In a rare move, the World Bank’s governing board has called for a far reaching internal review of the bank’s private lending arm, the International Finance Corp., and rejected the IFC’s recent response to a stinging audit which accused it of financing a Honduran company linked to death squads, according to people with knowledge of the matter.
The governing board’s rebuke came as Congress adopted spending legislation which would place toughened oversight conditions on U.S. contributions to the bank and require the U.S. government to push for accountability in criticized international development projects.
The converging developments together suggested a rising new consensus on the need for reform at the World Bank Group, which has been accused of complacency in recent years, after internal audits found impoverished communities had suffered as a result of serious irregularities in bank lending.
As a result of the board’s rejection, the IFC withdrew its original “action plan,” or blueprint for addressing the problems raised in the audit, and was ordered to produce a new one. A spokesman for the IFC said Monday that his organization could not comment on internal discussions with the board.
An audit released earlier this month found that the IFC had violated its own internal policies by extending millions of dollars in credit to the agribusiness firm Corporación Dinant SA de CV, despite the fact that it was embroiled in a decades-old land conflict with peasant farmers.
After the $30 million loan agreement in 2009, Honduras suffered a coup d’état backed by Dinant’s owner, Miguel Facussé Barjum, and saw skyrocketing levels of violence. Human rights workers specifically linked Dinant to 40 of 100 targeted killings associated with land disputes surrounding industrial plantations in the northern Bajo Aguán region that followed. The company has denied the allegations.
The audit found that IFC officials had internally suppressed damaging information about the Dinant project and then improperly disbursed the first $15 million of the loan, even though the company was not in compliance with IFC policies that, for example, demanded a grievance mechanism for public complaints. As violence broke out, the IFC also failed to properly supervise Dinant, and did not demand the company investigate allegations of violence by its security forces.
In response to the audit, Dinant released a statement saying it disagreed with some audit findings and would release a more in-depth rebuttal in the future.
“Dinant takes the allegations in the report very seriously and will use all mechanisms at its disposal to defend its reputation, as well as that of its founder and Executive President, Miguel Facussé, and its staff,” the statement said.
However, given the extraordinary levels of continuing violence surrounding the project — 113 people have been killed in land-related violence in the Aguán region since 2010, according to the organization Rights Action — the audit generated an unusually high level of news media interest, exposing the bank and its leadership to harsh scrutiny.
At the board meeting, members severely criticized the IFC and its initial response, released with the audit, according to people briefed on the board meeting. In that response, the IFC said it would ask Dinant to continue cooperating with local police investigations into the allegations and take remedial steps, some of which were already among the original lending conditions which Dinant had failed to meet.
Some of the claims in the response also appeared to be at odds with facts cited in the audit.
For example, in a letter to auditors, the IFC said that when the Dinant project was appraised in 2008 there was “no evidence” of legal claims to contest Dinant’s ownership of the land used for its plantations.
But auditors found abundant records of peasant grievances and land disputes surrounding Dinant properties, including public allegations dating back to the 1990s, that Dinant had illegally acquired farmland.
In August 2008, four months before the project’s approval, the newspaper La Tribuna reported on the deaths of 12 people in violent confrontations over disputed land at the site of a former military installation, which, campesinos say, overlaps the Dinant plantation.
Peasants and government authorities predicted that “blood will flow,” especially in northeastern Colón department, where many of Facussé’s land holdings are located, if the problem of land tenure Honduras were not resolved, the article said.
Details about Thursday’s meeting were not immediately available but, in frank exchanges, members of the World Bank Board of Governors expressed open frustration with the IFC’s reaction to the audit.
The board comprises the president, Jim Yong Kim, and 25 representatives of World Bank member countries. The president in most cases does not vote.
One of several sources briefed on the meeting described board members as “really unhappy,” and said the board had directed the IFC to develop a new action plan and to conduct a general review of its internal structure and culture.
Auditors found that staff members responsible for helping ensure environmental and social compliance were far weaker in the IFC hierarchy than those in charge of investments. The investment staff is principally concerned with the success of the investment projects, and only minimally accountable for the environmental or social consequences.
In a statement distributed to board members ahead of the meeting, 70 different human rights, development and transparency organizations, including Global Witness, Oxfam and several Honduran groups, called the audit of the IFC “one of the most damning ever issued.”
“Such findings should rightly provoke shockwaves at the institution, and an admission of fault, a commitment to root and branch investigation and reform and apology and remedy to affected communities who have suffered at the hands of IFC’s client,” the statement said.
World Bank leadership in the past has rejected management’s response to audit findings but this is rare.
Former president Robert B. Zoellick in 2009 temporarily suspended financing throughout the World Bank Group for the entire palm oil sector after IFC persisted in supporting the palm oil trading house Wilmar, which had been accused of violating environmental protection measures and annexing indigenous peoples’ customary lands in Indonesia.
In the spending legislation adopted Thursday by American lawmakers, which has yet to be signed by the president, Congress directed the U.S. representative to international financial institutions, including the IFC, to push the organization to respond to such audits.
The institutions must respond “by providing just compensation or other appropriate redress” to people who suffer human rights violations as a result of any loan or grant, according to the bill.
As the largest World Bank shareholder, the United States carries the heaviest weight on the board and is the only member which can veto changes to World Bank structure.
The bill would also require the U.S. Treasury Department to withhold funding to any of the international financial institutions unless the Treasury confirms to Congress that the institution as a rule commissions “independent, outside evaluations” of each of its projects to ensure that they effectively reduce poverty and observe safeguards.