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The Satyam Fraud, Two Years Later

Bea Edwards, January 11, 2011

Roughly two years ago, Ramalinga Raju, the CEO of Satyam Computer Services, confessed to his board that the company -- the fourth largest IT outsourcer in India at the time -- was insolvent. Approximately $1 billion in assets, Raju admitted then, did not exist. Satyam, an acclaimed good corporate citizen, collapsed spectacularly, earning itself the moniker India’s Enron in a few short weeks.

Defrauded investors filed a series of lawsuits, and criminal charges sent Raju, his PriceWaterhouseCoopers auditors, and other Satyam officers to jail to await trial. There they remain, while the Securities and Exchange Bureau of India untangles the web of false invoices, inflated payrolls, fraudulent accounts, doctored balance sheets and offshore businesses that surround the Satyam debacle.

Background

The company had enjoyed a meteoric rise in the corporate outsourcing business that began with its surprising selection as the principal IT vendor for the World Bank’s internal information technology work. In the late 1990s, Satyam was an obscure, mid-size, family-owned IT company headquartered in Hyderabad, India. There it was discovered by Mohamamed V. Muhsin, Chief Information Officer (CIO) of the World Bank. Muhsin, at the instigation of James Wolfensohn, had assumed the responsibility for establishing the IT architecture of the Bank. For reasons that remain somewhat unclear, he enlisted Satyam in the enterprise, selecting it over larger and better-known companies. In the digital hysteria leading up to following the Y2K scare, Satyam received a flow of ever-larger contracts from the bank, and rumors began to circulate in Muhsin’s department that held a financial interest in the company.

In 2005, after Muhsin’s patron Jim Wolfensohn left the Bank, an investigation of the Muhsin/Satyam affair began, and in 2006, Muhsin retired under a cloud of suspicion.  The next year, he was also debarred – banned from any further relationship with the bank – after the investigation of him concluded that he had received “improper benefits” from Satyam.

According to a spokesman for the World Bank, the US Department of Justice (DOJ) was informed at the time about the improper and potentially illegal relationship between Satyam and the World Bank’s former CIO. In other words, at least two years before Satyam collapsed in India’s largest fraud to date, the US DOJ had been tipped off by the World Bank that the company engaged in fraudulent and corrupt practices at the highest levels of management.

And nothing happened.

Cyber-Intrusion and Debarment

For the past two years, GAP has sought to unravel this puzzler. In late 2008, after a series of cyber-break-ins affected its sensitive servers, the World Bank announced that it was terminating Satyam’s contract because the work required had been concluded early. At the time, GAP filed a Freedom of Information Act (FOIA) request for the files transmitted to the US DOJ by the bank regarding Muhsin and Satyam. While the FOIA stagnated in the queue at DOJ, a counter-story emerged that provided a more plausible explanation for the abrupt conclusion of the intimacy between the company and the bank: Satyam had been suspended from consideration for future bank contracts in February 2008 as a result of its unseemly dealings with Muhsin. The troubling cyber-breaches that followed were Satyam’s retaliation. In response, the Bank terminated the company’s existing contract and debarred it for eight years.

High-level Satyam management emphatically denied this account and World Bank officials reinforced the denial when asked about it in November 2008 by Rich Behar of Fox News. But then, in a telephone conversation with GAP, the World Bank admitted that Satyam’s debarment had in fact occurred in September 2008, for apparent corruption. The whole house of cards, however, fully collapsed a few weeks later, in January 2009, when Satyam did. It emerged at that point that the three major IT vendors for the bank had all been debarred for suspicion of corrupt practices. Not coincidently, all three of them had been contracted by Mohamed Muhsin.

When this deception was exposed, the World Bank issued a press release declaring a new era in transparency regarding corruption and debarments on its corporate side. The bank would henceforth publish the names not only of firms and individuals debarred from its operations in borrowing countries, but it would also release the names of vendors debarred from contracting directly with the bank, such as Satyam.

FOIAs and the DOJ

In May 2009, DOJ informed GAP that the World Bank had never referred information about Muhsin or Satyam to law enforcement authorities. DOJ’s Criminal Division had no files on the matter. But the World Bank insisted the referral had been made, and GAP filed a second FOIA. Like the first one, the second FOIA produced no record of a bank referral. When GAP requested information for the third time (in September 2009), DOJ replied that some few records had been located on a computer, and a limited number of those were released.

The documents released did not account for key documents the World Bank claimed to have transmitted to DOJ. Moreover, DOJ withheld documents purportedly to protect the privacy of specific individuals, but at the same time released embarrassing documents regarding another individual, about whom GAP had not even inquired. GAP appealed the decision in January 2010. After considering the request for nearly one year, the appeal was denied on December 28, 2010, invoking the same exemptions and adding one other.

GAP has now filed suit to obtain the documents from the Justice Department.

The record on this issue is disgraceful. The World Bank, which advertises itself as a paragon of high principle and ethical standards, was party to a corrupt corporate relationship that contaminated its IT structure. The Bank promoted the corrupt corporation and sought to conceal its fraudulent practices, even after they were undeniable. For its part, DOJ apparently buried or ignored whatever limited information it had received from the bank about Satyam, took virtually no action, and left the ticking time bomb of fraud to explode in India and on the New York Stock Exchange when Satyam collapsed.

Today

Two years later, the true story of the relationship between Muhsin, the World Bank and Satyam remains obscure, as all three parties have reinvented themselves. Satyam is now Mahindra Satyam “a leading information, communications and technology (ICT) company providing top-class business consulting, information technology and communication services.

Meanwhile, the World Bank asserts: “In recent years, the World Bank Group has prioritized governance and anticorruption as part of its reform agenda. Building on years of experience in investigations and sanctions, the World Bank Integrity Vice Presidency has been ramping up its investigative and preventive efforts to protect Bank Group-financed projects, while holding wrongdoers accountable for any waste of development funds.”

And on his website, Muhsin describes his role at the World Bank as leading a “major effort to align information technology with the organization’s business strategy; successfully implementing major reforms in information and knowledge management, enterprise resource and business systems, global telecommunications, and video conferencing.” In addition, Muhsin appears to evade his debarment by working for another World Bank vendor in a position of influence.

But fundamental questions remain that must be answered:

-  What was the sum total of “improper benefits” that Muhsin received from World Bank IT vendors while he was CIO?

-  Has he been effectively debarred from further Bank work?

-  In 2006, did the World Bank refer the pertinent information it possessed about corrupt practices at Satyam to the US Department of Justice for potential prosecution?

-  If so, why does DOJ claim to have so little information, and why did the Justice Department not act, given that the fraud was so simple and extensive?

-  Is the World Bank’s IT system now secure, given that it was established by a corrupt and fraudulent corporation that enjoyed a privileged relationship with the CIO?

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