Panel Urges World Bank to Change Antigraft Plan

2/03/2011

WASHINGTON, Sept. 12 — The anticorruption drive led by Paul D. Wolfowitz as president of the World Bank, which shook the institution and contributed to his downfall, remains hampered by weak management, internal distrust and employee resistance to combating fraud, a panel of outside experts concluded Wednesday.
 The panel, led by Paul A. Volcker, a former Federal Reserve chairman, recommended that the bank’s new president, Robert B. Zoellick, work with the bank board to overhaul its antigraft operations and instill more confidence among bank employees and affected countries.
“This is not an easy problem,” Mr. Volcker said in an interview on Wednesday. “By far the most important thing is getting the entire bank on board with the importance of an anticorruption effort. This goes against decades of grain in the other direction. There’s been outright conflict in the bank as to whether to have an anticorruption function.”
The long-awaited report said it was impossible to quantify the losses from bid-rigging, bribes, poor quality of goods and services and other problems of graft in the operations of more than $20 billion a year in lending to poor countries.
“There is, however, a general sense that the losses are substantial,” it said. Current and former officials at the bank say that some form of fraud affects as much as 40 percent of the bank’s programs. Corruption was a signature issue of Mr. Wolfowitz, a former deputy defense secretary under President Bush who was forced to resign from the bank in May after the disclosure that in 2005 he had arranged for a pay and promotion package for Shaha Ali Riza, his female companion and a bank employee at the time.
His actions related to fighting corruption, like suspending aid to countries without consulting the bank’s board, ruptured his ties with the staff and directors. One effect was that the board and Mr. Wolfowitz agreed to bring in Mr. Volcker last year to examine the anticorruption efforts.
Mr. Zoellick welcomed the report for its “excellent and I hope most useful” recommendations, and he indicated that he would probably put most of them into effect. Aides close to the new president say that whether anticorruption efforts succeed will depend as much on his personal efforts to heal rifts at the bank as on managerial changes.
In an interview, Mr. Zoellick said many of the Volcker proposals were in line with plans he and his staff had already generated. “The most important recommendation is that anticorruption efforts are a vital function of the bank and need to be incorporated into everything we do,” he said.
By all accounts, Mr. Volcker, who had investigated the United Nations oil-for-food scandal in which Iraq siphoned off money from its oil sales, had to navigate many contentious charges and countercharges. Many of them focused on the activities of the institutional integrity unit led by Suzanne Rich Folsom, a Wolfowitz appointee and onetime Republican Party activist.
Many bank employees charged that under Ms. Folsom, the anticorruption campaign was waged selectively and unfairly against employees and countries and that it was intended to carry out the agenda of a conservative Republican distrustful of the bank’s mission.
Supporters of Ms. Folsom said, on the other hand, that they had been constantly stymied by bank employees who saw corruption as minor and as an acceptable cost of doing business in poorly governed countries.
The Volcker report, while exonerating the anticorruption team of unfairness or political motivations, said a “siege mentality” in the institutional integrity unit led to “excessive secrecy” about its activities and a refusal to share its findings with colleagues and people in the affected countries.
In general, the report said the bank had done a poor job in following up findings of corruption with remedial action in many countries, and it recommended that Mr. Zoellick select a top manager to oversee efforts to work with countries and regional bank officials to root out graft once it is uncovered. It also called for an outside panel of advisers to evaluate antigraft activities.
In a significant rebuke to Mr. Wolfowitz, the panel also recommended that the head of the integrity unit not serve as a counselor in the president’s office, as was done under Mr. Wolfowitz. Critics had charged that Mr. Wolfowitz and his top aides received information on corruption from Ms. Folsom that was not shared with colleagues, leading to financing decisions that rewarded or punished countries for political reasons, and to retaliatory actions against personnel without due process.
In the interview, Mr. Volcker said he and his investigators had found no evidence that the bank acted in favor of or against any country based on political motivations. “These questions of bias and so forth, we’ve found no substantiation of them,” he said. But he added that the follow-up on corruption charges was “cumbersome” and “slipshod.”
The panel also recommended that the anticorruption drive be carried out by a more diverse staff, a reference to the criticism that, under Mr. Wolfowitz, nearly 40 percent of the staff and most of the unit’s leaders were American.
A major question left by the report, especially among the bank’s 10,000 employees, was the future of Ms. Folsom’s leadership. Top aides to Mr. Wolfowitz have left the bank, and many bank employees have openly hoped that Ms. Folsom will follow.
But the report praised the operation of the integrity unit, and implicitly the performance of its director. Going further, Mr. Volcker said in the interview that she had done an outstanding job and that he had found no evidence to back up the charge that she had exhibited favoritism.
Mr. Zoellick also said he had no intention of removing Ms. Folsom, and Ms. Folsom, a lawyer with experience in corporate ethics matters, issued a statement praising the Volcker report and said she would not resign. “I am dedicated to the work of this department and the mission of the institution,” she said.
However, two people close to Ms. Folsom said that after the battles over Mr. Wolfowitz, and after being vindicated by the Volcker report, they would not be surprised if she left this year.
The panel also recommended that the integrity unit discontinue investigations into sexual harassment — Mr. Volcker said it was a “chronic problem” at the bank — and other forms of personal misconduct, which it said had been a distraction and a focus of bitterness among bank employees. These charges should be investigated by a unit in the human resources division, the report said.