Last week, Senator Lugar sent out this press release, "Lugar Urges International Development Banks to Step Up Corruption Cases." Bless the man for trying to uphold notions of honesty not-currently-in-vogue in most of the rest of the world -- or in government for that matter. Lugar had asked the multilateral development banks about how they addressed criminal violations in their operations, when such crimes came to light. Not surprisingly, the answer he got from World Bank President Robert Zoellick didn't really answer the question. While Zoellick's reply was encouragingly upbeat, it was also irrelevant.

As I read the letter from Zoellick, I began to ponder the nature of corruption in the 21st Century. It must be the season: a time to look back on the year and consider how many real scandals were ignored....

My own humble focus this year has been on the farce also-known-as-criminal-justice in India and the Satyam scandal -- the "biggest fraud in Indian corporate history.” Zoellick's letter to Lugar and my interest in Satyam converge because Satyam was suspected of some serious crimes at the World Bank, as its lead IT outsourcer from 2000 through 2008. These allegations were described in depth and with documents in a series of articles written by Richard Behar and published by Fox News (I know, I know.) Satyam’s criminal malfeasance seemed to range from Chinese espionage to loading illegal spyware on secure computers to irregular invoices from Satyam to the World Bank to shadow employees and corporate shell games.

Senator Richard Lugar released a statement on Tuesday in which he urged all multinational development banks to refer companies and consultants suspected of fraudulent or corrupt practices to relevant national authorities. The development banks -- including the World Bank, African Development Bank, Asian Development Bank (ADB), European Bank for Reconstruction and Development, and Inter-American Development Bank (IDB) -- previously reported their practices in this area of anti-corruption work to Sen. Lugar at his request.

Lugar, who as Ranking Member of the Senate Foreign Relations Committee has long been a strong supporter of protections for whistleblowers at the development banks, noted that referring cases of corruption for potential prosecution is a strong deterrent.

Recently, investigators from the World Bank, IDB and ADB appeared together on a panel during the meetings of the International Anti-Corruption Conference in Bangkok to discuss their new cross-debarment agreement. Under the agreement, which took years to negotiate, a firm or consultant found guilty of fraud at one bank, and subsequently debarred, will, in many cases, be debarred by the others. But Lugar made it clear that expulsion from the club of development bank contractors is not sufficient to curb fraud and corruption in many cases. Referral for prosecution should also be more frequently considered and used. From his statement: 

Last week, the World Bank Administrative Tribunal released its latest decisions. GAP found decision No. 437 (AI No. 2) to be particularly significant, given its implications for whistleblowers and for those who raise racial discrimination issues at the Bank. In this case, the Tribunal ruled that the Applicant’s performance evaluation and termination were “an abuse of discretion,” and “arbitrary,” and awarded the Applicant three years’ salary and costs. While GAP applauds the Tribunal for awarding certain financial relief to this long-suffering whistleblower, we were disturbed to see that the judges dismissed the Applicant’s retaliation claims in one sentence, without exploring the merits of those claims in-depth. Similarly, the Tribunal dismissed the Applicant’s racial discrimination claims, in a decision that maintains the pattern of racial discrimination that GAP first reported in Racial Discrimination at the World Bank. Although the Applicant in this case (whom GAP represented on an informal, advocacy basis) wished to return to the Bank, the Tribunal ruled against his reinstatement:

Neither the Tribunal’s Statute nor its Rules require that the Tribunal must order reinstatement when it finds a termination decision to be arbitrary. The Applicant demonstrated certain unprofessional behavior when he was not appointed as the ICP Global Manager. Over the years, he has criticized his managers and engaged in communications that failed to meet the standard expected of a Bank staff member (see AI, Decision No. 402 [2010]). He has made no secret of his contempt for the institution where he now seeks reinstatement. In these circumstances, the Tribunal does not consider reinstatement to be an appropriate remedy. Instead, the Bank must pay compensation to the Applicant.

Ironically, the Tribunal directly contradicted this statement in its own ruling by categorically dismissing the Bank’s unsubstantiated claims that the Applicant had engaged in “critical workplace behaviors” and “unprofessional communication.” The Tribunal observed that before the Applicant filed a complaint his performance was “praised” by his director. The Applicant was recognized as a dedicated and hard working “high performer,” who brought “much value to the [department's] work,” and possessed “excellent technical and interpersonal and client skills.” Clearly, the Applicant’s adverse performance evaluation after he disclosed wrongdoing and filed racial discrimination charges stands in stark contrast to his performance evaluations before he filed. Nevertheless, the Tribunal refused to reinstate this wrongfully terminated whistleblower as he had “criticized his managers.” But whistleblowers are, by definition, “critical” of corruption and often question the failure of managers to address wrongdoing, as this Applicant did.

The judgment shows that even when whistleblowers win before the Tribunal, they still lose, as the consequences of the retaliation to which they’re subjected are usually not fully addressed. Because whistleblowers are not guaranteed reinstatement at the Bank, their employment record can remain tarnished even when they “win.” Vindicated whistleblowers may consequently lose their visas and be obliged to return, jobless, to their home countries. Meanwhile, those who retaliated against them are rarely held accountable by the Tribunal.

In 2008, when the World Bank passed a new whistleblower protection policy, GAP warned that the policy had fatal flaws: one of these is the lack of guaranteed reinstatement for whistleblowers who successfully contest retaliatory dismissal. At the time, the Bank's Office of General Counsel asserted that a right to reinstatement is unnecessary because it is only denied in "extraordinary" cases. GAP contested this statement after finding that of the complainants who challenged termination successfully on due process or substantive grounds between 2000 and March 30, 2008, less than 15 percent were actually re-instated. The remaining 85 percent were dismissed from institutional employment despite prevailing. The prevailing Applicant in decision 437 joins the growing ranks of Bank employees who were dismissed despite prevailing.

Regarding the Applicant’s racial discrimination charges, he argued

“that the termination of his employment provides not only a classic example of how the Bank mistreats African staff members who bring racial discrimination charges against their managers, but also shows how far the Bank would go to stifle racial discrimination charges. The Applicant alleges ‘blatant racism in the Bank in general and in DECDG in particular’ and points out the virtual absence of black professionals in DEC Vice Presidency.”

Once again, the Bank has failed to substantiate a case of racial discrimination. In 2009, the GAP report found that not a single complaint of racial discrimination brought before the Bank's internal justice system in the previous 12 years had been validated by the Tribunal.

Shelley Walden is International Officer for the Government Accountability Project, the nation's leading whistleblower advocacy organization.

Last week, the Washington Times published an article by freelance reporter Kelly Hearn that exposed gross financial mismanagement of the investment portfolio of the Inter-American Development Bank (IDB), and a cover-up of serious irregularities in the construction of the Camisea pipeline(s) through the Amazon Basin in Peru. The IDB responded with a letter to the editor to the Times a few days later.  

Today, the Government Accountability Project (GAP) sets the record straight by correcting the tortured arguments made by the IDB.

GAP takes issue with virtually every point raised in the nearly-800 word letter. The IDB wrongly challenged validated facts presented in the article, specifically by:

• Misrepresenting the chief criticism of the Camisea pipeline’s integrity by focusing on a disproven cause of the corrosion in the pipes, rather than the allegation that the pipes were corroded. The letter ignores the sources and facts in the story that document the serious potential problems with the pipes. (Allegation #5)
• Misrepresenting the approval process for securing an increased capital contribution from the U.S. government, making it seem as if the increase had been approved although the United States Congress has not passed the necessary legislation. (Allegation #2)
• Obscuring a serious financial loss suffered by the IDB as a result of its high-risk investments by citing the institution’s overall income. (Allegation #1)
• Emphasizing that a commissioned, third party engineering report looked into these allegations after they were initially raised – in an obvious attempt to suggest the problems were solved. The article illustrates how this third party report should have been more thorough, and how it actually discovered additional serious problems. (Allegation #6)
• Praising the institution’s practices in protecting whistleblowers, when in fact, GAP has extensive documentation showing that the IDB routinely retaliates against whistleblowers. (Allegation #8)

For GAP’s complete analysis of, and response to, the eight assertions made by the IDB, click here

GAP’s International Reform program has been monitoring the whistleblower policies of multilateral development banks and other international organizations for over a decade. In 2007, whistleblowers working with GAP were pivotal in the scandals surrounding Paul Wolfowitz, which resulted in his abrupt resignation.

On November 9, Mr. Kelly Hearn published an excellent piece in the Washington Times that exposed the financial mismanagement of the investment portfolio of the Inter-American Development Bank (IDB), and a cover-up of environmental damages caused by the Camisea pipeline(s) through the Amazon Basin in Peru.

In a letter to the editor, the IDB responded with misleading and fallacious arguments designed to extend the cover-up. The arguments presented by the IDB are printed – word for word – below in bold. GAP’s response follows each point enumerated.

IDB Allegation #1

The article states that the IDB "last year suffered a billion-dollar loss after putting its money into mortgage-backed securities." In fact, the IDB registered $1.3 billion in net income last year.

The Truth: The losses referred to in the article are clearly attributed to bad investments. With a sleight of hand, the IDB switches the discussion to the Bank’s “net income.” In fact, no one know the value of the IDB’s investments in mortgage-backed securities at this date because the investments are illiquid. In any case, Mr. Hearn was describing losses that hit the IDB investment portfolio beginning in 2008 and continuing into the second quarter of 2009. The losses occurred because the IDB made substantial high-risk investments in mortgage-backed securities in 2006 and 2007, precisely when better bankers were dumping these dubious “assets.”

The IDB’s own Investment Review Panel Report asserted:

[F]irst, a relatively weak policy environment allowed significant problems to develop largely undetected; and second, Management placed undue reliance on policy to prevent problems and failed to develop an adequate risk management culture that also could have detected problems and provided remedies before the accumulation of significant losses (para. 1.3)

The review of the Bank's portfolio has established that these significant losses were concentrated in U.S. structured products bought in 2006 and 2007…. These include: Mortgage Backed Securities (MBS), Collateralized Debt Obligations (CDOs), and Collateralized Loan Obligations (CLOs), as well as AAA-rated tranches backed by lower quality collateral, such as Home Equity Lines of Credit (HELOCs) and second lien mortgages (para. 2.5)

 

Last Friday, the United States was subjected to its first review by the United Nations Human Rights Council. The council -- which was re-formed in 2006 -- will review the human rights record of each U.N. member once every four years, offering a means for countries to set goals and receive feedback regarding their human rights records.

Under President Bush, the U.S. abstained from joining the council on the grounds that its design was “flawed” – in particular, that it granted membership to notorious human rights violators such as China, Cuba, and Libya. Ironically, during this same time period, actions taken by the U.S. government in the name of national security (e.g. tolerance of torture, Guantanamo, warrantless government wiretapping) served to significantly undermine the U.S.’s own human rights reputation.

While the move to participate in the council remains controversial, supporters have pointed out that meaningful American participation could help reform the UN system from within, while simultaneously helping to restore the U.S.’s reputation. The Obama administration stated that U.S. inclusion was an attempt to “level the playing field” regarding human rights, and would encourage other countries with more egregious violations to improve their own records.

According to a front-page article in Tuesday’s Washington Times (Leer en Español), the Inter-American Development Bank (IDB), an international financial institution that lends to Latin American and Caribbean governments, concealed deficiencies in the Camisea natural gas pipeline project in the Peruvian Amazon. Journalist Kelly Hearn found that

“…bank officials in 2007 manipulated a technical investigation of a rupture-prone pipeline, producing a fraudulent report that cleared the way for a controversial $400 million loan to a natural-gas export project headed by a Texas oil company.”

This company was Hunt Oil, which was known to have close ties to the Bush administration.

Nongovernmental organizations have long been critical of the Camisea project, especially after five ruptures along the pipeline route caused contaminant spills onto the ancestral lands of indigenous peoples and into the pristine rivers and streams through the region. In 2006, AmazonWatch, an environmental NGO, called Camisea “arguably the most damaging project in the Amazon Basin.” The same year, Bill Powers, an engineer from E-Tech International, detailed several problems with the pipeline. From the Washington Times:

Bill Powers, E-Tech's president and an engineer, came forward with a detailed report claiming that the company that built the leaky pipeline had cut corners to avoid some $90 million in costs. He said the company — known by its Spanish acronym as TgP — violated the bank's loan agreement by using pipes that had deteriorated owing to inadequate storage before their use in the project.

Mr. Powers — who based his report largely on testimony, documents and photos provided by a Peruvian welding inspector who worked on the leaky pipeline — also claimed that TgP used unqualified welders and that it had changed the pipeline route without the bank's approval.

Sometimes, the Indian press confuses me. Last week, there was the headline: "Satyam Is Back on Track" on SIFY.com. That semi-editorial gives its byline to India's "Business Standard" article entitled: "A Long Way to Recovery," regarding the "release" of Satyam's financials for the last two years -- financials that have yet to be filed officially with the SEC or anybody else.

Now, if I read this correctly, Satyam has lost $1.75 billion (USD) since 2008. However, from 2009 to 2010, it grossed $1.1 billion with a profit of over 8% -- exceeding analysts' expectations.

Didn't Satyam stop paying employees for a short time at the outset of the scandal in January 2009? Then, it started laying off workers while others plain quit. Then, Satyam started hiring new workers like mad because it had so much work to do. If I recall correctly, Satyam said that it had retained all of its major clients; and by July 2009, it also reported that revenues were adequate to maintain its workforce of over 40,000 employees. Now we learn that 17,000 workers left Satyam, reducing the headcount to 27,000 from 44,000 in fiscal ’08-’09.

Then, during the World Cup in South Africa this year, Satyam, as a major corporate sponsor (recall those flashing video billboards along the field during the final match?), announced that it had actually won new contracts as a result of the media exposure.

In fact, Mahindra couldn't buy all of the shares it needed to own Satyam outright because Satyam shares were doing so well in 2009. As of today, it still hasn't bought a controlling interest, though no one in the media seems to have noticed the difference between owning a large part of Satyam's shares and owning a majority stake outright. (I may be quibbling since no one seems to care about details, apparently.)

Yesterday, United Nations Dispute Tribunal Judge Memooda Ebrahim-Carstens issued a judgment in the long pending case of Artjon Shkurtaj, the United Nations Development Programme (UNDP) whistleblower who made much publicized disclosures regarding UNDP wrongdoing at its North Korean office. The judge ordered Secretary-General Ban Ki-moon to award Shkurtaj fourteen months’ net base salary as compensation for the failure of the ad hoc External Independent Investigative Review Panel (EIIRP) – appointed by UNDP to investigate the case – to allow Shkurtaj to comment on adverse findings contained in its publicly released report.

According to the decision:

Even if the EIIRP did not identify the applicant as the subject of its investigation, its report contained significant adverse findings about his credibility, trustworthiness and integrity. The Tribunal finds that not only was the applicant not given an opportunity to respond to these adverse findings, he was not even made aware of the EIIRP’s concerns regarding his credibility at any point prior to the issuance of the report. The Tribunal is persuaded by the applicant’s argument that the report of the EIIRP contained adverse findings against him and that, in the particular circumstances of this case, he should have been made aware of them prior to the issuance of the report and provided with the opportunity to comment on them and provide his explanations. Therefore, the Ethics Office’s finding that there was a violation of the applicant’s procedural right to be made aware of—and to have the opportunity to respond to—the adverse findings concerning his credibility and trustworthiness was reasonable and justified. This is particularly so considering the report was made public, following which there was no further process made available to the applicant to contest these findings. This failure resulted in a violation of the applicant’s due process rights, damaged his career prospects and professional reputation, and caused him emotional distress, for all of which he should be compensated. (para. 47)

The Judge also ordered the respondent to pay an additional $5,000 as compensation for its inordinate delay in considering the UN Ethics Office’s June 2008 decision in Shkurtaj’s case. According to Judge Ebrahim-Carstens, “to date, i.e. in over two years, UNDP has not made a decision on the Ethics Office’s recommendation to compensate the applicant as stated in its report dated 27 June 2008.” Again, according to the ruling:

The intrepid, French investigator, Clouseau, was fond of saying "We suspect everyone; we suspect no one." Then, on cue, he'd take a pratfall or bumble on to a significant clue. Have Indian authorities unwittingly left Clouseau a clue in their long, drawn-out investigation of the fraud at Satyam Computer Services?

In January 2009, all hell broke loose when Satyam CEO Raju Ramalinga wrote a letter of resignation to his board in which he admitted to orchestrating what became known, alternately, as "India's Enron" or "the largest corporate fraud in Indian history." Raju, himself, was likened in the press to Bernie Madoff, which is a gross distortion, as Madoff actually went to trial and to jail. To be fair, after being arrested, Raju spent 18 months in jail during which time he's suffered a heart attack and been treated for a long-standing Hepatitis C infection related to his daily insulin injections. In last few months, he's been confined to a hospital for treatments.

The press were surprised this week, however, to see Raju for the first time, appearing before a local magistrate in his home state of Andhra Pradesh after being granted bail. Raju bounded up the stairs to the courtroom, accompanied by his lawyer and his doctor, where he denied all charges; after which, he returned to being bed-ridden at the hospital.

According to Raju, Satyam wasn't a US$4 billion, wonderfully profitable, high tech miracle; it was a smaller, humbler enterprise.

Needless to say, when the fraud broke open, employees were laid off; the markets tumbled; and Indian outsourcers took a hit. Respected Indians associated with Satyam and Raju suffered embarrassment; the government took over the corporation; and investigators (which many in the Indian press referred to as "sleuths" in another nod to Clouseau) uncovered all sorts of documents, shenanigans, and otherwise untoward, un-businesslike behavior at Satyam and its auditors, banks, and partners.

Fast forward a bit, and US courts hearing a civil suit against Raju and Satyam accepted Raju's declaration of "pauper" status. According to Raju, he was penniless.

Meanwhile, as the Indian government was trying to straighten out the Satyam mess, restore India's corporate credibility, and get back to the business of increasing India's high tech market presence, it ordered that Satyam be sold at auction to the highest bidder. The highest bidder among three bids turned out to be from Tech Mahindra, another Andhra company. Though the high bid was hefty (US$579 billion for 31% of the company's shares), the two losing bids (from non-Indian companies) were almost identically low, too (Clue?). A key condition of the sale was that Tech Mahindra would be required to purchase an additional 20% on the open market to complete its acquisition.

And this is where the Indian narrative of corruption-fighting at Satyam starts to fall apart.

According to this report in Bloomberg, "India’s Central Bureau of Investigation, which has charged Raju and eight others including his brother Rama and Vadlamani of faking invoices and falsifying accounts, in January filed fresh charges against Raju and five others. The six men inflated Satyam’s tax liability by 5.26 billion rupees by boosting its revenue through fake sales invoices and non-existent interest income from deposits that were never made, investigators said."

That's about US$113 million.

Fact-check time:

1. Satyam was a US$4 billion enterprise, trading on the Mumbai and New York stock exchanges.
2. Raju said it wasn't really making 18% per annum since the late 1990s; it was making more like 4%. He said he had inflated the numbers upward to US$1 billion.
3. Tech Mahindra won a three-way bid for the right to buy 31% of Satyam for US$579 million -- essentially valuing the company at around US$1.5 billlion, as part of the Indian authorities' plan to sell off and clean up the company, and put the scandal behind it.
4. Tech Mahindra was required to purchase 20% of Satyam on the open market by June 2009 to complete the deal. Currently, as of August 2010, Tech Mahindra only owns 41% of Satyam stock because the stock is so expensive, Mahindra can't afford to buy more.

Oh, by the way, in February 2010, Indian news reported that authorities weren't going to press Tech Mahindra to complete the sale after all, saying "Satyam need not merge with Tech Mahindra."

Huh?

Well, the only hint of Satyam's real worth and income comes from the bids received by the Indian government at the time Satyam was "sold" to Mahindra in 2009; and two of the three bids were almost identically 15% lower than Mahindra's. To date, the reconstituted "Mahindra Satyam" has been doing well with weekly reports of new contracts and new hiring. Even at the height of the breaking scandal, Satyam's biggest clients stayed with the company, kept mum about their financial arrangements with Satyam, and kept their Satyam staff busy with work. For its part, Satyam continued to pay all of its bills and doesn't seem to be in arrears to anyone; there has been no talk of bankruptcy or defaults.

So where's the money?

To be fair, no one really knows how much money is involved in the Satyam fraud. Starting with Raju himself, the amount of money involved has been reported anywhere from US$1 billion to US$5 billion. However, besides Raju's own admission of inflating Satyam's profits by more than US$1 billion (an assertion that Raju has now recanted officially), the number given by the CBI in its latest charges and reported by Bloomberg last week represents the most recent figure cited by an official investigative agency.

Even Clouseau knew that by following the money, you find the crooks. But, given the amount of time and effort required to produce financial reports for Satyam from 2008 and 2009 (now due sometime in September 2010), the number of people who have been thrown into and released from jail, and given Raju's release this week from custody upon the posting of US$90,000 in bonds and withdrawing his confession, it's pretty clear that this investigation will not be going anywhere anytime soon. And even if it goes somewhere, it won't be going near anybody who matters.

On one hand, under Raju, Satyam's internal accounting teams spent countless hours modifying the financial software, books, invoices, and accounts payable at Satyam (putting in almost as much effort as authorities are putting in to produce "real" financials for the company); Raju and his family set up dozens of fake companies to which Satyam paid fictitous bills; and auditors were co-opted with others into a conspiracy of ignorance. Even a reverse merger with Raju's own Maytas was attempted in order to move non-existent Satyam cash into actual Maytas real estate (to many observers, real estate being the only real "wealth" in Raju's eyes). All of this, in order to hide what?

US$113 million? Why would Raju even make up the US$1 billion figure?

And even if Clouseau and the rest of us know that the money trail always leads to the guilty, it's equally clear that the guilty know that if there's no money trail, they won't be found.

Now, who has the power to make all of that money disappear?

A pratfall would be nice right about now.

The writer is an expert in this field whose identity must remain confidential.