This post was written by GAP International Reform Director Beatrice Edwards for her Daily Kos Blog.

On Friday, October 16th, Raj Rajaratnam, a Sri Lanka national and hedge fund manager was arrested at his Manhattan home and charged with insider trading by the US Justice Department and the Securities and Exchange Commission (SEC).  As the manager of  Galleon Management LP, a  Wall St. hedge fund, Rajaratnam is accused of running a network of IT and health care company insiders who helped him amass $20 million in profits in the past three years.

As it turns out, in addition to benefiting from private information while making trades for his fund’s hedgers, Rajaratnam also cashed in on public largesse through his corporations’ access to generous loans from the World Bank Group.

Rajaratnam, who is now US-based, is one of the largest foreign investors in publicly traded Sri Lankan corporations.  He is the second principal investor in John Keells Holdings, Ltd. (JKH), the largest Sri Lankan conglomerate in the country, and he’s an important investor in Dialog, the national telecom firm.  Rajaratnam’s hedge fund also is a principal stockholder in the National Development Bank of Sri Lanka (NDB) and the Commercial Bank of Ceylon (CBC).  All four companies collected credit from the International Finance Corporation (IFC) – the private sector lending arm of the World Bank Group – over the past two years. The NDB established a risk-sharing facility with the IFC for up to $30 million two months ago. The CBC collected an investment from the IFC of $60 million in July 2008; JKH finalized a lending facility for up to $100 million in February, 2008, and Dialog’s most recent IFC loan amounted to another $100 million in August, 2007.

Well before the IFC loans were approved for companies in which Rajaratnam had a major stake, his reputation was, well, dubious. He had been investigated and fined nearly $2 million by the SEC in 2005 for “improper short-selling” of 17 stocks.  In 2007, a charity he had strongly supported was closed down for funneling donations to the Tamil Tigers insurgency in Sri Lanka.

At the time the IFC loan for JKH came Rajaratnam’s way, the company’s reputation for integrity was also highly suspect.  The corporation had effected an extremely smelly privatization deal that was under review by the Supreme Court of Sri Lanka, and four months after the IFC finalized its loan to JKH, the company’s Chairman was found to have worked “to secure illegal advantages….adverse to the public interest.”  The privatization deal manipulated by JKH was reversed by the Court as ‘unlawful.’  The Sri Lankan Secretary to the Treasury admitted violating the Sri Lankan Constitution as well as his oath of office for handing over to JKH a prosperous, revenue-producing state asset  for a fraction of its real value, and structuring the deal as a private monopoly on essential port services.

Despite its history of backing Rajaratnam’s Sri Lankan investments well after serious questions had been raised about the hedger’s ethics, the IFC posts the following statement on its website:

“The IFC is at the forefront of the market and of development institutions in guarding against fraud and corruption in its projects. This approach complements and supports IFC’s determination to act as a leader on sustainability. Avoiding fraud and corruption is necessary to ensure that IFC’s investments are successful, that its resources are being used effectively, and that its development objectives are met.”

Oh, please.