The Global Financial Crisis and The Transnational Anti-Corruption Regime: A Call For Regulation of the World Bank’s Lending Practices
Is there any similarity between the lending practice of the World Bank Group and the functioning of the U.S. financial system prior to the crisis? ACRN Research Correspondent Giulio Nessi comments on the current anti-corruption policies of major international financial institutions and illustrates an article investigating the parallelism between the corruption risk underlying the two mechanisms.
International financial institutions are not immune from the risk that their funds are misappropriated and thus diverted away from the intended purposes. On the one hand, historical evidence show that corrupt leaders of developing States have personally benefitted from any kind of capital flowing into their countries. Furthermore, scholars like Joseph Stiglitz, former Chief Economist and Senior Vice-President of the World Bank, have publicly exposed the lack of transparency of global financial institutions and the lack of accountability which characterizes their policies and decision-making process. On the other hand, those institutions have become increasingly aware of the corruption risk within their activity and on the detrimental effects that fraud causes to the population of recipient countries. In this sense, the World Bank Group has established a unit – the Integrity Vice Presidency – to investigate and impose sanctions related to allegations of fraud and corruption in the activities financed by the Bank Group. Similar policies have been adopted by regional financial institutions such as the African Development Bank Group, the Asian Development Bank, the European Bank for Reconstruction and Development, and Inter-American Development Bank. On top of that, all the latter multilateral development banks have entered into a mutual agreement to enforce each other’s debarment actions with respect to four common sanctionable practices, i.e. corruption, fraud, coercion, and collusion. As for the International Monetary Fund, specific measures to strengthen governance may be promoted within its lending activity and thus become part of a country-program’s conditionality. Most recently, Jin Liqun, the secretary general of the interim multilateral secretariat of the proposed Asian Infrastructure Investment Bank has stressed that the latter institution will maintain a zero-tolerance stance against corruption.
In spite of the latter progress, international financial institutions have still a wide margin to improve their anti-corruption policies. In a recent article, Paul Sarlo addresses some issues which may contribute to the debate over the evolution of the current framework. The paper focuses on the lending practice of the World Bank Group and advocates for its reform considering that its risk-driven mechanisms appear similar to those underlying the U.S. financial system before the crisis which erupted in 2008.
After having framed the role of the World Bank Group within the transnational anti-corruption movement, the article contends that its loan activity should be integrated by a system of internal due diligence in order to minimize the risk that corrupt practices take place within its developmental projects. In this context, criticism is also raised toward another major anti-corruption initiative of the World Bank (and of the United Nations Office on Drugs and Crime) known as “StAR” (Stolen Asset Recovery), which the author considers inefficacious because it is “oxymoronic” in nature, merely advice-oriented and highly complex from a procedural perspective. Comparison is thus made between the current World Bank Group lending policy and the U.S. financial regulatory framework prior to the crisis of 2008, and a significant common denominator is found in the incentives toward concluding high-risk transactions and breaching the respective fiduciary duties. The article then calls for the introduction of an interbank relationship between the financial institutions of the World Bank Group and the World Bank itself based on two principles: economic exposure and economic risk. Finally, the article suggests that reforms would be best achieved if the progresses of the World Bank’s anti-corruption policy were monitored by an independent international organization with demonstrated expertise and no conflict of interests such as the United Nations Economic and Social Council.
The article touches upon a topic of great interest which is likely to be further scrutinized by the anticorruption legal scholarship. The need to analyse and eventually reform the dynamics underlying the practice of key international actors of today’s global economy is apparent if one only considers the considerable amount of money they manage and the multiple interests involved in their projects. At the same time, one should consider the scarcity of internal accountability mechanisms and the difficulty in regulating such episodes of corruption by means of traditional public international law instruments. Although the novelty and complexity of the subject did not allow the author to examine in depth all the far-reaching issues sustaining his reasoning, the article accurately frames the issue of corruption in the context of international financial organizations’ activities. Most interestingly, it represents a valuable starting point to reflect on the systemic consequences the latter problem produces on both the global financial system and the international development action.
The World Bank performs little to no due diligence when it makes loans to borrowing countries to contribute to their developmental projects. The result is a breach of fiduciary duty—one that invites corrupt governments and their affiliates to steal forty percent or more of the World Bank’s loans each year. The World Bank’s lending practices not only undermine the transnational anti-corruption regime, but they also compare to the transactions of subprime mortgage brokerages and investment bankers that precipitated the financial crisis. To curb the World Bank’s high-risk lending, organizations in the international community must regulate how the World Bank conducts its business, namely through a form of bank resolution known as interbank discipline.
Paul Sarlo, “The Global Financial Crisis And The Transnational Anti-Corruption Regime: A Call For Regulation Of The World Bank’s Lending Practices”, Georgetown Journal of International Law 45(4) (2014), 1294-1321
Cross Debarment Agreement among Multilateral Development Banks [http://lnadbg4.adb.org/oai001p.nsf/]
The IMF and Good Governance, IMF Factsheet, 30 September 2014 [http://www.imf.org/external/np/exr/facts/pdf/gov.pdf]
“AIIB to have zero-tolerance for corruption: official”, Xinhua News Agency, 22 March 2015 [http://news.xinhuanet.com/english/2015-03/22/c_134087672.htm]
J. E. Stiglitz, “Globalization and Its Discontents”, W.W. Norton & Company, 2002 [http://books.wwnorton.com/books/detail.aspx?ID=18298]
J. Hickel, “Flipping the Corruption Myth”, Al Jazeera, 1 February 2014 [http://www.aljazeera.com/indepth/opinion/2014/01/flipping-corruption-myth-201412094213280135.html]