Congress Squeezes Development Banks; House and Senate appropriators take action against the Inter-American Development Bank and one of its sister institutions in response to accusations of corruption

0 Comments | Insight on the News, Sept 2, 2003

Byline: Timothy W. Maier, INSIGHT

Congress sent a clear message to clean up alleged corruption and mismanagement at the Inter-American Development Bank (IDB) when House and Senate Appropriations subcommittees recommended deep funding cuts for the multilateral bank's sister financial institution, the Inter-American Investment Corporation (IIC), Insight has learned. The cuts come on the heels of a series of Insight investigative stories about the bank's procurement procedures and other practices. Both the IDB and the IIC receive U.S. taxpayer funds and consequently are subject to congressional and federal authority.

Congressional sources say the budget cutbacks also are in response to allegations that the IDB shortchanged retirement packages and failed for nearly 10 years to pay life-insurance proceeds to grieving spouses. While IDB officials claim they are working to resolve these issues, members of Congress are irked that such behavior has gone on for so long that it became institutionalized. Sen. Mitch McConnell (R-Ky.), chairman of the Senate Appropriations subcommittee on Foreign Operations, and Sen. Patrick Leahy of Vermont, the ranking Democrat on that committee, fired off a letter to the bank in August demanding details about the retirement and life-insurance packages. They have yet to receive an explanation.

The multilateral banks are under extensive congressional and criminal investigations covering a series of allegations ranging from cronyism in hiring and contracting to misappropriation of funds [see "Corruption Corrodes Development Banks," Oct. 15-28, 2002, and "IDB Update: Kickback Case Referred to U.S. Attorney" at Insight Online investigative archives]. Congressional investigators say they are convinced that the IDB improperly used taxpayer funds targeted to encourage growth in the private sectors of Latin America and the Caribbean to bail out mounting losses posted by the IIC a total of $41 million in 2002. This followed reported losses of $15 million in 2001, according to sources familiar with the bank's books [see "Congressional Investigators Begin Probe of IIC" at Insight Online investigative archives].

In response to the corruption allegations and failure of IDB President Enrique Iglesias to deliver on promised reform, Rep. James Kolbe, (R-Ariz.), chairman of the House Appropriations subcommittee on Foreign Operations, Export Financing and Related Programs, recently knocked out all funding for the IIC. The Senate Appropriations subcommittee on Foreign Operations similarly cut the IIC funding from a requested $30.9 million to $8 million.

And the U.S. Senate was not the only legislative body to cut the IIC's budget. The Italian Senate also has been convinced not to fund the IIC or the Asian Development Fund, say sources at the banks and in Rome, because of the corruption allegations reported by Insight. All the cuts are welcome news to the dozens of whistle-blowers who risked their careers by coming forward to report questionable practices, including the ability and willingness of the executives of these institutions to operate without ever having to account for expenses because independent audits are not required.

Tom Devine, legal director for the Washington-based Government Accountability Project, a nonpartisan law firm that supports whistle-blowers' rights, praised the House and Senate for taking a hard-line stance. "It's a healthy warning shot by Congress and the first step in restoring accountability for taxpayer funds," says Devine, whose group is representing some of the IDB and IIC whistle-blowers. "The other multilaterals should pay close attention because in some respects they have it coming, too."

Sources within the IDB say the message from Congress comes at a time when employees have been so distraught about alleged corruption that one supervisor tried to commit suicide by slashing his wrists and wrote "The bank is corrupt!" on a wall inside the bank's Washington offices. Sources claim that another employee, convinced the institution had become satanic, performed an exorcism ritual to rid the bank of its "evil spirits." While the exorcist/employee was characterized by others as unstable, a growing consensus believes Iglesias has lost the confidence of the people around him. Insight has reported that possible replacements include former Mexican president Ernesto Zedillo, currently a Yale University professor and Forbes magazine columnist, and Chile's former finance minister Eduardo Aninat [see "'Friends of Enrique' Enjoy Advantages" at Insight Online investigative archives].

Meanwhile whistle-blowers inside the multilateral banks are providing Congress with detailed accounts of the dubious transactions and inner workings of the IDB and IIC. These new allegations, for instance, involve senior bank officers ordering subordinates to create phony expense reports. The sources say at least one supervisor attempted to inflate taxi accounts to pay for prostitutes with tax monies. But whistle-blowers continue to fear for their jobs and refuse to be identified on the record. Devine says one problem is that the multilateral banks claim to operate with sovereign immunity, beyond U.S. law, leaving no means other than cutting off funding (or acting out a suicide or even an exorcism) to get the attention of these institutions and persuade them to follow acceptable banking, business and personnel standards.