    It is an accepted practice for operating companies to set aside 2.5 
percent to 3 percent of their total project costs for community 
development but in the case of Bonny, the whole companies budget, NLNG 
and others is not up to 1 percent and this has led to several reactions 
that has resulted to the death of those Bonny people, protesting for 
their rights.
    The last communal uprising led to the intervention of Rivers State 
and Federal Government, to bring about peace in the areas. It is 
imperative to the State that before a project like NLNG is to be 
executed, the Environmental Impact Assessment (EIA) must be conducted 
to evaluate the effect of the project on the environment, but in this 
regard, nothing was done, which is a negation of the rule.
    The Mangrove Forest Conservation Society of Nigeria (MFCSN) 
protested loudly, and a haphazard attempt was done. As at today, what 
NLNG/AFDB have is a conditional permit, with a list of several 
conditions that must be met before their conditional approval will be 
confirmed and certificate issued. AFDB was contacted earlier enough by 
MFCSN on 31/10/02 and 14/11/03 respectively to carry out the standards/
compliance to National and International Environmental Conditions: In 
their response, we observed that there was no transparency. This is 
because a genuine public hearing ought to have been done in Bonny 
Island--host community of NLNG or any of the project communities. We 
feel the host communities are the ``proximate sufferers'' and cannot 
afford N50,000 to N100,000 to go to Abuja for such public hearing. This 
means that the few members of the host communities who went to Abuja 
were handpicked, friends/stooges of NLNG, the common people were not 
there and not even informed, too.
    It is also worthy of note that NLNG/AFDB, acknowledged the fact 
that the project did not meet the due diligence standard of AFDB/World 
Bank, as their consultant of that of NCM--report bank said so in their 
report. Surprisingly, AFDB granted the loan without addressing the 
issues raised which we believe was not ordinary in view of the millions 
of dollars paid to consultants/company officials by TSKJ--the 
consortium handling the project.
    Today, Bonny, Rumuji, Soku, etc., bear the scars of the AFDB 
corrupt influence of unfulfilled promises. It is also painful to state 
here that Bonny community was not the only community that lost lives to 
such wicked marginalization and repeated brutality, oppression, and 
suppression of the people by the police, sent by Government on the 
request of NLNG.
    Bin Tolo in Malaysia cannot be compared to Ilioma in Bonny where 
NLNG has altered its geographical location with AFDB funding, to the 
extent that access to the community is difficult due to pipe lines 
crisscrossing and pipe laying havocs.
The impacts of NLNG/AFDB's funded activities in Bonny
    1. Destruction of forestry;
    2. Housing crisis due to unplanned population explosion;
    3. Reduction of fisheries on the sea;
    4. Deterioration of road due to heavy-duty vehicles and 
unanticipated increased usage;
    5. Educational pressure, in terms of more students for schools and 
no new schools, no teachers, as the few prefer the casual work at the 
sites;
    6. Increased traffic accident/crime;
    7. Inflation and loss of income;
    8. Overstretching of public utilities like water, electricity;
    9. Transportation hardship--more people using fewer roads.
AFDB in other parts of Nigeria
    From the interactions of the NGOs/CBOs movement, we discovered that 
AFDB-funded projects are full of deceit and corruption, such as the 
Bonny project, the Edo state water project, etc., funded by AFDB to the 
tune of $300 million led to the importation of rusty and obsolete pipes 
now lying waste with no water. While Edo/Delta States are now saddled 
with the deduction of several millions as interest payments, not even 
the principal. This has led to deepening poverty, money that could have 
been used for other developmental projects, is now used to pay fake 
debts and Edo cannot even pay salaries of its workforce due to these 
dubious debts.
    Edo/Delta State landed in this trouble because AFDB did not follow 
its internal control in granting such loans. Its officials were 
corrupted to look the other way and the Vice President of AFDB 
confirmed that they (AFDB) did not do what it is supposed to do which 
has confirmed that the process was irregular.
African issue
    On further investigation, we discovered that the same corrupt 
influences occurred in AFDB-funded projects in Lesotho and Uganda which 
means that urgent and radical solution is needed, if AFDB activities 
must impact positively on the people and we see U.S.A.
Commendation/recommendation
    1. We commend the U.S.A. Senate for its interest in the true 
development of Africa through its support to AFDB and its further 
interest to see that intended goals are met.
    2. We appreciate the Anti-Corruption Crusade of His Excellency, the 
President of the Federal Republic of Nigeria, Chief Olusegun Obasanjo. 
He needs international support in his antibribery crusade. His 
Excellency is tackling both the giver and receiver at the domestic 
level. We, therefore, suggest that the international community should 
be ready to tackle the Multi-National Companies like Halliburton that 
involved in NLNG/AFDB bribe/stealing of radio-active materials in 
Nigeria that led to its ban and it did the same in Iraq, too. The 
question is that what is the position of the American Congress to curb 
this menace, especially as this is an American Company. The Secretary 
of U.S.A. blew the lid off the bribe.
    3. Transparency International should also beam its categorization 
of not only corrupt countries but also the countries of origin of bribe 
paying Multi-National companies, so that we would know their corruption 
index, too.
    4. It is very important for American Government to play more roles 
in AFDB's activity. It should go beyond broad policymaking to active 
participation as one of its financiers as the social and economic 
impacts of its operations are impoverishing the people, leads to human 
rights abuses and giving loans not used for productive activities.
Summary
    AFDB activities have impacted negatively on Africans, instead of 
the positive and purposeful ways it was designed, because of its 
involvement in corruption.
    Therefore, current strategies to curb this ugly trend are welcomed. 
It should be strengthened and new policies made to eliminate it with 
U.S.A. playing more active role that is beyond policymaking.
    The U.S.A. should also investigate and solve the issue of bribe--
giving in the form of P.R. or Lobby by Western Multi-National 
Companies.
                                 
                                 ______
                                 

Minutes of the 659th Session of the Senate of the Italian Republic, XIV 
                    Legislature, September 28, 2004

    I hope the Assembly will understand and appreciate this commitment, 
approve it and sustain it with actions suitable to guide it and promote 
it.
    PRESIDENT. I postpone continuation of the debate on the above-
mentioned Bill to another session.
Continuation of the debate on the following Bill: (2667) Italy's 
        financial contribution to replenish the resources of 
        international funds
    PRESIDENT. The item on the agenda is the continuation of the debate 
on Bill No. 2667.
    I remind everyone that the general debate on the topic began in the 
September 23 morning session.
    Senator Martone is scheduled to speak. During his remarks he will 
also address agenda item G1.
    Senator Martone has the floor.
    MARTONE (Green Federation/The Union). Mr. President, honorable 
colleagues, Mr. Under Secretary, the acronyms that fill the Bill being 
debated distract us from some of the great challenges that the 
international community has been facing for decades: from the fight 
against poverty to a sustainable development, from the reduction of the 
foreign debt to the fight against hunger and underdevelopment in 
Africa.
    The GEF [Global Environmental Facility], an organization 
established before the 1992 Rio de Janeiro Conference by the UNEP, the 
UNDP, and the World Bank for the purpose of protecting the world's 
public resources (water, biological diversity, climate, the ozone 
layer), is a case in point. Its efforts, however, are often jeopardized 
and counteracted by destructive development projects financed both by 
public funds and private banks, including the World Bank. Another case 
in point is the Trust Fund to support the HIPC initiative, whose launch 
was unduly delayed, and which is struggling to effectively attack the 
foreign debt problem of the developing countries, cornered as it is 
between the lack of political will on the part of the creditor 
governments, and access criteria that are based primarily on 
macroeconomic concerns rather than on those that promote human 
development.
    In these remarks, however, I want to focus on the IDA 
(International Development Association), an agency of the World Bank 
Group that is dedicated primarily to lending to developing countries--
to the poorest countries among them.
    The most recent negotiations for the thirteenth IDA replenishment, 
which ended in 2002 and which is under discussion today, centered 
around several crucial issues, the most important of which referred to 
the percentage of IDA funds to be used as donations and the percentage 
to be used as repayable loans, albeit at zero percent interest.
    The issue at hand, ultimately, is whether we should increase the 
yearly percentage of donations, which is now 34 percent of IDA's annual 
budget, to 50 percent or more. While such an increase would undoubtedly 
entail, on the one hand, a lowering of the debt owed by the 
impoverished countries over the long term, it would, on the other hand, 
gradually deprive the World Bank of financial revenue resulting from 
repayment of the loans.
    This American strategy (the United States is a leading supporter of 
this shift from loans to donations) is being met with opposition, now 
as in the past, by the European countries because it masks a desire to 
see the IDA's budget gradually shrivel up, whereupon the aid from the 
World Bank would be progressively and easily replaced by bilateral aid 
that would be more open to political control and influence. Such a 
change would in effect bypass the governments. It would constitute, by 
and large, a privileged source of financing for the leading private 
United States charity organizations that are often willing partners in 
the U.S. Government's foreign policy, and, as such, apply selection 
criteria driven exclusively by political and strategic convenience.
    The ``grants versus loans'' issue is also being debated at the non-
governmental level. In fact, many observers believe that the gradual 
replacement of loans with donations would make the IDA simply another 
agency in competition with the UNDP, a United Nations specialized 
agency that already distributes donations, in effect making the latter 
superfluous.
    Hence there is a contradiction in mandates, in the roles assigned 
to the World Bank on the one hand, and to some specialized United 
Nations agencies on the other. This contradiction is currently 
jeopardizing many of the United Nations efforts to fight poverty and to 
promote sustainable development.
    The 2002 Monterrey Conference on ``Financing for Development'' 
tried to address this contradiction. One of its recommendations was to 
strengthen the role of the ECOSOC (United Nations Economic and Social 
Council). However, the Conference took no position on what we see as 
the fundamental factor (especially today, with respect to the 
possibility of reforming the United Nations), i.e., the proposal, put 
forward by many parties, of creating an Economic and Social Security 
Council to address and resolve the root causes of these contradictions.
    Other issues surrounding the IDA are also under discussion. One 
concerns specifically the basic philosophy and the intervention 
criteria that underlie aid for development and international 
cooperation. Among these issues, I would like to recall the discussion 
being held within the IDA about the role of the private sector and the 
possible use of these public funds (which are earmarked to fight 
poverty), to expand the private sector's direct foreign investments or 
to expand privatization programs that in fact would entail, among other 
implications, the introduction of fees for the use of basic social 
services.
    The effectiveness of the private sector is one of several crucial 
issues being discussed in the debate over strategies to fight poverty. 
However, this discussion is based on purely ideological assumptions 
that we believe could subvert the very meaning of international 
cooperation, for example, through the introduction of user fees.
    We believe that an approach that seeks to attach a monetary value 
to the fundamental rights of citizens, such as the right of access to 
welfare, to basic services such as health and education--which, quite 
to the contrary, should be removed from the marketplace and guaranteed 
public access--is unacceptable.
    The second crucial issue in the fight against poverty, and 
therefore also in the context of IDA discussions, relates to the 
principle of aid selectivity. This concept has been defined by World 
Bank economists. According to this definition, the Bank's meager 
resources should increasingly be given more and more to ``best 
performer'' countries, i.e., to those governments that decide to open 
up their economy, removing barriers to private foreign capital and 
making the free market and privatization cornerstones of their 
development strategies.
    We believe that this possibility constitutes a serious attack on 
the sovereign rights of governments, on the very principle of economic 
sovereignty of each nation, which is enshrined in the United Nations 
Charter. Aid selectivity is one of the most devious tools for creating 
a global market and for imposing in an unchecked, undemocratic way, the 
Washington Consensus.
    However, today's debate also allows us the opportunity of 
discussing more contingent issues.
    In the next few days--tomorrow or the day after--the World Bank and 
the International Monetary Fund will hold their annual meetings in 
Washington. Our government is under pressure to pass the finance bill 
and go to Washington with our house in order.
    I wish to remind my esteemed colleagues that this financing also is 
extremely late with respect to the original schedule. In any case, the 
fundamental issues that will be debated at the sixtieth annual meeting 
of the World Bank and the International Monetary Fund revolve, first of 
all, around the need to inject innovative and radical ideas into 
possible solutions for the foreign debt problem of developing 
countries.
    Two important proposals are being put forward on this issue. The 
U.S. Government wants to write off 100 percent of the multilateral 
debts held by the World Bank and the International Monetary Fund. The 
British Government also has a similar proposal for next year's G-8 
Summit.
    Apart from the two above proposals, we believe that there is still 
an urgent need to craft truly participatory processes, whereby the 
debtor governments may participate in the same degree as the creditor 
governments, and thus moving beyond the confines of exclusive bodies, 
such as the London and Paris Clubs. We also envision the participation 
of the civil society groups and communities that suffer the most from 
the burden of foreign debt, through the use of international 
arbitration rules. Governments and community action groups around the 
world--and even the United Nations--have already put forward such ideas 
with regard to Argentina.
    On this issue, we believe that the last G-8 Summit meeting held in 
Sea Island offered some encouragement, since it voted to continue 
support of the HIPC initiative (criticized by many observers as being 
``too little, too late'') extending it for two additional years. 
However, it did not review the access guidelines, hence preserving an 
exclusively economist-oriented approach instead, of a development-
oriented approach. It also failed to recognize that in its eight years 
of existence, the HIPC has yielded only partial results, having 
cancelled only one third of the foreign debt of the poorest countries--
countries that today still groan under an overall debt of US$90 
billion.
    This is the fundamental contradiction: the G-8 countries did not 
hesitate to discuss the need to completely cancel Iraq's debt, using 
the foreign debt issue simply as another tool of foreign policy, in a 
purely discretionary and opportunistic manner.
    Even James Wolfensohn, the President of the World Bank, in a recent 
interview with the Financial Times, denounced this inconsistency: more 
and more funds are being set aside for war and weapons, and the 
attention that the international community concentrates on the fight 
against terrorism detracts from the priority of fighting poverty, of 
reaching sustainable development and of writing off the debt.
    I would like to remind you that according to the most recent UNDP 
report on human development, the amount of money that the countries of 
the Southern Hemisphere send to our cash registers in the form of debt 
repayment, lack of market access, and so on continues to be enormous: a 
total of about US$200 billion.
    Contrast this to the fact that (as reported by Wolfensohn in the 
Financial Times interview), the world spends US$900 billion on weapons 
every year, a figure that is 20 times the total amount of public funds 
distributed for development purposes world-wide. This inconsistency is 
proof that not even the international community was able to profit from 
the peace dividend that many of us hoped would be generated from 
nuclear disarmament and the end of the rivalry between the Eastern and 
Western blocs.
    In addition to these commitments that were not followed through, 
there are other issues that we believe our government should support, 
with greater effort, issues that worry not only us, the community 
action groups and NGO's of Italy and the rich countries, but also, and 
especially, the civil society organizations that are active in the 
developing countries.
    Important, worthy initiatives supported even by the World Bank such 
as the Commission on Large Dams [sic] or the extractive industries 
review have fallen on deaf ears. The moratorium on the construction of 
large dams, the principle of prior informed consent, the principle of 
compensation to the local communities for the damage sustained as a 
result of destructive projects, the moratorium and support of the 
extractive industry (which could also help in starting to reduce the 
dependence of our development models on oil by promoting renewable, 
small-scale energy sources and the principle of sovereignty with 
respect to energy), have thus far come to naught. As a matter of fact, 
the commitments of the World Bank are in contradiction with its own 
recommendations.
    For the above reasons, we believe that the Italian Government 
should have a more decisive voice on the World Bank Board, to ensure 
that these recommendations and requests are finally accepted and 
implemented, since they result from a process of bilateral cooperation 
that has involved governments, international financial institutions and 
civil societies working together to formulate suggestions.
    Finally, I would like to add that the World Bank Group has a 
leadership role in strengthening approaches and methods with regard to 
development aid. Accordingly, the correct application of internal 
safeguard standards in the assessment of social and environmental 
impact, public consultation, participation, access to information, and 
third-party objective evaluation of its projects and plans constitute 
some of the best guarantees for an independent check on the work 
performed by these entities and on the use of the public funds that 
Italy gives to them (in the case of IDA, every three years).
    Notwithstanding the above, and notwithstanding the encouraging 
position that President Wolfensohn took early in his term in office, we 
continue to watch the World Bank and its management as they endeavor to 
weaken and loosen the above-mentioned safeguard measures, by granting 
to the governments of the countries that receive the loans, greater 
discretionary power in defining the social and environmental standards 
by which they must abide.
    In our opinion, this could cause further serious damage to the 
quality and effectiveness of the actions of the World Bank and the use 
of public funds. Damage would also be inflicted on the functionality 
and mandate of independent evaluation mechanisms, which Italy supports 
as well, such as the Inspection Panel.
    The effects of this change in direction--which is being discussed 
right now by the International Finance Corporation (the World Bank 
agency in charge of the private sector, among other duties), could be 
very serious indeed. On this matter, I would like to mention my 
personal experience. A few months ago I attended the Americas Social 
Forum in Quito, Ecuador. On that occasion, a sort of ``people's court'' 
on the World Bank and on food sovereignty was set up, with the 
participation of campesino leaders, union leaders and activists from 
Latin America who work in the area of food sovereignty, the right to 
water and the right to food.
    According to the above testimonies and in keeping with factual 
evidence, in Latin America the World Bank has a policy of supporting 
the expansion of intensive, single-crop farming and of GMOs 
(genetically modified organisms) as well as the privatization of water. 
This is an encroachment upon a country's sovereignty in terms of food 
supply; it also creates a condition whereby our countries and the aid 
agencies begin to build a real ecological and social debt toward the 
indebted countries (who in this case become creditors).
    Last but not least, I want to call your attention to the 
investigation that is being conducted by the United States Senate 
Committee on Foreign Relations about reports of corrupt practices with 
respect to World Bank development projects, some of which, such as the 
Yacyreta Hydroelectric Project (between Argentina and Paraguay) and the 
Lesotho Highlands Water Project (in Lesotho) are also using Italian 
companies and Italian public funds through bilateral cooperation and 
export credit mechanisms (SACE--Society for Alternative Culture and 
Education, an NGO).
    To give you an idea of the magnitude of the problem, I wish to 
remind you that detailed, independent and reliable analyses that are 
included in internal World Bank documents, show that in the case of 
Indonesia, at least US$8 billion of World Bank funds were allegedly 
lost due to the corruption of those governments and even of World Bank 
officials.
    In addition, according to a report by Richard Lugar, Chairman of 
the U.S. Senate Committee on Foreign Relations and a Republican 
(therefore someone who undoubtedly does not have great support for the 
views of my political group, but whose own views must be mentioned, in 
deference to fair political reporting), since 1946, because of 
corruption, at least US$130 billion in World Bank funds were diverted 
from their institutional targets.
    We believe that this sort of situation can cause great harm to the 
very institutional mandate of the World Bank, its credibility, and its 
effectiveness, further increasing the foreign debt of the developing 
countries.
    Therefore, it is imperative that the Italian Government commit 
itself to support reform initiatives to make these institutions more 
accountable for their activities and to tackle the main cause of 
corruption, strengthening the oversight and transparency mechanisms in 
contract-awarding procedures and public access to information, and 
proposing, among other solutions, the creation of an independent 
oversight body to serve as watchdog and prevent the embezzlement of 
funds earmarked to fight poverty.
    Given the above considerations, it is compellingly clear that the 
Parliaments themselves must exercise more control. We are sorry to see 
that this room is almost empty precisely when we are discussing vast 
amounts, such as the =500 million or more that will be earmarked for 
this institution, which, as I have tried to explain, is often all too 
happy to act in ways that contradict its very reason for being, outside 
of any parliamentary oversight.
    We therefore believe it is important that we continue to insist, in 
all venues, that these entities become more transparent. The agenda 
item and the amendment that I submitted with some of my colleagues 
address this issue, and I trust that the government and the sponsor 
will accept them.
    In an old confidential World Bank document that was leaked and 
created a lot of scandal (starting with the fact that it was leaked), 
some evaluators of the World Bank's activities stated that 
institutional loss of memory goes hand in hand with institutional 
optimism.
    What they meant was that the World Bank is often all too willing to 
forget the damage it inflicts, while continuing to offer an optimistic 
view of its work. As far as institutional policy is concerned, the 
World Bank tries to give more importance to the amount of funds it 
disburses rather than the quality of the disbursements, since it is 
incapable of learning from its past mistakes, mistakes that are 
highlighted in its own original documents.
    I believe that this Parliament, together with the civil society and 
community action groups, can and must treat this lack of memory not 
with a homeopathic cure, but with a radical treatment, by better 
monitoring the political orientation of the World Bank's activities, 
thus contributing, albeit modestly, to a renewed focus on politics and 
democracy rather than on market and laissez-faire imperatives.
    We are convinced that an ideology centered on neo-liberalism and 
the Washington Consensus has already shown so many limitations and 
incompatibilities. So much so, in fact, that our first imperative is 
now to rethink, immediately and radically, the very reason for being of 
institutions such as the World Bank and the International Monetary 
Fund--institutions that have continued to champion a laissez-faire 
ideology and have relentlessly carried that ideology out.
    PRESIDENT. The general debate is ended. The sponsor has the floor.
    CASTAGNETTI, acting sponsor. Mr. President, I waive my right to 
speak.
    PRESIDENT. The government representative has the floor.
    MAGRI, State Under Secretary for Economy and Finance. Mr. 
President, as mentioned, Bill No. 2667 authorizes Italy's participation 
in replenishing the resources of several International Funds such as 
IDA-XIII; the Special Fund of the Caribbean Development Bank-V; GEF-
III; the African Development Fund-IX; IFAD-VI and the replenishment of 
the HIPC Trust Fund. The Italian Government took on these commitments 
in 2001-2002.
    The Senate Bill No. 2667 was duly approved by the Foreign Relations 
Committee on March 3rd, and was also approved by the Budget Committee.
    It is important that Parliament approve this bill before the end of 
the year in order not to lose the corresponding financial allocation 
for the 2004-2006 three-year period. Failure to approve this bill would 
also have a heavy negative impact upon Italy's image in the context of 
international financial relations on public aid to development, since 
it would postpone indefinitely the payments that our country owes, thus 
increasing the already long delay that has accumulated up to now.
    Unfortunately, we agree with Senator Martone that these all-
important measures are not receiving the attention they deserve.
    To give you an example, I briefly recall that the International 
Development Association, part of the World Bank Group, is the leading 
source of financing for the 79 poorest countries of the world, those 
countries whose per capita income, in the year 2000, was at or below 
US$885.
    The Special Fund of the Caribbean Development Bank is the fund-
disbursing arm of the Bank--Italy has been a member since 1988. Said 
agency grants low-interest loans to countries in the Caribbean area. It 
is financed with contributions from its member countries and its 
leading goal is to reduce poverty and increase social development.
    The Global Environment Facility is a multilateral fund managed by 
the World Bank and composed of 173 member countries, to which 32 donor 
countries contribute financially. Its projects, approved by a specially 
appointed Committee, are carried out by three implementing agencies, 
i.e., the World Bank, UNDP and UNEP.
    With respect to replenishing the financial resources of the African 
Development Fund, I recall that this Fund is the loan-disbursing arm of 
the African Development Bank. Through low-interest loans it finances 
projects and plans in the poorest countries that would otherwise be 
ineligible to receive bank loans.
    At present 38 countries, mostly from Sub-Saharan Africa, have 
access to the funds of this agency. This area is definitely among the 
poorest in the world, hence the African Development Fund represents one 
of the most important resources for these countries.
    The IFAD, the International Fund for Agricultural Development, is 
especially dear to us. With its headquarters in Rome, it was 
established in 1978 as the thirteenth specialized United Nations 
agency, the result of a decision taken at the 1974 World Food 
Conference.
    The IFAD's main goal is to supply direct funds and mobilize 
additional resources for programs promoting the economic development of 
the poorest populations in rural areas, mainly by improving the 
productivity of agricultural projects.
    Most of IFAD's resources are made available to low-income countries 
in the form of loans on highly facilitated terms, such as a 40-year 
period for repayment of the principal with a 10-year, no-interest grace 
period (but with a yearly service fee of 0.75 percent). Any State that 
is a member of the United Nations or a U.N. specialized agency may 
participate to the Fund.
    The Fund has designed and carried out several different 
environmental, socio-economic and cultural projects, financing more 
than 600 projects and programs in 114 countries. It has also funded 
donations for technical research and assistance amounting to about 
US$420 million.
    For each dollar invested on behalf of the poorest among the rural 
populations, IFAD has mobilized US$2.9 from the donor countries, for a 
total of about US$22 billion. Therefore, considering the scarcity of 
available resources, resource mobilization has always been one of the 
leading roles of this entity.
    Finally, there is the replenishment of the HIPC (Heavily Indebted 
Poor Countries) Trust Fund. The HIPC initiative was launched in the 
fall of 1996 by the World Bank and the International Monetary Fund, at 
the urging of the G-7 countries. Its goal is to promote the 
cancellation of the debt of the poorest countries that have the largest 
debts (mostly Sub-Saharan African countries).
    In fact, a large debt is one of the major reasons that stymies the 
economic development of these countries. Most of the people who subsist 
on less than one dollar a day live in the 40 poorest, most heavily 
indebted countries.
    In view of the above reasons, Mr. President, I request that this 
Bill be approved quickly. The Bill's humanitarian inspiration and, 
above all, our government's fulfillment of the obligations it has 
committed itself to, merit the most serious attention.
    I acknowledge the care and attention that Senator's Martone has 
given to working and cooperating with us in the Committee to finalize 
this Bill, whose approval is imperative.
    PRESIDENT. I adjourn the debate on this Bill to a future session.
         announcement about interpellations and interrogations
    PRESIDENT. This is a notice that this Office has received one 
interpellation and several interrogations; they are published in 
Attachment B to the Minutes of today's session.
    I remind you that the Senate will reconvene in a public session 
today at 4:30 p.m. with the same agenda, as amended.
    The session is closed. (11:39 a.m.)

                              ATTACHMENT A

                                  bill
Italy's financial contribution to replenish the resources of 
international funds (2667)
                           item on the agenda
G1

MARTONE, BRUNALE, SALVI, Paolo BRUTTI, MARINO, FLAMMIA, DI SIENA, 
PAGLIARULO, BEDIN, DE ZULUETA, RIPAMONTI, FALOMI, DE PETRIS, CORTIANA, 
DONATI, PETERLINI, LONGHI, ZANCAN, TURRONI, MANZIONE, ACCIARINI, 
MALABARBA, BOCO, GIARETTA, Franco DANIELI.

    The Senate:
    Whereas Bill No. 2667 on ``Italy's financial contribution to 
replenish the resources of international funds'' includes Italy's 
contribution to the thirteenth replenishment of capital of the 
International Development Fund (IDA-13), a World Bank agency dedicated 
to granting loans to the poorest countries for the purpose of fighting 
poverty;
    Taking into account the investigation currently under way in the 
United States Senate on cases of corruption involving the alleged 
participation of World Bank officials in infrastructure projects, some 
of which, such as the Yacyreta Hydroelectric Project (Argentina-
Paraguay) and the Lesotho Highlands Water Project (Lesotho) also 
involved Italy's contribution, by way of SACE bilateral cooperation and 
export credits;
    Recalling that according to detailed analyses that are part of 
several internal World Bank documents, at least in the case of 
Indonesia, at least US$8 billion in World Bank funds were allegedly 
lost due to corruption, and that according to a report by Senator 
Richard Lugar, Chairman of the U.S. Senate Committee on Foreign 
Relations, at least US$130 billion in World Bank funds have been 
diverted from their institutional goals as a result of corruption, 
starting in 1946;
    Underscoring that corruption can cause great harm to the 
institutional mandate of the above-mentioned institution, and to its 
credibility and effectiveness, thereby increasing the foreign debt 
burden of the countries receiving aid, and jeopardizing efforts in the 
fight against poverty;
    Considering that the World Bank Group plays an active leadership 
role in strengthening approaches and methods with regard to promoting 
development, and that the correct application of internal safeguard 
policies for the assessment of social and environmental impact, 
consultation, and evaluation of projects and programs are the best 
guarantees for an independent, democratic control of said institutions 
and for the highest degree of effectiveness in the work they carry out;
    Recognizing the steps forward that the World Bank has taken in this 
respect, for example, by setting up independent appeal and verification 
mechanisms, such as the Inspection Panel;
    Acknowledging however, the World Bank's intention to revise these 
safeguard mechanisms to made them more flexible, thereby assigning 
greater discretionality to the governments of the loan-recipient 
countries in defining social and environmental standards, with serious 
prejudice to the quality and effectiveness of the World Bank's 
intervention and the use of public funds, such as those that Italy is 
earmarking for the replenishment of the IDA,
    Commits the government:
    (a) To support initiatives to reform the activities of the World 
Bank, with a view to remedying the main causes of corruption and to 
strengthening transparency and oversight mechanisms for contract 
bidding and awarding, as well as public access to information;
    (b) To propose the establishment of an independent oversight body 
to watch over and prevent the embezzlement of funds earmarked to fight 
poverty;
    (c) To support the strengthening of independent evaluation and 
review structures, such as the Inspection Panel, and to ensure a 
greater commitment on the part of World Bank personnel to following and 
carrying out existing policies, instead of proposing a greater degree 
of discretionality;
    (d) To report to Parliament about these initiatives, and about the 
position that the Executive Director for Italy at the World Bank has 
expressed on these matters.
                                 ______
                                 

          Letter to the Colombo Daily Mirror, January 30, 2003

                     FOREIGN FUNDED PROJECT RACKETS

    I was appalled to read in the newspapers recently that an enormous 
amount of money is to be spent on a water resources management project 
with a loan obtained from the Asian Development Bank. A breakdown of 
the Rs. 1400 million project budget indicates that Rs. 62 million is to 
be spent for import of vehicles, Rs. 182 million for purchase of 
equipment, Rs. 248 million for employing foreign specialists and Rs. 
492 million for training.
    I venture to predict that this project will also end up with very 
limited benefits to the people of this country but will bestow ample 
benefits to the lender, the politicians and state officials associated 
with the project just like the fifteen or more similar projects related 
to water that were completed during the last two decades with loans 
from the World Bank and the Asian Development Bank.
    From what I have seen and continue to hear I can predict how a good 
portion of these loan funds will be used. As far as vehicles are 
concerned, a few luxury jeeps each costing over 30,000 U.S. dollars 
will be imported by the project in addition to a large number of 
utility vehicles. The Minister, Deputy Ministers and high ranking 
officers will requisition the luxury vehicles for their use if they are 
even a little superior to what they are using at present, and some of 
the less expensive vehicles will be allocated to their Coordinating 
Secretaries while the rest will be distributed among the officers 
working in the project.
    It will be a very common practice for even second level and third 
level officers working in the project to travel daily from their homes 
in these vehicles as far as from Nittambuwa to Colombo and from 
Kurunegala to Anuradhapura in flagrant violation of government 
regulations.
    Spending Rs. 246 million on foreign specialists will be an 
unpardonable waste of public funds, especially in a field such as water 
resources management when there is an abundance of local talent. The 
engineering faculties of the Sri Lankan universities have produced 
thousands of very competent engineers, many of whom have obtained MScs 
and PhDs from reputed universities and are presently employed in the 
Irrigation Department, Water Resources Board, Mahaweli Authority, the 
universities and other local institutions.
    There is little justification for employing foreign engineers and 
paying them salaries more than fifty times the amounts paid to the 
equally qualified and experienced local engineers.
    Much of the 492-rupee-million budgeted for training will be wasted. 
The Minister and Deputy Minister, Secretary of the Ministry, Head of 
the Department, officers of the Treasury and even few of the 
Coordinating Secretaries of politicians will undertake study tours in 
developed countries.
    An ongoing water related project in the state sector can be cited 
as an example of such waste. The Minister, Deputy Ministers, Secretary 
of the Ministry, Director General and Directors were among those who 
visited the Tennesse Valley Authority in the U.S., numerous Australian 
water resource institutions and attended international seminars on 
river basin management in U.S.A. and Europe utilizing project funds.
    Of the above who undertook foreign travel utilizing loan funds, the 
Minister and Deputy Ministers do not hold office any more, the 
Secretary was transferred to the Ministry of Health, the Director 
General moved to the Ministry of Highways and the Director of Technical 
Services who went to Europe and several other countries attending 
seminars is positioned in the Ministry of Defence.
    What then was the gain to the country from these foreign tours?
    The tragedy of our country is that hardly any one is bothered about 
such waste.
    Has the Department of External Resources ever gone back to an 
institution which has completed a project, thoroughly evaluated it and 
ascertained whether project objectives have been met and monies spent 
frugally and justifiably?
    If not, what action has been taken against those responsible for 
inefficiency and waste? The lukewarm attitude to project supervision by 
the Department of External Resources is well known and clearly shown by 
the lackadaisical attitude of their staff at quarterly monitoring 
meetings of projects. They hardly utter a word, eat the cadju nuts, 
drink the tea, collect the honorarium and depart in peace.
    The public should be made aware of the craft and the techniques 
adopted by the lenders. They plan their activities with meticulous care 
and thoroughness seven or eight years in advance. One strategy they 
adopt is to identify a small short term project that has great 
potential for expansion and lending, and to offer a grant of about half 
a million dollars for its implementation. The government gleefully 
accepts this and the lenders quickly set up the project, get a 
foothold, establish themselves and take the opportunity to prepare a 
project expansion proposal for a tidy sum of 20 to 30 million dollars, 
but this time as a loan. The locals readily agree to this too. This is 
how projects flourish in this country and how the public debt keeps on 
increasing.
    In my view, most of the World Bank and Asian Development Bank 
projects are big rackets with the beneficiaries being the lenders, 
politicians and corrupt state officials. Somebody has to take a quick 
and hard look at these projects funded by loans and the manner in which 
the funds are used.
    How long is the country going to allow the importation and use of 
luxury jeeps, or costly junkets overseas by politicians and bureaucrats 
using taxpayers' money?
    These are the parasites of the country sucking the blood of our 
people with impunity. I suppose it is only the Prime Minister who can 
stop this utter waste of public funds and more importantly, arrest the 
spread of this corrupt culture. May the Prime Minister pay attention to 
this matter.
                                            R. Dissanayake,
                                                             Kotte.
                                 ______
                                 

          Letter to the Colombo Daily Mirror, October 6, 2004

         ADB CLARIFIES INACCURACIES ON CORRUPT PROJECT IN LANKA

    We refer to the recent article entitled ``U.S. Senate Highlights 
Corrupt Projects in Sri Lanka,'' published on October 2, 2004. We have 
always regarded the Daily Mirror to be a well-researched and respected 
publication. In this case, however, the article contained a number of 
inaccuracies which we wish to clarify.
    First, the statements attributed to U.S. Senator Richard G. Lugar, 
Chairman to the Senate Foreign Relations Committee appear to be those 
of Bruce Rich, Senior Attorney with the NGO Environmental Defence who 
testified before the committee. As you know, the Senate Foreign 
Relations Committee is looking into combating corruption in the 
multilateral banks and has been holding a series of meetings of which 
the Asian Development Bank, African Development Bank and European Bank 
for Reconstruction and Development were the focus of last week.
    During the hearing, allegations were made about the Southern 
Transport Development Project (STDP) in Sri Lanka, which were not new. 
In fact, ADB had addressed many of the issues relating to the project, 
in your own publication in May 2002.
    On the pre-qualification process highlighted in your article, the 
objective was to ensure that sufficient and appropriately experienced 
and resourced companies were eligible to tender for the ADB-funded 
project, thereby achieving a cost and quality effective outcome.
    Three companies were originally pre-qualified, and another--the 
fourth company referred to in your article--met the basic financial, 
experience, and resource requirements but fell slightly short of a 
passing mark when these criteria were combined.
    Since the objective of the process was to maximize competition, and 
because the deficiency was of a technical nature only, the company was 
permitted to participate in the tender process. It is important to note 
that the company became eligible simply to tender for the work, in 
competition with the originally pre-qualified companies. There was no 
question of the company being awarded the contract as a consequence of 
this pre-qualification process.
    The article also claims that the road is being realigned and that 
this realignment will result in an almost 100% increase in cost. This 
is not correct. The project will experience some cost overruns as a 
consequence of design and other issues but these are not a consequence 
of the change of alignment. There has been a general misunderstanding 
that the project cost increased from 11-12 billion rupees to 27 billion 
rupees because of the alignment changes. However, this is actually a 
misleading comparison between the cost of the ADB-financed section and 
the total project cost, which includes the section financed by the 
Japan Bank for International Cooperation.
    Finally, the article states that the company that was awarded the 
contract was able to submit a second bid, once the bid prices of the 
other companies were known.
    This is also not correct. Perhaps the misunderstanding has arisen 
because the bidding documents permitted all bidders to submit 
alternative technical and financial offers reflecting different design 
options.
    Only one company, the one eventually awarded the contract, did so 
but this alternative bid was submitted concurrently with all other 
bids, prior to the date fixed for bid opening, not afterwards. This was 
completely in accordance with the bidding documents and procedures 
agreed to by the Government and ADB.
    Regardless of all the above considerations, given the interest this 
issue has generated, ADB will review this process to ensure that it 
meets the highest standards of transparency and accountability.
    The claim that ADB does not seriously address the issue of 
corruption in its projects is without foundation and misleading. 
Indeed, ADB has had an anticorruption policy since 1998.
    In conclusion, we are concerned that such serious errors of fact 
are being reported as accepted truth. We hope that our clarification 
reassures you and your readers that the article to which we have 
responded contains factually incorrect information or is based on a 
misunderstanding of the process that led to the selection of the 
contractor.
                                    Alessandro Pio,
                           Country Director, ADB Sri Lanka,
                                                  Resident Mission.
                                 ______
                                 

          Letter to the Colombo Daily Mirror, October 18, 2004

                   ADB--THE TRUTH BEHIND THE HIGHWAY

    In the Daily Mirror of October 6, titled ``ADB Clarifies 
Inaccuracies on Corrupt Project in Lanka.'' Mr. Alessandro Pio, Country 
Director, ADB, made statements which were not true. All the citizens of 
Sri Lanka are clients of the Asian Development Bank and need to be 
informed of the truth.
    To quote the ADB's own words indeed there are many 
``inaccuracies'', but they are in their letter, not in the Daily Mirror 
article. We highlight below the most blatant of the inaccuracies in 
their letter.
    Mr. Pio says, ``There has been a general misunderstanding that the 
project cost increased from 11-12 billion rupees to 27 billion rupees, 
because of the alignment changes. However this is actually a misleading 
comparison between the cost of the ADB financed section and the total 
project cost, which includes the section financed by the Japan Bank for 
International Cooperation.''
    This is totally untrue. Mr. Alessandro Pio is either unaware of 
what he is commenting on or he is deliberately misleading the people of 
Sri Lanka. The major documents of the project include the cost for the 
entire road in the range Rs. 11-15 billion not as Mr. Pio indicates for 
only a section of it.
    The following are extracted from project documents of the 
Government's and those of ADB. The documents show costs as follows:

   The Environmental Impact Assessment for this project done in 
        1999 shows the cost as Rs. 12.8 billion for the Combined Trace 
        and Rs. 13.3 billion for the Original Trace. (Combined Trace 
        Rs. 12,765.476 million, Original Trace Rs. 13,285.316 million.)
   The Feasibility Study done by WSA Engineering for the 
        Government and paid for by ADB gives costs for the whole length 
        from Kottawa to Matara as between Rs. 9.3 billion and Rs. 15.2 
        billon depending on whether the Expressway will be 2 or 4 lanes 
        and on the junction type. (Section 3.3 Table ES1 Financial 
        Construction Costs.)
   Asian Development Bank Report and Recommendation of the 
        President (RRP). This is the document on which Board of the ADB 
        grants its loan. The report covers the whole Expressway 
        including the JBIC section and shows the cost of construction 
        as Rs. 12.1 billion. (Economic Internal Rate of Return 
        Construction cost--Total of costs to be incurred Rs. 12,123 
        million.)

    With regard to the points allocated at pre-qualification, there has 
been more than enough publicity of the computations, all recognise that 
the disqualification was not of a technical nature. Kumagai Gumi, has 
financial problems, its Bank had to write off an enormous amount of 
debt in 1997 and again in 2000. More recently its executives have also 
allegedly been involved in bribery, illegal political donations and 
money laundering. See Mainichi Newspaper about Imajo in Japan in 2002, 
and again in 2003 and Papua New Guinea Post Courier about 1995 to 2000. 
So much for Mr. Pio's ``Deficiency of a technical nature.''
    Let us now address the issue of alignment changes. Three cases went 
to the Supreme Court, where the petitioners from the Bandaragama and 
Akmeemana areas specifically complained about alignment changes which 
did not comply with the laws of Sri Lanka. The Supreme Court agreed 
with them, saying that ``. . . the deviations proposed by the RDA were 
alterations requiring CEA approval after compliance with the prescribed 
procedures and the principles of natural justice . . .'' This confirms 
that the traces described in the EIA were changed and these changes 
required approval in line with the National Environmental Act.
    ADB insisted that an EIA be done as part of their loan 
requirements. The traces studied by the EIA were as mentioned above 
quoting table 9.1. The costs were 12.7 billion for the Recommended 
trace, they are now 27 Bn. Mr. Pio's figure. ( Ministry figure at a 
meeting with the Prime Minister and Affected People 29 Bn.)
    If the increase from Rs. 12.7 Bn. to Rs. 27.0 or 29.0 was not due 
to trace changes which have been proved to exist, where did the money 
go? If Mr. Pio knows the answer he owes the public a duty to share his 
information with us.
    We strongly advise those who have access to the Internet to read 
the full text of the U.S. Senate testimony by Mr. Bruce Rich. It draws 
many parallels with another ADB project in Thailand where the project 
cost overrun was huge, the location was altered the public were 
protesting and ADB turned a blind eye to the corruption, disbursing the 
loan regardless. Eventually the ADB Inspection forced by the affected 
people with great difficulty said they were not at fault, and carried 
on. Hon. Mr. Takshin came to power, investigated the corruption and 
stopped the project. Court cases are proceeding against the Contractor 
and Government Officials. JBIC who also ignored the peoples voice and 
let the project carry on, asked for its money back and is probably 
laughing all the way back to their Vaults!
    These episodes show the ADB as irresponsible lenders and more 
dangerously, are not truthful in their statements.

               Sarath Athukorale and Heather Mundy,
                         Joint Organization of the Affected
                             Communities on Colombo/Matara Highway.

                                  
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