In 2009, the World Bank’s Independent Evaluation Group (IEG) released an unprecedented 700-page evaluation which found evidence that the institution is failing to adequately address the risks of fraud and corruption in its assistance programs. While its findings apply to the International Development Association (IDA) – the arm of the Bank which provides assistance to low-income countries — the entire Bank relies on the same regulatory controls.
Specifically, the evaluation found a “material weakness” and six “significant deficiencies” in IDA’s compliance with its Articles of Agreement and Operational Policies. A “material weakness” constitutes a threat to the institution’s ability to accomplish its objectives and carry out its fiduciary duties as required by its charter. Thus, the likelihood of Bank resources being stolen through collusion, over-pricing, under-delivery, and bribery may be high.
The Senate Foreign Relations Committee has been investigating fraud and corruption at the Bank since 2003. On March 10, 2010, it released a report on this topic – “The International Financial Institutions: A Call for Change” — which corroborates some findings of the IEG and urges the U.S. and other major donor countries “to be firm in demanding that needed reforms are secured before committing additional funds” to the World Bank and other multilateral development banks.
In response to the IEG evaluation, Bank management is implementing a remedial Action Plan and a Governance and Anti-Corruption Strategy and making reforms, including the adoption of a new whistleblower policy. The new policy, however, does not meet the standards set out in the US Foreign Operations Act of 2005 for credible whistleblower protection at international institutions. Nor does it meet basic criteria of best practice according to Transparency International and the Government Accountability Project and, in the 21 months since its adoption, no Bank staff member has successfully defended him or herself from retaliation for reporting on corruption.
The Action Plan still has not elaborated new, specific control measures for many issues, let alone shown that new measures to address fraud and corruption are operational. The Bank’s IEG itself is reserving judgment on the Plan until all the requisite new control measures have been identified.
While the Bank’s management is reporting on its stricter, more comprehensive supervision related to fraud and corruption, it is also issuing major strategy paper to member governments — such as February 2010 “New World, New World Bank Group” — that supervision and compliance efforts are “top-down” and “out of sync” with the new development paradigm.
It is striking that, at a time when the IEG has found the World Bank to be in non-compliance with its charter, the institution’s management is stressing a shift away from compliance. For instance, a September 2010 paper states that “At a time when the development community is focused on results, accountability, and partnership, current supervision efforts place most of the emphasis on inputs, process, and oversight of compliance…What is needed is a culture shift—from a culture of supervision to a culture of implementation support… [Emphasis added.]
The management of the World Bank wishes to please major developing country governments that want fewer strings attached to the institution’s lending operations. Indeed, there is a need for greater voice of developing country constituencies in Bank governance. But, at the same time, the institution is obligated by its charter to ensure that borrowed money is not stolen from the poor and that development effectiveness is strengthened. This requires reliable, independent enforcement of its existing anti-corruption guidelines and regulations as well as greater efforts to ensure compliance with fiduciary (fraud and corruption) and safeguard (social and environmental) controls.
Donor countries are proceeding to approve significant levels of resources for the World Bank: 1) a 30% capital increase for the International Bank for Reconstruction and Development (which lends to middle income countries); 2), a 75% capital increase for the part of the Bank that supports the private sector, the International Finance Corporation (IFC); 3) an increase of $8 billion (to a total of more than $50 billion) for the next funding cycle of the Bank’s International Development Association (IDA); and 4) billions more for climate change.
Donors should heed the report of the Senate Foreign Relations Committee recommending that new funds and capital increases for the World Bank and other multilateral development banks (MDBs) should be withheld until major reforms are in place. These reforms need to ensure that ongoing corruption is not impoverishing the countries that the World Bank is trying to help and that other needed reforms to improve the development effectiveness are in place.
Nancy Alexander, Heinrich Boell Foundation, Alexander@Boell.org; 202-460-4588
We acknowledge the contributions of Jack Blum, Attorney and Chair of Tax Justice Network USA
*The views expressed are those of the authors and not necessarily of the Heinrich Boell Foundation.
 The IEG findings are set forth in 5-volumes entitled, “Review of IDA Internal Controls”:http://web.worldbank.org/external/default/main?contentMDK=22142204&theSitePK=1324361&piPK=64252979&pagePK=64253958 The IEG states that, “with important qualifications, IDA’s internal controls framework operates to a high standard overall.” However, the “important qualifications” relate to the institution’s central weakness in failing to address fraud and corruption.
 U.S. Government Printing Office, “The International Financial Institutions: A Call for Change, A Report to the Committee on Foreign Relations United States Senate,” March 10, 2010, 111th Congress, 2n Session, S. Prt. 111-43, p. 1. http://foreign.senate.gov/imo/media/doc/55285.pdf
 World Bank, “Moving Ahead on Investment Lending Reform,” Risk Framework and Implementation Support,” September 3, 2010: http://www-wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2009/09/09/000333037_20090909235811/Rendered/PDF/502850BR0Box3410only10SecM200910442.pdf.