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Satyam Scandal Still Haunts World Bank

, December 16, 2010

Last week, Senator Lugar sent out a 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.

As a result of all of this hanky-panky (plus some festering rumors about the financial and real estate relationships between certain World Bank staff and Satyam CEO Ramalinga Raju's family), the World Bank debarred Satyam in 2008 after four years of investigations into wrong-doing.

Did Zoellick mention this unpleasantness in his letter to Lugar? Nope. Nor did he clarify longstanding questions about the sanctions ultimately imposed on the Bank's former CIO after he received improper benefits from Satyam, a primary vendor. While the Satyam case would seem relevant to Lugar’s questions regarding criminality, reporting, and action, Zoellick neglected to mention it.  

Instead, Zoellick held forth on the virtues of “debarment” – the expulsion of corrupt firms from the club of contractors standing in line at the World Bank trough – as a deterrent. Of course, in reality, the World Bank didn't debar anyone in the Satyam case until after the press started reporting the problems. In fact, the World Bank and Satyam parroted each other's fallacious denials of any problems until the day that the Bank itself spilled the beans in December 2008 —just two weeks before Satyam CEO Raju wrote hisfamous letter confessing to years of fraud. Also, it appears the Bank didn't officially refer anyone to the Justice Department for investigation, despite convincing evidence of criminal conduct that endangered IT security at the Bank. And from what I've been hearing, any talk of sanctions against corrupt senior managers is bogus. All's been forgiven and forgotten -- with a hefty reimbursement for all the hubbub, thank you.

I guess that's why Zoellick didn't want to bring Satyam up, when Lugar asked about prosecution of criminal conduct uncovered at the World Bank.

Of course, the US Justice Department has been less-than-enthusiastic about pursuing the Satyam case -- first under Bush, and now under Obama too. (It isn't encouraging when AIG's former independent monitor has been nominated as Deputy Attorney General and the former head of the Criminal Division --who was supposedly investigating the wrong-doing at the Bank -- rotated through the revolving door to become the personal defense lawyer for the principal World Bank manager in the scandal.)

The consequences of this sort of thing at the World Bank are deeply disturbing. What if the world’s premier development institution’s financial statements – managed through an IT system set up and run overseas by a fraudulent corporation that collapsed when the world discovered its assets were a fiction – were unreliable?

So now what? In the World Bank's case, as in Bernie Madoff's, a sudden economic crisis seems to have increased demands on cash flow that can't be fiddled by fancy SAP financial systems and outsourced accounting staff. But unlike Raju or Madoff, the World Bank's sacred triple-A bond rating prohibits urgent borrowing -- privately or on the
capital markets -- lest anyone ask why.

In fact, one World Bank insider told me that if all of the countries with trust funds entrusted to the World Bank were to demand an audit right now, they'd get a rather nasty surprise. Now, that's a Christmas gift no one wants under their tree.

So let’s hope someone starts asking follow-up questions after Zoellick’s dodgy answers to Lugar. The Justice Department should ask; the SEC too. The World Bank's board of member nations might inquire, and the press, of course.

More likely though, the World Bank will do what it's always done: it'll cover up the problem; it'll hurt its most honest and productive employees by laying them off and replacing them with cheaper contractees. It’ll continue to its downhold on funds for the poor and sick while rushing funds to protect tigers in South Asia. And then, it'll fudge a reason for seemingly incomprehensible, stupid administrative actions. Let me guess: decentralization?

But let's not forget the Satyam scandal. Let's raise our glasses to the time-honored traditions of parallel books, false invoicing, double billing, shadow staffing, and mind-boggling complexity in the service of illegality. A note to current and new Satyam customers: are you getting what you paid for with your new IT system? Or will you get a lot more than that when you print out those new balance sheets for your auditors?

Just asking.

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