COMBATING CORRUPTION IN MULTILATERAL …



COMBATING CORRUPTION IN MULTILATERAL DEVELOPMENT BANKS: Executive Summary of Key Issues and Recommendations Raised during the US Foreign Relations Committee Hearings Over the May 2004 to April 2005 Period.

By: Vinay Bhargava, Director, EXT and Emil Bolongaita, Consultant, The World Bank

1. Background. The US Senate Foreign Relations Committee chaired by Senator Richard Lugar held a series of public hearings, during the period May 2004 to April 2005, on “Combating Corruption in the Multilateral Development Banks (MDBs)”. A total of sixteen panelists (experts), testified, including US Executive Directors to the MDBs, academics and specialists. Following the hearings, Senator Lugar has introduced, in the US Congress, a Development Bank Reform and Authorization bill (S.1129) which calls for reforms to bring greater transparency and accountability at the MDBs: the World Bank, the African Development Bank, the Asian Bank, the Inter-American Bank, and the European Bank for Reconstruction and Development. The draft bill was unanimously approved by the Senate Foreign Relations Committee on July 26, 2005. This is an executive summary of a detailed paper that analyzes the testimonies at the hearing; it does not contain an analysis of the Lugar Bill as that requires legal interpretations.

2. Significance: According to several opinion polls worldwide, there is widespread public concern that some of the foreign assistance is wasted due to corruption. In this context, the Lugar committee hearings provide valuable information about how the current efforts by MDBs are seen by well informed experts in USA and the suggestions they have for improvements. The issues and recommendations emerging from the hearings are worthy of serious consideration by MDBs as they consider additional measures to combat corruption in MDBs operations.

3. Key Issues and recommendations. Many of the experts who testified acknowledged the efforts, and progress, being made by the MDBs to control corruption in their operations and particularly praised the leadership of the World Bank in addressing the problem of corruption in international development. At the same time several issues were identified and solutions recommended. The following table summarizes the key issues and recommendations.

| Issues |Recommendations |

|1. Culpability of MDBs in “criminal debt” |MDBs to write off “criminal debt” |

|2. MDBs weak institutional incentives to foster staff |MDBs to change corporate cultures and staff incentives for greater |

|accountability for anticorruption |anticorruption accountability |

|3. Poor auditing and supervision of MDBs of loans and |MDBs to explicitly evaluate and tackle corruption risks in project |

|projects |and sector operations |

| |MDBs to adopt strict governance criteria in engagement in |

| |controversial sectors, particularly in extractive industries, |

| |large-scale infrastructure, and private sector operations |

| |MDBs to develop differentiated approaches in engagement, |

| |non-engagement, or disengagement with different countries |

| |MDBs to promote participation of civil society and media in MDB |

| |operations |

| |MDBs to “harmonize” anticorruption policies, including debarment of |

| |firms. |

|4. Divergence between MDB anticorruption policies and |MDBs to practice greater transparency in all aspects of its |

|actual implementation |activities. |

|5. Lack of MDB initiative and support to investigate and |MDBs to provide support to governments investigating and prosecuting |

|prosecute corruption |corruption in MDB-financed projects |

| |MDBs to provide greater resources and authority to its anticorruption|

| |units |

|6. Inadequate MDB safeguards to high vulnerability to |MDBs to prioritize corruption risks in policy-based or programmatic |

|corruption in non-project lending |lending |

| |MDBs to condition financial support on transparency reforms |

| |MDBs to provide institutional support to governments to meet |

| |transparency and accountability goals |

4. U.S. Treasury Position: During the hearings senior officials of the US Treasury including the US Executive Directors on the Boards of the MDBs testified. The key points they made are outlined below:

a) Establishing a strong result-based program will sharply reduce the likelihood that monies will be diverted for corrupt purposes;

b) At the institutional level reforms are focusing on improving internal auditing, investigation mechanisms, whistleblower protections, corporate procurement, and disclosure processes;

c) Reshaping of MDB personnel policies is needed towards results-driven anti-corruption work.

d) Effective implementation of Section 581 of the FY04 Appropriation Act (for greater transparency and accountability at MDBs) is necessary;

e) At project level, strong result measurement framework is needed;

f) At the country level focus should be to reward those countries that do improve their governance environment and enhance transparency and accountability;

g) Projects need to be underpinned with stronger whistle blowing protection;

h) MDBs to work on harmonizing anti-corruption policies;

i) A greater willingness to pull out from projects and cancel loans where corruption is suspected/detected;

j) Clear and comprehensive reporting of the MDBs anti-corruption efforts should be easily available to the public; and

k) Summaries of minutes of Board meetings should be made public.

5. Conclusions. The 16 panelists were generally knowledgeable about the efforts being made by the MDBs to control corruption in the operations they finance as well as to prevent/control corruption in their own staff. The issues identified by them are serious and the recommendations deserve careful consideration by the MDB authorities. The World Bank acquitted itself comparatively well in the hearings, but the subject of the hearings itself is clearly a continuing challenge for the World Bank, and other MDBs, going forward. Because of the numerous and vocal advocates of the issues involved, and the still widespread problem of corruption worldwide, the public profile and interest on the subject of corruption in development assistance will continue, if not intensify. Thus, it is all the more important for the MDBs to give serious consideration to the recommendations which emerged during the hearings and take actions.

Bhargava

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07/26/2005 9:24:00 PM

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