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Corruption at the Inter-American Development Bank: The Fox-In-The-Henhouse Syndrome

Bea Edwards, December 12, 2011

It seems that the Inter-American Development Bank (IDB) is holding an accountability gala (invitation here) this week called "Leveraging Transparency and Integrity as a Condition to Sustainable Development." There will be a transparency carnival conducted by The Institutional Capacity and Finance Sector, and a special star turn by IDB Bank President Luis Alberto Moreno.

The Bank has been working hard on transparency and integrity because it needs a bailout from the US Congress, which has been asking intrusive questions about the IDB's appalling record on aid effectiveness and anti-corruption. Specific Congressional offices have even been prying into the IDB's habit of retaliating against whistleblowers and using internal "oversight" offices to do it. As Representative Charles Dent (R-Pa) put it during a hearing this past spring (minutes 29 – 31):

As you know, these banks need reforms in many areas, but specifically in their internal judicial systems, which are not always as impartial when investigating charges of fraud, corruption and waste by various whistleblowers, and there was an example at the Inter-American Development Bank that, according to the press, immediately dismissed a contract officer in Haiti when that person raised the issue of fraud in the IDB's Haiti reconstruction contracts.

The "integrity" record at the IDB took another turn for the worse this past summer when the Administrative Tribunal handed down an embarrassing ruling in the Fernando Fernandez case. Those industrious enough to skim through the text discovered that Mr. Fernandez helped to award a series of contracts to chapters of PriceWaterhouseCoopers in exchange for a job for his son. In the published ruling, the identity of PwC is concealed, and the favored firm is referred to as XYZ, but trust me – it's PwC.

...[T]he Complainant (Fernandez) was issued a Notice of Investigation by the Ethics Officer alleging that he unduly influenced the Bank's award of a contract in favor of the XYZ, in exchange for a personal favor to the Complainant, the employment by XYZ of the Complainant's son.

If you read further, you'll find that Mr. Fernandez did, in fact, attempt to exchange favored treatment of PwC in IDB contract competitions for his son's new job there.

The Tribunal does conclude that there was misconduct by virtue of the fact that the Complainant took advantage of his post and position of trust as Senior Advisor to the Vice-President for Finance and Administration to procure a job for his son.

The whole situation is even more remarkable when the Complainant's position at the IDB is taken into account. Mr. Fernandez was:

[A] high official and former Deputy Auditor with responsibility for investigating ethics violations.

A remarkably Orwellian feature of the IDB is that a lack of transparency, flagrant misconduct and unethical practices often begin and end with the very departments created to promote accountability and integrity.

As pointed out, in the Fernandez case, Mr. Fernandez himself was a Deputy in the Office of the Executive Auditor.

Similarly, in a case brought to the Administrative Tribunal two years ago, an unnamed Complainant argued that an investigator in the Bank's unfortunately named Office of Institutional Integrity (OII) was biased and incompetent. The Tribunal agreed, and so, with great presence of mind, his superiors transferred him to the Ethics Office! And there he remains.

As it turns out, it's a good thing they have a little extra help over there, because the Ethics Officer in place at the time resigned abruptly after the conclusion of an investigation into her own professional conduct earlier this year.

Meanwhile, as an auditor, Mr. Fernandez was able to contest the Bank's sanctioning of his "wrongdoing," because the practices employed by the investigator in his case, acting on behalf of the Ethics Officer, were so outrageous.

In the end, the Tribunal ordered Mr. Fernandez reinstated, after three years of suspension without pay. Unaddressed in this conflict between this Deputy Auditor and the Bank, however, was the role of PwC itself. As those in the anti-corruption business should be aware, in the United States, under the Foreign Corrupt Practices Act, it is illegal (if such a term is applicable to anything the IDB does) to either offer or to accept a bribe. In this case, PwC clearly offered Mr. Fernandez a bribe, yet apparently escaped the fallout of the entire caper.

This is not surprising. According to its breathless description of itself, PwC is a model corporate citizen:

At PwC, leadership is at the core of our corporate responsibility strategy. Our programs are guided by one common commitment: to do what is right for our clients, our people, our communities and the environment. We deliver our services as a trusted business advisor by developing our people to be responsible leaders who demonstrate our leadership as good corporate citizens. Whether we're driving a discussion about corporate responsibility in the marketplace or donating our time and skills to local communities, we're continuing our long history of doing business responsibly.

And so, in the aftermath of the Fernandez debacle, PwC simply "reached out" to the IDB to mend fences, so to speak. In an agreement signed by the Bank and PwC, the Argentine affiliate of PwC was barred from applying for Bank contracts for a period of about a month after the Fernandez ruling and PwC US was barred for about a year.

Curiously, given the IDB's commitment to transparency, the agreement debarring PwC was strictly confidential between the parties. In a letter to five high level Bank officials, Executive VP Julie Katzman wrote:

Under the Agreement, the parties thereto, including the Bank, shall not disclose(i) the Agreement (including any terms thereof), (ii) information concerning the discussions that preceded the Agreement, or (iii) other related information concerning PwC US and PwC AE SRL...

So, we asked, what was the agreement between the bribe (the IDB) and the briber (PwC)? In its own transparent way, the IDB released this statement on August 15, 2011:

The Inter-American Development Bank (IDB) today announces that PricewaterhouseCoopers LLP (PwC) has agreed to contribute US$2 million to establish an IDB-managed fund to support integrity, governance and institution building in Latin America and the IDB. PwC has taken measures to address a past issue of concern. Among such measures include PwC's implementation of a focused internal compliance training program for PwC employees on IDB engagements, and PwC acknowledges its responsibility for ensuring compliance.

Note the delicate phrasing; "a past issue of concern." This particular "issue" involves a bribe, which would be, if it occurred in a jurisdiction where the rule of law applied, a crime.

So what exactly were the terms of the Agreement not to be disclosed, and what transpired in the discussions preceding the signatures on that particular piece of paper? Here's a suggestion: in return for a $2 million fund to support "integrity" and "governance," the IDB's Office of Institutional Integrity would not refer PwC to the US or the Argentine Justice Departments for investigation and possible prosecution.

It's just a guess, but in the absence of transparency, it's a good one. Such a superbly cynical move is completely in character: the IDB will use the funds dubiously extorted from PwC's corrupt actors to train Latin American and Caribbean officials in integrity.

 

Bea Edwards is Executive Director and International Director for the Government Accountability Project, the nation's leading whistleblower protection and advocacy organization.