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

In an unusual statement, the World Bank’s private-sector arm has threatened to cancel a controversial investment in a Honduran palm oil company that has been implicated in serious human rights abuses, including numerous killings, over the past five years.

A member of the Aguan Valley Palm Producers Association holds the fruit from which palm oil is extracted. Credit: USDA/cc by 2.0

The statement came two weeks after the release of a damning report by the Office of the Compliance Advisor/Ombudsman (CAO) of the International Finance Corporation (IFC) that concluded, among other things, that Bank officials should have raised serious questions about the alleged complicity in those abuses by Corporacion Dinant before approving a 30- million-dollar loan to the company in 2008.

The company, which is owned by Miguel Facusse Barjum, “the wealthiest, most powerful businessman in the country,” according to a State Department cable obtained by Wikileaks, is based in the lower AguanValley, a region populated by hundreds of campesino cooperatives established there as a result of a far-reaching land-reform programme initiated in the 1960s.

Conflicts over Dinant’s efforts to buy up these communities’ lands under a 1992 law designed to favour the country’s burgeoning privately-owned agro-export industry, account for many of the abuses.

Since the 2009 military coup, which ousted a pro-reform president and which was reportedly backed by Facusse, nearly 100 people – mostly campesinos, as well as some Dinant employees – have been killed in the valley, according to press reports, although Rights Action, a Washington-based group that has closely monitored the conflict, estimates the campesino death toll at “well over one hundred.”

“IFC has not disbursed funds to Dinant since 2009, and will not disburse further funding until Dinant fulfills its commitments in the Action Plan (worked out between the IFC and Dinant in light of the ombudsman’s report), including strengthening its community engagement and environmental and social standards, and reviewing its security practices,” the IFC said.

“Should Dinant fail to meet these commitments, IFC stands prepared to exercise all remedies available, including cancelling the loan,” according to the statement, which also promised to “refine” its action plan to take account of recent criticism by international and Honduran civil-society organisations (CSOs) and “reflect on” internal problems that led to mistakes.

While many CSOs welcomed the IFC’s latest statement, comparing it favourably to the agency’s initial, more ambiguous reaction to the CAO report, they said it still fell short of what is required to redress the situation.

“The only real difference from its previous statement is that they explicitly said the possibility of cutting off the loan remains open if the action plan is not complied with,” Annie Bird, who directs Rights Action, told IPS.

“The action plan that the IFC is proposing is completely inadequate. People are going into hiding, afraid of being killed, and entire communities remain in constant fear of being evicted from their land. And the IFC really isn’t doing anything to do about it. It’s just calling on the Dinant Corp to work with the government.”

Her disappointment was echoed by Berta Caceres, co-ordinator of the Honduras-based Indigenous Lenca organisation (COPINH). “There is a risk that the situation of violence and impunity which exists in the Bajo Aguan will repeat itself in the future, if the World Bank does not investigate this company’s activities nor consult indigenous communities, farmers, and Garifunas,” she said.

The original 30-million-dollar loan – part of a 100 million dollar package that included Germany’s development bank, the Inter-American Development Bank (IDB), and the Central American Bank for Economic Integration — was signed in April 2009 to fund expansion of Dinant’s snacks and edible-oils processing facilities.

In November 2009 – four months after the military coup that ousted elected President Manuel Zelaya – the IFC disbursed 15 million dollars in support of the project.

One year later, a coalition of CSOs asked the CAO to audit the project and its implementation in light of the human-rights situation in the valley.

The German development bank cancelled its 20 million dollar loan in 2011 after one rights group, Food First Information and Action Network (FIAN), submitted “evidence of the involvement of private security forces hired by Dinant and other companies owned by Miguel Facusse in human rights abuses and, in particular, in the murder of peasants in Bajo Aguan.”

In its 72-page report, the CAO concluded that IFC staff had violated the agency’s own rules by failing to undertake due diligence in assessing and responding to risks of violence and forced evictions and to consult adequately with the agency’s environmental and social specialists on the project.

These deficiencies, it found, were in part due to its culture and incentive system that effectively encouraged staff to “overlook, fail to articulate, or even conceal potential environmental, social, and conflict related risks.”

“IFC has important policies to protect human rights and the environment,” noted Jessica Evans, senior international financial institutions researcher at Human Rights Watch (HRW). “But the Dinant case shows that staff treat them as optional. That needs to avoid more tragic outcomes.”

In response, the IFC took issue with some findings but agreed with others and set forth an “Action Plan” which was immediately denounced by most of the CSOs, including HRW, as inadequate. Their reaction, as well as negative international media coverage, reportedly triggered the Bank board’s demand that the agency revise its plan – details of which have not been disclosed — and issue a new statement.

The statement differs mainly from the IFC’s initial reaction in the apologetic tone it assumes, stressing, for example, that it “acknowledges that there were shortcomings in how we implemented our environmental and social policies and procedures…

“As noted in the audit, IFC must take a broad view of the country and sector risks when considering projects. Additionally, we need to pay more attention to a client’s security practices and preparedness in fragile country situations,” it said.

But its contrite tone failed to appease the CSOs or some Honduras experts.

The IFC’s reliance on the Honduran government in resolving the land conflicts and addressing the human-rights situation made little sense, according to Dana Frank, a Honduras specialist at the University of California at Santa Cruz.

“There’s a reason why the national government is not intervening in the Aguan valley to stop these killings of campesinos and why there’s complete impunity for the security forces and private security guards who have been killing them,” she told IPS. “It’s because Facusse is a formidable power in the national state.”

Indeed, the Facusse family, of which he, at age 90, is considered the partriarch, is widely seen as the most important and influential in what is essentially an oligarchic system.

Rights Action’s Bird also complained about the inadequacy of the response, insisting that the IFC should not only cancel the loan but also work with the affected communities to redress the abuses they have suffered.

She also complained that the IDB, whose own private-sector facility, the Inter-American Investment Corporation (IIC), had participated in the loans to Dinant, has never audited its own performance. “Instead, the IDB is initiating a 60 million dollar loan to create a police intelligence unit that human rights organisations in Honduras are screaming about because the security forces there are out of control,” she said.