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Whistleblowers Reveal Inter-American Development Bank (IDB) Covered up Deficiencies in Camisea Gas Project

Shelley Walden and Bea Edwards, November 10, 2010

According to a front-page article in Tuesday’s Washington Timesthe 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.

The unapproved changes routed the pipeline through large tracts of unstable territory, prone to washouts and flooding, in order to save TgP significant time and money. TgP’s decisions were precisely what critics of Camisea had predicted: the corporations in line to benefit from the project would put profits ahead of ecological concerns, and the IDB lacked the political will to enforce its own safeguards. 
The Bank’s Office of Institutional Integrity (OII) subsequently hired an engineering firm, R.W. Beck Inc., to investigate these claims. Next, Stephen Zimmerman, then Chief of OII, ordered Maria Contreras, an investigator hired by the IDB, to review Beck’s report. She found that the firm failed to investigate “the qualifications of the welders, whether the pipes were new at the time of installation or if the pipeline route was altered to defray costs. What's more, she wrote, the appropriate experts hadn't even gone into the field to inspect the leaky pipeline.”

Contreras and OII staffer Jose Casasola were subsequently sent to Lima by Zimmerman in April 2007, without specific instructions and with only a week to report back their findings. According to an unnamed Bank employee, “it was clear at that point that the bank was not interested in a real investigation. They only wanted Camisea II’s big numbers.” Contreras resigned from the Bank when she returned to Washington from Peru.

According to GAP International Program Director Bea Edwards, who interviewed bank staff about the investigation and was quoted in the article, “this left Zimmerman and Casasola in a bind. They cobbled together a report dismissing the E-Tech [allegations] and leaving still unanswered questions and allegations."

On May 2, 2007, the IDB’s Oversight Committee on Fraud and Corruption, in a meeting that included Zimmerman and Casasola, determined that there “was insufficient evidence to warrant any further investigation of E-Tech’s allegations,” despite considerable evidence to the contrary. The Bank also determined that the Beck report, which did raise serious concerns about the project, would not be made publicly available “in light of objections expressed by TgP.” Seven months later, the IDB approved the $400 million loan for Camisea II.

The IDB received additional allegations about corruption in the project that it apparently failed to investigate. Most notably, OII was told by a former Peruvian energy minister that, “Hunt Oil had paid Peruvian officials to change a national hydrocarbons law that would have required the Peru Liquid Natural Gas (LNG) project to restrict its exports based on domestic energy needs.”

This story appears at a time when the IDB is asking shareholder governments to finance  an unprecedented $70 billion capital increase that will enable the bank to double its pre-crisis lending in Latin America. The largest single shareholder at the IDB, the U.S., is currently considering whether or not to approve an increase of approximately $2 billion in new cash deposits to the IDB. The Camisea “investigation,” however, shows that the IDB actively concealed fraud in a crucial project, despite the disastrous effects that pipeline ruptures and spills would have on the fragile ecology of the Amazon Basin.  Donor governments at the IDB must now consider the impact of increased funding for a development bank that is willing to whitewash its investigations and conceal fraud in order to finance projects that benefit private corporations with ties to powerful political families.

This is just one of a series of recent scandals involving the IDB. In 2009, ProPublica reported that the Bank lost nearly 2 billion dollars as its investments in high-risk mortgage-backed securities evaporated. The IDB was the only multilateral development bank to suffer losses on such a scale. In June 2010, an open letter from a group of IDB managers and staff appeared on the Bank Information Center website; the letter described the Bank as “in turmoil” and cast doubt on the ability of IDB president Luís Alberto Moreno to manage the bank. Most recently, according to news reports that appeared last week in publications throughout Latin America whistleblowing about corruption has been on the rise at the IDB.

As more IDB whistleblowers come forward, the IDB’s handling of whistleblower retaliation complaints is being subjected to increased scrutiny by the IDB Staff Association, U.S. Congress and GAP.

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