Global Policy Forum

World Bank Focused on Fighting Corruption


Graft and Bribery, Once Tolerated, Punished by Blacklisting

By Jonathan Finer

Washington Post
July 4, 2003

Once upon a time, World Bank financiers viewed their mission in narrow terms: Lend money to poor countries to try to make them richer. The governments that borrowed the money might let a bribe determine who was awarded a contract, and money intended for new highways or hospitals was sometimes siphoned off for other purposes, such as buying weapons. But overall, bank officials said, a little bit of corruption was tolerable -- often necessary -- to make economic development work. They don't say that anymore.

Responding to evidence that corruption impedes the progress of failing economies, the World Bank in the late 1990s began cracking down on the corrupt practices of its borrowers. "The one thing I'm proudest of is our work on corruption," bank President James D. Wolfensohn said recently.

Before he took office in 1995, Wolfensohn said, the bank considered corruption "an issue of politics," as opposed to one of economic development. Now, "it is now central to what we do." Under Wolfensohn, the bank began participating in international efforts to fight corruption. It developed internal controls to audit its projects. It compiled a blacklist of nearly 100 companies and individuals banned from receiving bank-funded contracts because of bribery, theft or for breaking other rules. Since 1996, the bank has started more than 600 anti-corruption programs in nearly 100 countries, according to a published statement.

Some observers of the World Bank -- which reported that it lent $19.5 billion of dollars in the year ended June 30, 2002 -- say it should be doing more to discourage the governments and companies it works with from misusing its money, which comes mostly from the governments of rich countries. The bank has continued to fund projects in countries where corruption is said to be rampant, such as Bangladesh. Only one country, Kenya, has been prohibited from receiving bank loans because of its government's corrupt practices, and that was temporary. Despite the blacklist, the bank sometimes has been reluctant to ban companies that violate its rules.

Because many of the world's most corrupt countries are also among the poorest, the bank's new stance can force difficult choices between continuing aid to a country that needs it and cutting it to discourage corruption. Poor countries are also notoriously poor record-keepers, making auditing more difficult.

"No one says this is easy. It's a trade-off," said Peter Eigen, founder and president of Transparency International, a corruption watchdog group. "You can't just have a simplistic link between the level of corruption and the level of funding. Some of these countries would really struggle without the bank's loans."

Eigen, who left the World Bank in 1991 when his pleas for a stronger anti-corruption stance were ignored, said he believes that under Wolfensohn the bank has made fighting corruption a priority. "It's very hard to change a large organization like the World Bank, and they're still working through this," Eigen said. "They were pretty bad, and allowed [corruption] to become a major problem. There's been a total change in policy, but to change from policy to total implementation is a long way to go. While I'd be hard pressed to say they've licked it, they are an enthusiastic and effective partner." The U.S. General Accounting Office evaluated the bank's anti-corruption efforts and gave a mixed review in a June report. While it found that the bank had taken "important steps" toward reducing internal corruption, the agency also recommended further action, including a more extensive audit of whether the bank's loans are used for their intended purposes.

The bank "has a long way to go," said William Easterly, an economics professor at New York University. "If the client is important enough geostrategically or one they want to cultivate in the long run, they will continue lending to them, despite long histories of corruption. They continue forcing loans down that pipe."

Corruption can take many forms, but it is usually defined as the misuse of public office or money for private gain. In the 1980s and early 1990s, most academic literature on economic development argued that corruption could help "grease the wheels" of a fledgling economy. But after several studies showed that corruption impedes development, many foreign aid programs began advocating "zero tolerance" toward corruption.

The World Bank responded to the shifting conventional wisdom. Soon after Wolfensohn railed against the "cancer of corruption" at the bank's 1996 annual meeting in Hong Kong, the bank formed an investigative body to audit its loans and set up a 24-hour hotline to allow staff and members of the public to report allegations of corruption. In November 1998 the bank convened a "sanctions committee" to punish companies and individuals guilty of corruption. In 2000 it formed a "department of institutional integrity" to investigate allegations of corruption within the bank or in connection with bank-funded contracts. It also started working with anti-corruption groups that once were highly critical of its activities. With Transparency International, the bank supports anti-corruption efforts such as an initiative to better account for money lent to countries involved in military conflicts.

To combat corruption, the bank can ban, or "debar," companies that use bribes and other unethical means to secure contracts, or it can directly punish governments by denying or decreasing loans to those where corruption is rampant. World Bank officials cited a recent audit of an urban development project in Sulawesi, Indonesia, as an example of a successful crackdown on companies. A 2002 review of the project -- for which the bank provided money to improve water services, housing, sanitation, flood control, roads and transportation on the remote Indonesian island -- found widespread corruption in procurement. In April of this year, the bank debarred 15 Indonesian companies for various lengths of time.

The bank has permanently debarred 93 companies, but provides no information about them beyond their names and where they are based. The list includes four local firms. Asia Construction, which the blacklist says is located in Delaware and Maryland, is out of business. Two other companies, Digidata and Knowledge Engineering, both of Virginia, are owned by David Riper, of Fairfax, whose name also appears on the bank's blacklist. He was accused of paying a kickback to a bank official to help secure a contract on a project in Nairobi. Riper declined a request for comment. One Washington company, International Access Corp., is debarred until 2004. An attorney for the company said in a prepared statement that the firm "was not treated fairly" by the bank but did not address the reasons for the bank's decision.

Despite the lengthy list of banned companies, several critics say that simply targeting firms that don't follow the rules is not enough. "The view of most economists is that all the money is really going into one pot," Easterly said. "The government might refrain from stealing funds on a World Bank project, but compensate by stealing more from another project." Instead, Easterly advocates cutting off countries whose governments have demonstrable corruption problems.

In June, the bank announced that Kenya, an East African country making a difficult transition to democracy after decades of one-party rule, was approved for a new loan of more than $100 million. In the past decade, Kenya has temporarily been cut off from funding by the World Bank and its affiliate lending organization, the International Monetary Fund, because of widespread political corruption. As recently as May, a government official there was accused of taking a $100,000 bribe from a contractor in the Kenya Urban Transport Initiative Program, a bank project that was suspended in August 2002 because of charges of rampant bribery and embezzlement. In approving the recent loan, the bank cited several steps Kenya's new government took to combat corruption.

Meanwhile, the bank continues to increase its lending to Bangladesh, a poor and densely populated South Asian country plagued by debilitating floods, which consistently ranks near the top of world corruption surveys. It is due to receive $554 million from the World Bank this year, and roughly the same amount next year, said Enrique Pantoja, a World Bank country officer for Bangladesh. The country's loan package for the previous three years averaged around $250 million a year, he said. "Not all poor countries are equally corrupt," Easterly said. "Why can't they do better at lending to those that do better?"

Other development experts point out that the level of corruption in a country is difficult to define and to quantify. Transparency International's index, which ranked Bangladesh as the most corrupt country in the world for 2002, measures the international community's "perception" of corrupt practices, which some say can be misleading. "Bangladesh is actually a tricky case," said Steven Radelet, a senior fellow at the Center for Global Development. "The Transparency number has a few asterisks. It's based on fewer sources than the others. This is not Zimbabwe, not Nigeria. It's not a disaster, or a kleptocracy. They've made progress in a number of other areas like health care and family planning. So they're getting a big check this year. It's a judgment call."

Transparency International's Eigen said: "Sometimes when companies start to take corruption seriously, more cases are uncovered. It gives the impression that they are more corrupt when they are actually doing better. The bank seems to be handling these cases well." Anti-corruption advocates said they will be watching closely what has, up until now, been the most widely publicized case of corruption in a bank-funded project: the Highlands Water Project, a dam and power plant built in the late 1990s in Lesotho, a tiny mountain kingdom in southern Africa. Government authorities there charged several companies with various forms of corruption, including paying bribes to win contracts.

The World Bank debarred several of the smaller firms involved, but one large multinational corporation, Acres International of Canada -- which in 2002 was found guilty of paying a $266,000 bribe to the project's head -- has not been punished so far.

"We are continuing to get legal advice on that," Wolfensohn said. "It is still under review." Staff writer Paul Blustein contributed to this report.

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FAIR USE NOTICE: This page contains copyrighted material the use of which has not been specifically authorized by the copyright owner. Global Policy Forum distributes this material without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes. We believe this constitutes a fair use of any such copyrighted material as provided for in 17 U.S.C § 107. If you wish to use copyrighted material from this site for purposes of your own that go beyond fair use, you must obtain permission from the copyright owner.