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Sunday, 14 June 2009

Corruption and the World Bank

A review of Steve Berkman's The World Bank and the Gods of Lending

Peter Bossard

Despite promises from former World Bank President James Wolfensohn back in 1996 to take vigorous action to combat bribery, a new book by bank insider Steve Berkman suggests that nothing has changed, writes Peter Bossard. Citing case studies from Nigeria and Gambia, Bossard says Berkman's The World Bank and the Gods of Lending 'combines number crunching with vivid detail and moral outrage'. Berkman concludes that not one of the more than 100 projects he worked on 'did not reek of corruption', says Bossard, estimating that depending on the country, 15-40 per cent of the World Bank’s disbursements for any given project are lost to corruption. But Berkman 'does not give up all hope', arguing that the World Bank 'needs to spend less and supervise more' and proposing that 'the bank fully disclose all anti-corruption investigations, government agencies involved and funds stolen in its annual report'.

In a major departure from the past, World Bank president James Wolfensohn in 1996 identified corruption as the 'cancer' of development. Wolfensohn promised to take vigorous action to combat bribery, and launched various strategies and action plans. A new book argues that behind the rhetoric of good governance, nothing has changed. In The World Bank and the Gods of Lending, the bank insider and corruption fighter Steve Berkman explains in stunning detail how government officials milk billions of dollars from bank loans and credits every year. The World Bank management, still mainly concerned with pushing money out the door, meanwhile looks the other way.

At International Rivers we have warned that the World Bank encourages corruption by promoting inappropriate, bribery-prone mega projects for many years. We always thought that the bank’s own funds were off limits. After all, the bank insists on strict international procurement, accounting and auditing standards. Steve Berkman’s chilling account, which summarises insights from 16 years spent inside the institution, proves that we were na├»ve.

The Gods of Lending combines number crunching with vivid detail and moral outrage. Berkman reports how Nigerian officials charged $2,200 for 18 cups of tea and snacks at a roadside stall under a World Bank loan (and got away with it). A project office with eight staff in the same country charged a switchboard for 60 telephones, 48 air conditioners, 14 shredders and 12 refrigerators to the operating expenses of another Bank project – all at prices well above the going market rates. They also claimed expenses for television and video sets at 249,999 Naira apiece – more than ten times the equipment’s street value, but just one Naira less than the amount which triggers stricter controls.

In a gripping chapter, Steve Berkman takes us on a trip to The Gambia, a poor West African country. We travel there to investigate suspicions of corruption in a US$12.3 million agricultural services project in 1998. The very first payment under the project was for four Japanese cars – a transfer of US$95,700 in Danish kroner to a bank account on the Bahamas. The cars are nowhere to be found, and the company that supposedly sold them doesn’t exist. When the ministry responsible for the project finally provides the serial numbers of the cars in question, the Nissan corporation states that such cars were never produced.

Berkman continues his investigation. He comes across a company which supplied goods as varied as computers, textbooks, chickenfeed and cattle scales for a total amount of $430,000 to the project. These guys must be bigger than Wal-Mart, our man in The Gambia thinks, and pays a visit. He finds a small stationery shop in the capital, whose owner is completely unaware of the goods he is supposed to have sold. Needless to say, the equipment is not in the government’s inventory.

Our investigator continues to go through the books and identifies $1.3 million in fraudulent transactions in nine days – roughly 10 per cent of the project amount. A government official admits that under ‘intense pressure’ from higher officials, another 20-25 per cent of the credit was diverted to other government agencies, without documentation to support the claim. We assume the spoils of the project had to be shared. And we suspect the author could have nailed down the full project amount in fraudulent transactions if he had had more time.

Steve Berkman explains some of the countless petty scams by which the World Bank gets milked. In countries such as The Gambia, local traders and government officials commonly work together. The officials will instruct a trader to submit three competing bids for a contract, with his own bid being the lowest. The prices are always well above the market rates, and often dictated by the government officials. The trader doesn’t always know what orders are placed in his name. From time to time he is asked to provide blank invoices. He receives a cheque, cashes it in, hands the cash back to his contact and gets a commission for his service.

Much of this fraud is carried out through so-called special accounts. Such accounts are controlled by project officials for the recurrent expenditures of World Bank projects. Their funds are disbursed against statements of expenditures (SOEs), which require little documentation and are hardly ever reviewed by Bank staff. Government officials do not have to account at all for the interest which these accounts accrue. Consequently, a sizable portion of these accounts lay idle, so that a maximum amount of interest can be siphoned off. When Berkman first warned about the corrupt potential of special accounts and SOEs in 1993, they had risen from 9 per cent to 37 per cent of the World Bank’s disbursement. In 2004 (the latest year for which figures are available), a staggering 60 per cent of project lending was disbursed through these mechanisms.

James Wolfensohn’s war on corruption triggered a flurry of activities by World Bank staff and management. Yet all efforts were hemmed in by the imperative to keep lending irrespective of corruption. ‘We could talk all we wanted’, comments Berkman. ‘We could send letters; we could hold meetings with high-ranking officials; we could conduct financial management, procurement, and disbursement workshops; and we could stand on our heads. But our “partners”, the government officials with whom we were dealing, had no intention of ending this wonderful arrangement by which they were enriching themselves. And the bank had no intention of ending its relationship with these thieves.’

The Gambia project for which Berkman painstakingly documented the machinations of corruption confirms this grim assessment. Even during the Wolfensohn presidency, the author’s findings had no consequences for the government and its corrupt officials. The stolen funds were never returned. No charges were levied. The Bank’s lending continued. The show must go on.

Berkman concludes that not one of the more than 100 projects he worked on 'did not reek of corruption'. He estimates that depending on the country, 15-40 per cent of the World Bank’s disbursements for any given project are lost to corruption. And he quotes a report of the bank’s staff association which comments that 'stealing from bank funds is the rule, not the exception'.

Even with such stunning conclusions, Berkman does not give up all hope. He argues that the World Bank needs to spend less and supervise more. He calls for smaller, simpler projects, which do not create a 'feeding frenzy for corrupt government officials'. He says that the bank needs to insist that borrowing governments prosecute, punish and recover the assets of guilty individuals in the same way they would treat other criminals. And he proposes that the bank fully disclose all anti-corruption investigations, government agencies involved and funds stolen in its annual report.

The World Bank tries to avoid a public debate about this burning problem. It has never formally responded to The Gods of Lending. The bank’s bookshop did not get bank sponsorship to organise an event with the author. Informally, bank representatives argue that the new book presents extreme cases which are not representative for the bank’s portfolio. If this is correct, it is not comprehensible why the institution did not rigorously tackle the fraud Berkman uncovered in Nigeria, The Gambia and other countries.

Bank representatives also argue that the book accurately identifies problems of the past, but that the institution has meanwhile addressed them and moved on. This is the World Bank’s standard response whenever systematic problems in its portfolio are uncovered. Yet only in April 2009, a report by the Independent Evaluation Group gave the bank the lowest possible grade for its anti-corruption measures. The bank’s guidelines for supervision, financial management and procurement don’t address the risk of fraud, and staff who speak out on corruption issues run the risk of reprisals by their managers. As Steve Berkman concludes in his book, 'the bank talks, and the money walks'.


* Peter Bosshard is the policy director of International Rivers. He is author of the blog Wet, Wild and Wonky, where this article was first published

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