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 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

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.”

Systemic reassessment

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 cbiron@ips.org

The World Bank is being urged to explicitly incorporate human rights into its development lending criteria, ahead of an important technical briefing on the subject to its board of directors on Tuesday.

The Washington-based institution has never mandated that the programmes it funds comply with international human rights standards, largely on the concern that politicising the bank’s lending could complicate its country-by-country anti-poverty focus. But rights campaigners are pointing to a growing consensus that sustainable development is impossible without a specific focus on human rights."Our understanding of development is not just about income generation – it is about improving people’s lives." -- Kristen Genovese of CIEL

The bank is currently in the midst of a two-year review of its environment and social “safeguards” policies. On Tuesday, the board will discuss input received on the issue from some 1,800 stakeholders over the past year, as well as a draft framework for reforms.

“The safeguard policies are intended to protect people and communities from the unintended harm of Bank-financed activities,” Kristen Genovese, a senior attorney with the Center for International Environmental Law (CIEL), a Washington watchdog group, told IPS.

“We do not want the Bank to make up its own rules; we already have rules that protect people and the environment that have been agreed to by the international community … this is what the Bank’s intended beneficiaries and civil society organisations are demanding in the safeguard review.”

On Monday, the Washington office of Human Rights Watch, an advocacy group, released a report stating, “the time has come for the World Bank to implement mechanisms to prevent it exacerbating or contributing to human rights violations”. In recent months, high-level United Nations officials and some national governments have backed similar calls.

“[D]evelopment finance has been increasingly moving in a direction to better protect human rights,” the report states.

“The World Bank is falling behind … [Yet] the increased ability for non-traditional donors to provide assistance abroad affords the Bank an enhanced opportunity to show how poverty can be eradicated without violating human rights, how aid can reach the poorest and most marginalised communities the right way, and how development can be sustainable.”

Staff discretion

HRW researchers offer three case studies, from Vietnam and Ethiopia, in which programmes partially funded by the World Bank have subsequently been implicated in wide-ranging allegations of rights abuse.

In southern Vietnam from 2005 until 2010, for instance, the bank funded health programmes at government detention centres for addicted drug users that appear to have used, at least in part, an approach of rehabilitation through forced labour. HRW has also documented cases of arbitrary detention and torture at the centres.

In Ethiopia, the bank is funding a two-billion-dollar programme called Promoting Basic Services (PBS), aimed at bolstering health, education, sanitation and other essential concerns. Yet in recent years the Ethiopian government’s development initiative has included, in certain parts of the country, the forcible relocation of around 1.5 million people, particularly ethnic minorities.

HRW says it has verified accounts of at least seven people having died due to a campaign of violence and intimidation carried out against holdouts from this “villagisation” process, allegedly at the hands of Ethiopian state security forces.

“The Bank’s legal counsel has issued a number of opinions in the last 10 years, finding that the Bank can take human rights into account and on occasion should,” Jessica Evans, an HRW senior researcher here in Washington, told IPS.

“But until there is a binding policy requiring the Bank to respect human rights in all of its activities, the degree to which human rights are considered will remain a matter of staff discretion.”

According to Monday’s report, the bank’s refusal to commit to human rights due diligence leaves its staff without clear guidance on whether such issues are or are not their responsibility – much less how to address them.

“In practice, funding decisions relating to rights concerns lack transparency and appear arbitrary and inconsistent,” the report warns. “Further, this precludes people whose rights are adversely affected by these decisions from holding the Bank to account.”

World Bank officials note that the Vietnam drug centre funding was part of a national effort to support the country’s HIV/AIDS programme, and “helped save many lives and reduce social stigma”, according to a bank spokesperson.

In Ethiopia, too, the PBS programme was part of a national push to assist some 84 million Ethiopians, “and has contributed to the country’s exceptional progress towards many of the [Millennium Development Goals].”

“The Bank is dedicated to reducing poverty and protecting people in the projects we finance,” the spokesperson told IPS. “Human Rights Watch has been active in our first round of global conversations on ways to modernise our environmental and social safeguard policies for investment lending, which have been recognised as the world standard.”

Policy first

Further, the spokesperson pointed out that on Jul. 12 the bank authorised its Inspection Panel, an independent complaints body, “to investigate [the Ethiopia] project to see if it followed Bank policies”. (The related complaints can be found here.)

Yet as the process is currently set up, external auditors such as the Inspection Panel can only look into compliance with set bank policy.

“The Inspection Panel will not be able to effectively incorporate human rights into the bank’s lending framework until there is a bank policy that requires respect of human rights,” HRW’s Evans says.

“Once we have such a policy, the Inspection Panel will play a critical role in holding the bank accountable should it fail to comply with it. Until that time, the Panel will only be able to incorporate human rights to the limited degree that the Indigenous Peoples policy allows.”

Campaigners are now calling on the bank to include in its safeguards a commitment not to support any activities that will contribute to or exacerbate human rights violations and to respect international human rights in all of its projects. Doing so, they say, will further the institution’s overall goal.

“The Bank needs to respect human rights in its operations because our understanding of development is not just about income generation – it is about improving people’s lives,” CIEL’s Genovese says.

“When you, for instance, support a mine that despoils the land and pollutes the water – thereby infringing on the communities’ rights to water, health and natural resources – you further impoverish them. Development without respect for human rights is not true development.”

According to the bank’s safeguards review website, a final draft of the safeguards review update is due by June of next year.