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Wednesday, October 1, 2014
- For the second time this year, an internal auditor has criticised the World Bank’s private sector investment agency over dealings in Honduras, and is warning that similar problems are likely being experienced elsewhere.
The investigation found that the bank’s private sector investment agency, the International Finance Corporation (IFC), took on a significant stake in a Honduran bank but undertook “insufficient measures” to assess that institution’s own investments. These included at least one company involved in a deadly land dispute.
The auditor, known as the Compliance Advisor/Ombudsman (CAO), also levels a broader critique of the IFC’s investments in third-party groups such as the Honduran bank. When dealing with these “financial intermediaries”, the CAO warns, financial considerations appear to be receiving far more attention from officials than the environmental and social policies meant to safeguard local communities.
“IFC acquired an equity stake in a commercial bank with significant exposure to high risk sectors and clients, but which lacked capacity to implement IFC’s environmental and social requirements,” the CAO states in a report released Monday.
“The absence of an environmental and social review process that was commensurate to risk meant that key decision makers … were not presented with an adequate assessment of the risks that were attached to this investment.”
The report focuses on a 2011 IFC investment, worth 70 million dollars, in Banco Ficohsa, Honduras’s third-largest bank. CAO found that important information was withheld between IFC offices over the extent of business between Banco Ficohsa and Corporacion Dinant, an agribusiness company that for years has been accused of waging a violent campaign to expand its palm oil plantations in the country’s Aguan Valley.
In January, CAO issued critical findings on a separate IFC investment in Dinant, from 2009, worth 30 million dollars. Dinant is owned by Miguel Facusse Barjum, one of the wealthiest businessmen in the country and reportedly a backer of the 2009 military coup that ousted a pro-reform president.
Over the past half-decade, more than 100 people have reportedly been killed in the Aguan Valley in clashes between Dinant security personnel and local cooperatives.
IFC has put on hold the Dinant deal and enacted a plan aimed at ameliorating the situation. The new report does not find evidence that the Banco Ficohsa deal was aimed at funnelling additional funds to Dinant, but CAO researchers suggest that the effect was the same.
“[W]aiving a key financial covenant and then taking an equity position in Ficohsa … facilitated a significant ongoing flow of capital to Dinant, outside the framework of its environmental and social standards,” the report states.
Local civil society groups say the effect has been devastating.
“The philosophy of the World Bank is to ‘end poverty’, but what has happened in this process has been the opposite,” La Plataforma Agraria de Honduras, a Honduran network, told IPS in Spanish.
“Instead, we’ve seen greater wealth for corporations and transnational landowners and greater poverty for the poor, who have been driven from their lands. And although the previous CAO report was very critical, the World Bank has continued to finance Dinant through Ficohsa.”
Beneath the intermediaries
In a formal response also released Monday, the IFC does not dispute the CAO findings. But it does suggest that they are no longer relevant, following changes put in place in part in response to the January CAO report on Dinant.
New procedures, for instance, will now allow for additional oversight visits to “medium risk clients”. Multiple new processes will also aim to close information gaps of the type that led to the Ficohsa revelations, including the creation of a new vice-president-level position to focus on “risk and sustainability”.
“Under this new structure, [environmental and social] risk will receive the same weight and attention as financial and reputation risk,” two IFC vice-presidents wrote in a letter to CAO.
Yet the remarkably critical CAO report has already added momentum to an ongoing campaign to convince the World Bank Group to reform the IFC’s dealings with financial intermediaries such as Banco Ficohsa. Such deals have become increasingly important to the IFC’s portfolio over the past decade, but they have traditionally offered far less oversight for the agency.
In such projects, the IFC requires the intermediary to set up a system aimed at ensuring that stringent environmental and social safeguards are met. But analysis of the effects of this system on the ground is left to the intermediary.
“This issue has been questioned in many cases – where a financial intermediary is the one doing the disbursements and the IFC is completely separate and doesn’t know what’s going on,” Carla Garcia Zendejas, a programme director at the Center for International Environmental Law (CIEL), a Washington-based watchdog group, told IPS.
“That’s the case here. Even if you have a system in place to assess these risks, if you’re not doing that properly the whole system is worthless.”
The CAO has repeatedly questioned the IFC’s policies on investments in financial intermediaries (a broad investigation can be found here). This time, the investigators are clear that the Honduras situation is likely not an isolated incident.
“[T]he shortcomings identified in this investigation … are indicative of a system of support to [financial intermediaries] which does not support IFC’s higher level environmental and social commitments,” CAO states.
“CAO’s findings raise concerns that IFC has, through its banking investments, an unanalyzed and unquantified exposure to projects with potential significant adverse environmental and social impacts.”
The auditor warns that, under current disclosure mechanisms, “this exposure is also effectively secret”, and calls for a “reassessment” of the agency’s management of social and environmental risk in its dealings with financial institutions.
Rights advocates note that similar concerns are cropping up in IFC investments in financial intermediaries elsewhere.
“One of this report’s main findings is that there is a breakdown in the IFC’s systems approach to [financial intermediaries], especially in risk categorization,” Jelson Garcia, of the Bank Information Center (BIC), a watchdog group here, told IPS in an e-mailed statement. “This … links to recent cases in Myanmar and India as yet another example of the IFC needing to take stringent and urgent reforms of its financial markets lending approach.”
Advocacy groups say a primary concern is the IFC’s institutional culture, which they say prioritises the volume of loans disbursed over their quality. BIC, CIEL and others are now calling on World Bank Group President Jim Yong Kim to order the preparation of a reform plan in time for the next big World Bank Group meetings, in October.
Edited by: Kitty Stapp
The writer can be reached at email@example.com