By Douglas Gillison
With a major client involved in a bloody agrarian conflict, the largest bank in Honduras still received $70 million in investment from the World Bank three years ago, according to an internal audit released Monday.
The findings compounded those of an earlier audit released in January, which found that the International Finance Corporation — the World Bank’s private-sector arm — had broken its own rules in directly lending millions to the client, the palm oil producer Corporación Dinant.
The IFC investment in Banco Ficohsa only increased the World Bank’s exposure to Dinant, which received tens of millions from Ficohsa even though the IFC knew Dinant was “affected by a violent land conflict,” according to the report.
The findings mirrored problems identified in 2012 when a previous audit had found that third party financial institutions, such as banks, investment funds and insurance companies, often failed to abide by IFC requirements in their own investments.
IFC support for the financial services industry in the developing world is ballooning — with new commitments every year representing nearly half of all investments and topping $10 billion in 2013 alone.
Figures published earlier this year by the Bretton Woods Project, an advocacy organization, showed that 62 percent of IFC commitments in the prior fiscal year had been devoted to such third parties and to financing trade — dwarfing World Bank support for education and health.
In an official response, IFC General Counsel Ethiopis Tafara and Jean Phillippe Prosper, vice president for Sub-Saharan Africa and Latin America, admitted that the Ficohsa investment had been faulty.
While the audit called on the IFC to reconsider its practice, the IFC said that improvements were in fact already underway.
“Our practices and procedures at that time did not require us to cross check our […] client’s key exposures against our own direct investment portfolio projects,” they wrote.
“Since then, we have taken steps to close these gaps and facilitate better information sharing among staff working in different parts of the institution.”
Yet in releasing Monday’s report, the IFC auditors suggested that lessons had not entirely been learned, calling for a “reassessment of IFC’s approach” to identifying the social and environmental risks of such investments.
“IFC had and has, at best, a superficial understanding of the environmental and social risks that are attached to Ficohsa’s client base,” the report said.
The IFC’s failures in Ficohsa generally suggest that it has “an unanalyzed and unquantified exposure” to the high-risk projects financed through third parties, the audit found.
Calls to Banco Ficohsa were referred to a Miami office where a representative was unavailable. A spokesman for the bank did not respond to requests for comment.
After an initial loan in 2008, the IFC in 2011 took a 10 percent stake in Ficohsa, approving $70 million in equity and debt investments.
By then, Ficohsa had already extended tens of millions in credit to Dinant and it would go on to lend another $39.4 million between 2011 and 2014.
In the aftermath of a 2009 coup, the U.S. Embassy in Honduras identified Ficohsa’s CEO, Camilo Atala, and Miguel Facussé, Dinant’s president, as part of a small oligarchy dominating the country’s economy and having “tremendous weight” on its political scene.
Dinant has vehemently denied targeting its political foes for violence.
However, auditors say that at least 40 killings in a violent land conflict surrounding Dinant’s plantations were allegedly linked to Dinant properties or security guards since the coup.
In a repeat of the Dinant audit, Monday’s report again found that IFC staff charged with environmental and social compliance and key IFC decision makers were kept in the dark.
Indeed, IFC investment staff in 2010 argued that Ficohsa should be allowed to exceed limits on lending to individual clients, including Dinant.
In a related memo, they referred to Facussé as a “very respected businessman” but withheld any mention of the land conflict.
As a result of such “siloing” of information, Ficohsa’s credit risk was thoroughly reviewed while its environmental and social risk was not — reflecting the IFC’s preference for making money over avoiding social harm, acording the audit.
Without proper internal disclosures, however, the exposure to social risks “is also effectively secret and thus divorced from systems” intended to offer accountability, the audit found.
The audit found that since late 2012, when social compliance staff at last learned of the allegations against Dinant, the IFC’s oversight of its dealings with Ficohsa had improved.
Furthermore, there was no indication that IFC had invested in Ficohsa with the deliberate intention of supporting Dinant, the audit found.
“We are taking a more coordinated approach to managing environmental and social risks and putting in place protocols to ensure that information flows to IFC’s top management for prompt intervention,” said an IFC spokesperson.
But in a statement on Tuesday ten activist organizations, including Oxfam and Friends of the Earth Honduras, called for meaningful reform.
Jim Kim, the World Bank president, should call on IFC for “root and branch reform of the IFC’s institutional culture, which incentivizes loan volume over quality – prompting staff to hide social and environmental risks,” they said.
Top photo: A group of Honduran peasants at a press conference in February 2014 reported the killing of 113 campesinos, allegedly by paramilitaries as part of a land conflict in Bajo Aguan. The conflict erupted in January 2010, a month after thousands of peasants occupied vast tracts of land owned by wealthy landowners farming African palm oil. GETTY IMAGES.