Detailed Report Shows 1990's Projects' Massive Corruption Involving Azerbaijan Oil Privatization, International Financier, and Former World Bank President
(Washington, D.C.) – Today, the Government Accountability Project (GAP) filed a report with the U.S. Treasury Department that exposes the World Bank's role in the widespread corruption surrounding privatization in Azerbaijan during the late 1990's. The report shows that James Wolfensohn, then president of the World Bank, personally assisted a rogue financier in his efforts to gain control of the State Oil Company of the Republic of Azerbaijan (SOCAR). While these efforts were ultimately unsuccessful, documents show that Wolfensohn silenced Bank staff members who spoke out about corrupt government officials working with Viktor Kožený, a notorious financial operator who had allegedly defrauded investors in the Czech Republic of nearly $1 billion only three years earlier.
"Before the financial fiasco in Azerbaijan occurred, Bank staff tried to expose the risks inherent in dealing with Kožený and corrupt government officials poised to profit illicitly from Caspian oil," said Bea Edwards, GAP International Program Director and author of the report. "They were silenced about the impending fraud, however, when Wolfensohn directly intervened on Kožený's behalf."
Azerbaijan began privatizing its economy in the mid 1990s, giving citizens vouchers they could exchange for shares of public enterprises. Because of the Russian experience with this brand of privatization, by 1996, the voucher approach to the sale of government assets was already regarded as highly vulnerable to corruption.
Viktor Kožený had demonstrated these vulnerabilities in the Czech Republic. After buying up a significant proportion of Czech vouchers and taking over profitable companies, he had apparently tunneled one billion dollars in value out of Czech enterprises and into offshore bank accounts that he controlled. His financial machinations played a large part in the Czech economic meltdown that began in 1996, and he became internationally notorious as the "Pirate of Prague." The following year, he resurfaced in Azerbaijan, using the World Bank president to sanitize his reputation with Azeri officials and potential investors.
At that time, the Bank had already approved a plan to support restructuring SOCAR. Because it would hold a stake in the Baku-Tbilisi-Ceyhan oil pipeline running through Georgia to Turkey, SOCAR was considered the 'crown jewel' of purchasable Azeri public firms.
World Bank & James Wolfensohn
GAP's report reveals that Kožený faced serious obstacles as he embarked on his voucher venture in Azerbaijan. Most importantly, he had to persuade Azeri officials that he should be allowed to buy vouchers despite his international notoriety. This problem became more complex when Bank officials, aware that he was under surveillance by Interpol, began warning pivotal government officials about him.
In response, Kožený mobilized mutual friends, who arranged for him to approach Wolfensohn, and enlist his support. In late 1997, Kožený met with the Bank president, and shortly afterwards, Wolfensohn wrote Kožený informing him that any negative comments made about him would be investigated by Johannes Linn, then a Bank Vice President, now the Executive Director of the Wolfensohn Center for Development in Washington, D.C. In March 1998, Wolfensohn met again with Kožený, and records show that Bank officials were no longer cautioning potential investors to avoid doing business with him.
Armed with his acquittal letter from Wolfensohn, Kožený expanded his circle of supporters, allies and investors. In addition, the letter had a "chilling effect" on staff members who had previously spoken out. The letter explicitly demonstrated that Kožený's projects were protected at the highest level of the World Bank.
For three years Viktor Kožený was active in privatization in Azerbaijan, orchestrating a fraud that swindled both the Azeri public and foreign investors, diverting hundreds of millions of dollars into Kožený's offshore bank accounts and derailing publicly-funded development initiatives. Only in 1999, when U.S. investor and whistleblower Frederic Bourke came forward and exposed the fact that at least one major investor had been defrauded, did the Azeri privatization program come to a halt. By the time the Bank's project to restructure SOCAR was cancelled, Kožený's core investors had lost well over US$200 million, and the transition from a command economy to a market society in Azerbaijan was in ruins.
According to GAP President Louis Clark, the lesson not yet learned at the World Bank is a simple one: "Wrongdoers will prevail and their schemes will prosper when those in the know are silenced or choose to remain silent. The questions for World Bank leaders and investor nations are: Why did this happen ten years ago in Azerbaijan, and why is that silence continuing today?"