Cleaning up the World Bank
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By Edward T. Pound and Danielle Knight
Back in the early 1980s, Leslie Jean-Robert Pean
was in a heap of trouble. Flat broke, in bankruptcy court; he had $10 in a savings account and a whole lot more debts than assets. Over the next half-dozen years, he scratched out a living in a variety of jobs. But in 1989, Pean, an economist, landed a job at the headquarters of the World Bank, in Washington, D.C.
By the early 1990s, Pean and his family had bought a big house on 3 acres of manicured grounds outside Washington, and he was passing around $100 bills like so much chump change.
"Our dream,'' the World Bank's mission statement says, "is a world free of poverty,''
something Pean really understood. The only trouble, bank investigators say, is that he wasn't focusing so much on helping the poor as he was on helping himself. Pean admitted to bank investigators that he had some $2.5 million salted away in a Swiss bank account, but he says it was family money.
The "C" word. Pean's activities are now under investigation by federal prosecutors, but to bank investigators the case is far more important than the alleged misdeeds of a midlevel manager whose bank salary never exceeded $166,000 a year. Kick backs, payoffs, bribery, embezzlement, and collusive bidding plague bank-funded projects around the world, a U.S. News analysis shows. The scale of the problem is enormous:
Knowledgeable analysts believe corrupt practices of one type or another may be associated with more than 20 percent of the funds disbursed by the bank each year.
The World Bank, controlled by 184 member countries, was involved at last count in more than 1,800 projects worldwide—everything from infrastructure improvement to efforts intended to enhance health, nutrition, education, and agriculture. The bank provides loans and grants of more than $20 billion a year, the money raised primarily through the sale of bank-issued bonds and member contributions. Over the past 60 years, the bank has approved loans of more than $550 billion. It is, quite simply, the largest and most influential antipoverty institution operating in developing countries.
For most of its history, World Bank officials ignored complaints about corruption. The "C'' word wasn't uttered in the hallways of the bank's opulent headquarters in Washington; bank managers worried that confronting those involved in graft would be an improper intrusion into domestic af fairs of sovereign states. That silence ended a decade ago, when the bank launched a campaign against corruption. It was an inspired idea by the bank's swashbuckling president at the time, James Wolfensohn, who denounced the "cancer of corruption'' and went on to create an internal rackets squad and a sanctions committee to investigate and punish wrongdoers.
Wolfensohn left the bank last year and was replaced by Paul Wolfowitz, the former No.2 official in the Defense Department, who was a leading advocate for invading Iraq and removing Saddam Hussein from power.
Wolfowitz quickly picked up the anticorruption torch. In his 10 months at the helm, he has made it clear that those who cheat and steal from the bank will be caught and punished, both on bank-funded projects overseas and among its workforce of 26,000 staffers and consultants. Sub-Saharan Africa, Wolfowitz says, is his primary target. Corruption "is an incredibly crippling factor on countries' efforts to develop,'' Wolfowitz says, diverting valuable resources from those the bank is trying to help—the world's desperately poor. Some 300 million people in sub-Saharan Africa live on less than $1 a day, Wolfowitz notes, adding that across the globe, that number is a staggering 1.2 billion. In two lengthy interviews, Wolfowitz disclosed that he had ordered a sweeping review of a major African program known as agetip after U.S. News uncovered evidence showing that the bank had failed to investigate serious allegations of theft in the program during the late 1990s. Wolfowitz wants to know what went wrong. Bank investigators have called in Stuart Eizenstat, a former senior American official who helped draw up the U.S. Foreign Corrupt Practices Act, to direct the inquiry.
U.S. News spent four months examining the World Bank's corruption and ethics programs. The review focused on the bank's investigative unit, the Department of Institutional Integrity, and the separate sanctions committee, created to bar corrupt contractors from doing business with the bank. The picture that emerges from the review is that of an institution struggling to carry out a critically important investigative mission in an environment in which, traditionally, staffers have been rewarded with promotions and salary increases for pushing money into projects—not for reporting corruption. Among the magazine's principal findings:
Allegations of theft in the agetip program began to circulate with in the institution in 1995, according to bank sources and internal documents. A bank audit in 1999 suggested, in the words of one official, "large-scale theft'' in the $600 million program, designed to create jobs in 11 French-speaking African countries. The bank opened an investigation into Leslie Pean, the once bankrupt economist who was a manager and key player in the program, but it pursued no other cases. In July 2003, the Pean inquiry was referred to the Justice Department, which declined to prosecute. Bank sources say a Justice Department prosecutor argued that the statute of limitations had run out on a specific bribery case and declined to open a more wide-ranging investigation of Pean's finances. Wolfowitz has since ordered bank investigators to take another look at the matter; after receiving a new criminal referral from the bank, prosecutors opened a formal investigation. Pean's lawyer calls the bank's allegations "outrageous.''
Until recently, the bank's integrity department had a backlog of nearly 400 investigations—a large number for an office of only 22 investigators. The problem, according to those famil iar with the unit, was lack of leadership, insufficient staffing, and a failure to move cases developed against wayward contractors out of the unit and into the sanctions committee. Wolfensohn, who spent 10 years as the bank's president, came to believe that the unit's director, Maarten de Jong, was ineffective and had failed to keep him posted on investigations, according to people close to Wolfensohn. Some decisions made no sense. Last year, as a budget measure, de Jong's aides imposed a freeze on travel, meaning that investigators could not go on missions overseas—a critical element in unearthing corruption. In an interview, de Jong, who retired last fall, main tained that the integrity department "was definitely on the right track under my leadership." Wolfowitz has invested $5 million more in the investigative unit and plans to add a dozen people to its staff. But the difficulties of investigating allegations of complex frauds on bank projects around the globe nevertheless remain daunting. Laxity. Senior managers in the integrity department were rebuked for failing to closely scrutinize major bank projects. Last year, the department's No.2 official pushed for funding of a healthcare project in India, despite evidence of massive fraud and the use of substandard drugs.
Wolfowitz put a hold on funding. Separately, two years ago, the unit's top managers withheld information on a major corruption issue involving Kenya short ly before bank executives approved a $207 million road project for the East African nation (Page 50). Troubled by continuing allegations of corruption on bank projects there, Wolfowitz froze $260.5 million in loans to Kenya last month.
The World Bank, despite the efforts of Wolfensohn and Wolfowitz, remains a bloated institution with fat salaries, tax-free, for many of its 11,000 employees, free education benefits for children, dependency allowances for spouses of up to $3,500 a year, and sweet heart consulting deals for former bank staffers and others. The bank's upper echelon—its 27 vice presidents—receives salaries that average $250,000 a year. Additionally, the bank spends $150 million annually on consultants, some of whom can earn as much as $1,400 a day. Before new controls were imposed, after a highly critical audit in 2004, some consultants made as much as $4,000 a day. One con sultant alone racked up $1.4 million in fees over a three-year period.
Policing the bank's
many complex projects and transactions is proving a herculean task. The bank has moved to ward more openness in the past decade, but it remains a highly secretive place that institutionally resists transparency. While its website contains a lot of information, some of the most important material never sees the light of day.
and other documents that might shed light on internal operations and projects are routinely kept confidential. Even the bank's 24 executive directors, who run the place, can't talk publicly about what goes on in their proceedings. "I am bound by a disclosure policy that I strongly disagree with,'' says Robert Holland, the executive director for the United States. "It bars me from telling you what happened in board meetings, or even disclosing statements that I made at board meetings about matters of crit ical interest to developing nations."
For Wolfowitz, the clock is ticking. Relaxed, sitting at a small conference table in his spacious 12th-floor office on a recent winter afternoon, he says he is as sured of only one term, or five years, in the president's chair—and hopes that "in five years I can accomplish something worthwhile.'' His effort to weed out corruption, he says, is not based on "a Calvinist obsession with good behavior." He has other things on his mind, he says—like establishing sound financial structures in developing countries, encouraging government openness, and using the bank's vast brainpower to foster education and training worldwide.
Power of the purse.
It's his anticorruption program, however, that is attracting at tention today. Some of the places the bank invests in are, to put it charitably, unreceptive to outside investigations of waste, fraud, and abuse. In some cases, investigators say, countries are reluctant to allow them to probe allegations of misconduct. In others, countries are not equipped to prosecute criminal referrals from bank in vestigators. Judicial corruption is another problem. Unlike a grand jury, the bank's investigators have no subpoena power, so they can't compel those under investigation to turn over information. The World Bank does have one big weapon, however—the power of the purse. Wolfowitz is using it like a club. Because of corruption concerns, he has held up loans to India, Bangladesh, Kenya, and Chad, while making it clear to the Republic of the Congo, in western Africa, that it won't get $2.9 billion in badly needed debt relief unless it first establishes strong anticorruption mea sures. Wolfowitz is implementing a series of other anticorruption reforms and has appointed a new director of the investigative unit, an ethics lawyer named Suzanne Rich Folsom.
Like Wolfensohn before him, however, Wolfowitz faces an uphill fight. Some big borrowers are not strong supporters of his antigraft schemes, and could go else where. Inside the bank, meanwhile, Wolfowitz has a bit of a rebellion on his hands. Internal critics complain that he is fo cused only on corruption. Development, not corruption busting, they say, is the principal mission of the bank. The resentment runs deep. Wolfowitz has been accused of snubbing some top bank managers on development issues and relying too heavily on three Republican advisers who have no prior bank experience. "It would be a pity if his political baggage and management style,'' says Bruce Rich, a Washington attorney and World Bank expert, "give people inside the bank a convenient excuse not to change.''
Then, of course, there is the environment in which the bank operates: corrupt dictators plundering their countries, political strife, disease, hunger, human- rights violations, and violence. Salaries are so low in many places the bank op erates, officials say, that government employees steal simply so they and their families can eat. In such an environment, bank funds can, and often do, end up in the wrong pockets
Glenn Ware, a former senior bank investigator, said at a recent legal seminar that the internal investigation unit explored some 2,000 allegations of corruption in the past six years and found "a recurring pattern of bribery, kickbacks, front companies, [and] shell companies.'' Another investigator says that bank managers in some countries believe they know precisely how much money they're losing to bribes and kickbacks. Based on the history of corruption in Senegal and Guinea-Bissau, for instance, the investigator says that the going rate to win a contract has been a 10 percent kickback. "In Indonesia, it's 15 percent upfront,'' he explains, "and 15 percent later.''
Some estimates are mind-boggling. A Northwestern University professor, Jeffrey Winters, an expert on Indonesia, told Congress in 2004 that he believed the World Bank had lost $100 billion to corruption over the years. Old bank hands ridicule the number but say they can't estimate how much has actually been stolen; they just don't know. But Steve Berkman, a former manager of World Bank projects in Africa who later worked as a bank investigator, says the $100 billion figure is probably conservative. Berkman has seen it all— corruption, big and small—but it is a tiny bit of graft that sticks in his mind. One day, in the 1990s, while reviewing an ed ucation project in Nigeria, he came across an invoice for $2,200. "We paid $2,200 for 18 cups of tea,'' he recalls. "The bank did nothing.'' It makes no sense, Berkman says, that an institution with so much financial acumen can't estimate its losses due to corruption. "They can tell you how many steps a woman takes from a hut to the village water well,'' he says, "but they can't tell you something like that?'' "No holding back." Whatever the flaws of its anticorruption program, the World Bank was the first multilateral development institution to establish such an operation. Wolfensohn— charming, brilliant, and irascible—became the bank's president in June 1995. No greenhorn, he understood how much corruption was a cancer in the de veloping world. A little more than a year into the job, he decided to tackle the problem head-on, installing inves tigators in the audit department to go after criminals inside and outside the bank. He later created the Department of Institutional Integrity and autho rized $10 million for its investigators to root out instances of fraud and abuse. Separately, he established the new sanctions committee, to ban rogue companies and individuals from doing business with the bank. A financial disclosure program for higher-paid staffers—nearly 1,700 of them—also was established, although the disclosures are not public records.
Many current and former bank staffers applaud Wolfensohn's vision, but they say his enforcement operation wasn't aggressive enough in shutting down "leakage,'' one of the bank's many euphemisms for theft. "Wolfensohn was a visionary,'' says a former staffer in the integrity department, "but a lot of it was talk, not action.'' The sanctions process is frequently cited as the chokepoint for investigations. Many cases sat around for months in the integrity department before they were shipped over to the sanctions committee for action. The committee has banned either permanently or temporarily more than 330 consultants, company officials, and firms in seven years, but critics say that most of those disciplined are small mom and pop operations and that more than a third involved a single country—Indonesia. The committee has been reluctant, some bank officials say, to punish large companies engaged in misconduct.
A case often cited is that of Lahmeyer International, a German engineering con tractor indicted in 1999 in Lesotho, a small country in southern Africa, in a massive bribery scandal linked to a huge dam project. According to a bank statement, the committee decided in 2002 that the evidence "was not sufficient to con clude'' that "Lahmeyer had engaged incorrupt practices.''
A year later, however, Lahmeyer was convicted in Lesotho of paying more than $500,000 in bribes to the former chief executive of the Lesotho Highlands Water Project, which was de signed to transfer water from Lesotho to South Africa. Still, the bank failed to act. In April 2004, the bank said it had "taken note'' that a Lesotho appeals court had upheld Lahmeyer's conviction; the court also increased the company's fine to $1.9 million. Finally, last year, the bank notified the company that it faced possible debarment, but the case is still pending. At last count, Lahmeyer held more than $5 million in contracts on bank-financed projects. The company declined to comment for this story. "This was not,'' says one person who has watched the sanctions process closely, "a really functioning sanctions committee."
Bank officials say that a new sanctions process, aimed at streamlining the procedure, is being put into place. When Wolfensohn left office last June, the integrity department had a backlog of 387 cases, including some in the sanctions pipeline. That number has been whittled down by nearly a third in the past year. In interviews, Wolfensohn says his en forcement program was a success. "I was the first person in any international organization to put the finger on corruption,'' he says. "Our budget was more than every other institution put together. Secondly, there was no occasion that I did not'' pursue allegations aggressively. "There was no holding back, regardless of who was involved.'' And a challenge: "Three years from now,'' he says of the Wolfowitz team, "let's see how much better they have done.''
At the World Bank's gleaming headquarters on Pennsylvania Avenue, just two blocks from the White House, the name of Leslie Pean is well known. Once a manager in the bank's Africa region, the suave and flamboyant Pean came under scrutiny in 2001, while on leave, for allegedly taking kickbacks on bank-financed projects. Pean was later fired, a bank report says, "for accepting bribes from a consulting firm in exchange for influencing the retention of a consultant on a bank-financed project.'' Despite the outcome, the case remains troubling. Although kickback allegations first sur faced against Pean in 1995, the bank didn't mount an aggressive inquiry until six years later.
Pean, Haitian-born, now 56, began working full time at the World Bank in 1989, at a salary of $54,000 a year. But he was an ambitious man, friends say, with a fondness for world travel, art, expensive suits, and jewelry. Over the next few years, Pean spread money around as if he had plenty of it. In 1993, he bought a $455,000 house in a leafy Virginia suburb outside Washington, then spent more than $200,000 renovating it, according to bank records and investigators. He also financed a $300,000, two-story house a few years later for a woman he knew in Africa, investigators were told.
Pean's good fortune began after he be came a manager in the bank-funded agetip program. Shortly after joining the bank, Pean became a chief architect of agetip, an acronym for Agency for the Execution of Works in the Public Interest to Combat Unemployment. Simply put, borrower countries passed bank loan proceeds to delegated nongovernment agencies, or agetips, that managed the contracts in Africa for public-works projects like roads, sidewalks, and parks. Bank officials for the Africa region in Washington, where Pean worked, say the program has created many jobs in poor nations. Pean traveled to Africa to over see many of the projects. One of the coun tries he visited was Senegal, in western Africa. In May 1995, news reached World Bank headquarters that a person, identified in bank files as "a local entrepreneur,'' complained that Pean was receiving kickbacks "wrapped in gift paper'' from a consultant on the agetip project there. An ethics officer at the bank's headquarters argued that the allegations should be pursued urgently because, he wrote, "One must remember that agetip is considered a success story.''
Brown bags. The bank, however, took its time. In 1997, it finally dispatched an audit team to Senegal. That same year, a top bank official congratulated Pean, in writing, for his "excellent'' work on the agetip program. The bank's audit team, meanwhile, turned up "nothing to indicate any wrongdoing on the part of Mr. Pean,'' a bank ethics officer wrote in April 1998. "Case closed.''
Pean was out of the woods, or so it seemed. But allegations of fraud in the program persisted. Another audit team began a review of more than two dozen agetip projects in five countries—in cluding Senegal and Burkina Faso. Ac cording to bank sources and documents, the team uncovered indications of widespread theft in most of the projects—including overpayments to consultants, bid rigging, and disbursement of funds for services never rendered. Although Pean is not mentioned in the audit, his name came up repeatedly during the review, the sources say. The bank implemented changes in the program, but despite the findings of corruption, an investigation into agetip was never opened. The audit team, however, referred information it had collected on Pean and others to investigators Finally, in early 2001, the new Department of Institutional Integrity opened an investigation of Pean. Investigators there tracked how Pean spent his money, both in the United States and in Africa. One investigator traveled to Guinea-Bissau, where "numerous witnesses'' told him of the expensive house that Pean had financed there for an African woman, an internal bank report shows. The inquiry also uncovered the extensive renovations Pean had made on his house in Great Falls, Va., including a swimming pool, a horse stable, and a handsome two-story addition. Buddy Stolze, a contractor who supervised the expensive renovation, told U.S. News that Pean often paid in cash. The bank report summarizes his account: "Stolze said Pean's wife paid him in cash (at least tens of thousands of dollars in $100 bills delivered in brown paper bags), traveler's checks, and checks drawn on multiple bank accounts.''
According to people familiar with the inquiry, Pean admitted to bank investigators in an interview that he had be tween $2.5 million and $3 million in a Swiss bank account. Pean said the money belonged to his wife, Gail, however, explaining that she had inherited it from her late father in New Jersey. Witnesses said that her father was not wealthy and left only a small estate. Pean also told investigators he had given the woman in Africa only $5,000 toward her house in Guinea-Bissau.
In the end, bank officials say, investigators obtained accounts of "illicit activity'' by Pean from "many'' sources and documented a $12,000 payoff on a Guinea-Bissau agetip project. That information, along with details on Pean's spending habits, was forwarded to the Justice Department three years ago. Prosecutors there declined to pursue the leads. "They thought the case was too small,'' says a bank official, "[and] that we hadn't given them enough to go on.'' After Wolfowitz revived the case last summer, however, federal prosecutors and FBI and IRS agents began an investigation. Wolfowitz later ordered a major review of the agetip program, which continues to operate in six African countries, to "find out what was really going on'' during the 1990s.
Pean, who has authored a book on corruption in Haiti and also worked as a United Nations consultant, declined to be interviewed for this story. His lawyer, Stephen Schott, says his client denies profiting illegally from his job at the bank but adds: "If he was involved, there were other people in the bank involved, and I could name a few of them. I am not going to do so because that would be potentially slanderous. If there was any thing going on, he wasn't alone.''
Since Wolfowitz moved into the president's office at the World Bank, he has taken on some tough customers, none more so than the government of India. In February, the bank disclosed that it was holding up $800 million in new loans for health projects in India. That was a big deal. The Indian government wasn't pleased, and neither were some members of the bank's executive board. India, after all, borrowed nearly $3 billion last year, making it the bank's largest customer. "Resist the pressure." At a private meet ing of the executive board in March, Wolfowitz was criticized sharply for withholding the funds from the Indian government. Wolfowitz stood his ground and has refused to approve any new loans for India until certain reforms are put in place there. Similar complaints also have been registered in board meetings over his decisions to block funds to Kenya and to impose tough new anticorruption measures on the Republic of the Congo, a small oil state in the grip of a crooked regime. In the interviews with U.S. News, Wolfowitz said he would not cave to pressure. He must, he says, "resist the pressure to go ahead with things before the prob lems have been worked out
The India case is a good example of the conflict between Wolfowitz and the bank's old guard. The case actually began last summer, after investigators in the bank's integrity department uncovered corruption in an Indian health project aimed at reducing mortality and disease in women and children. Investigators uncovered bid rigging, numerous cred ible allegations of bribes to government officials, and the use of substandard drugs, according to documents and in vestigators. "Harmful drugs,'' says one senior bank official, were "being given to nursing mothers.''
At the time, the bank was preparing to lend India $350 million to move ahead with the project's second phase. Robert Hindle, a career bank employee and then a senior manager in the integrity depart ment, was dispatched to India to review the new phase. Before he returned home, he sent a report back to headquarters endorsing the project. On the one hand, Hindle wrote, the bank's South Asia technical staff had not been "candid'' in as sessing the corruption risks on the new project. On the other, he argued, funding should be approved because the bank's staff and Indian government had devised a solid plan to reduce graft.
Signs of progress. Hindle's report touched off a firestorm. A Wolfowitz aide, documents show, bluntly told Hindle in writing that his report made no sense. Hindle's "conclusion'' to go for ward, says Wolfowitz, "wasn't justified by the facts in the report.'' Wolfowitz put a hold on the $350 million project; other Indian health funds in the pipeline also have been held up. Hindle, who retired last November and now works as a bank consultant, declined to be interviewed for this story. Praful Patel, a bank vice president, told U.S. News that his South Asia staff had been candid in assessing corruption risks. Even as a Patel aide says that the bank is working to strengthen India's anticorruption program, the inquiry into the initial health project is continuing. Criminal charges and sanctions, bank officials say, are expected.
Looking back on his first year at the bank, Wolfowitz says he sees sure signs of progress in the fight against corruption, especially in Africa. "More and more Africans at all levels,'' he says, "are stepping up to the reality that corruption is a disease that's holding them back.'' More broadly, to critics who com plain that he is obsessed with an anti corruption agenda, Wolfowitz says there is a bottom line to what he is doing: "This is about making sure that the bank's resources go to the poor and don't end up in the wrong pockets. It is about fighting poverty.''
With research by Jennifer L. Jack