Business gets murky with IDB; an American business executive claims his company was subjected to shady bank procurement practices during a consulting contract financed by the IDB

Insight on the News, Dec 10, 2002 by Martin Edwin Andersen

For perhaps the first time, an American business executive is going public with allegations of fraud and other misconduct on a consulting contract financed by the Inter-American Development Bank (IDB). The whistleblower hopes that by challenging such IDB practices his company, and other U.S. enterprises, can escape future financial risks in doing business with the institution. The case came to light after other U.S. businessmen complained privately that they, too, had been subjected to allegedly shady bank procurement practices [see "Corruption Corrodes Development Banks," Oct. 15-28].

In October, the IDB oversight committee on fraud and corruption began investigating a contract awarded to the Plexus Consulting Group for work with the "City of Knowledge" business-development project, located in what once was Fort Clayton, a U.S. Army base at the Pacific opening of the Panama Canal. The IDB's U.S. executive director, Jose Forquet, a former CIA official, reportedly has taken a direct hand in trying to ensure that further harm does not come to Plexus.

Steve Worth, president of Washington-based Plexus, tells INSIGHT that in 2001 the consulting company and Ernst & Young won a highly competitive $700,000 management and accounting-services contract with the City of Knowledge. Once in Panama to close the deal, Worth was told about a new condition--one not stipulated in the contract. He would be required to put up a $100,000 personal bond to guarantee the work. "We had no choice as to the bonding agent we had to use," Worth says, but were steered to one partly owned by Fernando Eleta--a well-known former Panamanian diplomat and friend of several IDB staff members--"whom we were encouraged to hire for the project." Eleta's father, a prominent Panamanian banker also named Fernando, serves on the City of Knowledge board of directors, Worth says. The younger Eleta was unavailable for comment despite repeated messages left by INSIGHT on his cell phones in Washington and Panama, and at his home in the Washington.

"Although this requirement was highly unusual, we agreed to it because the language of the contract clearly specified that as long as the report was delivered we would be paid and the bond obligation dropped," Worth notes. "When the Ernst & Young report was deliver, ed at the end of March, the City of Knowledge refused to pay fees and expenses that had been incurred to that point as required under the contract. They did not accept any offer from Ernst & Young to make changes in their report. And they did not call upon mediation of the arbitration board--all of which provisions were foreseen in the contract. Instead, they proceeded to call our bond--preferring instead to take our money."

Being a small firm and having spent more than $200,000 in accumulated fees and expenses, Worth tried to salvage the situation without a lawsuit. Plexus jettisoned Ernst & Young, hiring another partner at additional cost. It also accepted a $230,000 cut in its original contract and was saddled with significant increases in the scope of the work it was required to perform. "In essence, the original contract that Plexus had entered into with the City of Knowledge for $700,000 was now reduced to $372,000 for a heavier workload, a lofty bond requirement and payments that Plexus was ordered to split between the contractor and the new subcontractor," Worth says.

Although the City of Knowledge alleged that the work done under the contract was unsatisfactory and balked at paying its fee, it began to use the logo, Website and promotional materials Plexus designed, took advantage of referrals it made and employed marketing strategies crafted by the Americans under the terms of the original contract. Meanwhile, two Panamanian groups feuded over who would get the cash forfeited from Worth's bond.

Facing heavy financial burdens due to the mounting costs (including an $18,000 invoice from Eleta) and nonpayment from the Panamanians, Worth was forced to take out a $75,000 loan. In September he contacted William Taylor, the IDB's auditor-general, to complain of the "unethical or fraudulent practices" to which Plexus had been subjected. On Oct. 16, the U.S. Commercial Liaison Office at the IDB reminded the long-serving Taylor that his office had promised to make the Plexus dispute "a high priority."

Miguel E. Martinez, a senior IDB manager, tried to limit the exposure of the bank, one of the major financiers of infrastructure projects in Latin America, for a possible claim against it, noting that the IDB was not a party to the contract between Plexus and the City of Knowledge. "The bank requires that all borrowers and technical-cooperation-grant beneficiaries, as well as suppliers, contractors and consultants that participate in bank-financed projects, adhere to the highest ethical standards, both during the bidding process and throughout execution of the contract" he said in a letter to Worth.

"This is the most blatant corruption I have ever seen," Worth fumes. "The IDB logo is on every aspect of the project, they endorse it and they finance it. How can they say that they are not responsible for it?"