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Dancing with Wolf: The next World Bank president's reputational risk

By Charlie Cray and Jim Vallette
31 March 2004

Today the World Bank's executive directors agreed to install U.S. Deputy Secretary of Defense Paul Wolfowitz as their next president. The vetting and voting on Wolfowitz took all of 15 days to complete.

A couple of days before the vote, Wolfowitz flew to Brussels, on request, for a meeting with European Union ministers. Only seven of the 25 EU countries bothered to send a minister or secretary of state. The Bush/Cheney administration managed to quiet many potential critics, including the governments of Brazil and Germany, with promises of valuable trinkets such as permanent seats on the UN Security Council. Much of the developing world was silent in the run-up to the vote. Some feared that criticism could limit future access to Bank finance.

We wonder if, without pressure from the U.S., the selection of Paul Wolfowitz could have passed the kind of "due diligence" test that the Bank applies before approving development projects.

In particular, we wonder, did the Bank's executive directors even consider an apparent conflict-of-interest? Not about Wolfowitz's girlfriend who works at the Bank; enough has been written about that elsewhere. This particular conflict represents a more serious reputational risk. The Bank has the potential to be tarred by a major Iraq-related financial scandal in which Wolfowitz plays a significant part.

Wolfowitz, as Deputy Secretary of Defense, shaped and directed U.S. reconstruction efforts in Iraq. The U.S. government, through Ambassador Paul Bremer and the Coalition Provisional Authority (CPA), had direct control over the Development Fund for Iraq (DFI) - the account where Iraq's ongoing oil export revenues were deposited under the occupation. Until the CPA ceded authority, Bremer and the CPA were solely responsible for the disbursement of these funds, along with the Pentagon, particularly Wolfowitz. In December 2003, for example, Wolfowitz ordered that reconstruction money from the DFI be released only to coalition countries' corporations.

According to the CPA's own auditors, the Pentagon and CPA disbursed billions of dollars of Iraqi oil revenues with little concern for competition, oversight or accountability. Without competitive bidding requirements, the Pentagon effectively crowned Halliburton the king of American war profiteers. A steady stream of investigative reports, whistleblower claims and even probes by the Pentagon's own auditors have revealed an ongoing epidemic of waste, fraud and bilking of American taxpayers, whose money was commingled with the "Iraqi people's" oil revenues.

Even before the war began, Wolfowitz assured the House Budget Committee that oil exports alone would pay for the country's reconstruction: "If we liberate Iraq, those resources will belong to the Iraqi people." Wolfowitz had longed for the "fabulous oil resources" of Iraq to be wrested from the clutches of Saddam Hussein and European oil companies.

Instead, billions were siphoned off by the occupational authority (CPA) to pay Halliburton and other U.S. contractors, leaving just $2.9 billion of $20.6 billion in oil-related revenues behind. (This week Newsweek printed a photo of CPA officials ready to hand out stacks of money, with a caption that reads "Free Fraud Zone.")

If the contractors had finished the job, it might mute complaints. But the dense tale of corruption and mismanagement created many problems that broadened and hardened popular opposition to the occupation. Wolfowitz did his part to alienate Iraqi hearts and minds. Recall that he barred foreign companies from receiving reconstruction contracts, a policy that delayed the procurement of spare parts for machinery and electrical generating equipment. The result: lower-than-estimated electrical generating capacity, further civil unrest and increased support for the resistance.

According to U.S. Representative Henry Waxman (D-CA), many tales of waste and corruption involving the CPA's abuse of the "Iraqi people's" oil revenues were hidden from international auditors, including the World Bank.

The Development Fund for Iraq (DFI) -- successor to the Oil-for-Food Program that so many in Congress and right-wing media outlets have obsessed over in recent months -- was created in May 2003 by a UN Security Council Resolution (1483). The resolution set up an obscure body known as the International Advisory and Monitoring Board (IAMB) - whose principle mission is to oversee U.S. stewardship of the development fund.

"We arguably have a greater obligation to oversee the DFI than the Oil for Food Program given that the DFI was under U.S. control," Waxman pointed out in a letter to U.S. Rep. Christopher Shays (R-CT), chair of one of the five committees investigating the former.

What does all this have to do with Paul Wolfowitz and the World Bank? It's directly linked. By order of the same UN resolution, the IAMB's work is directed by, among others, the President of the World Bank.

In other words, unless Wolfowitz chooses to recuse himself, in his new position he will be able to pressure the IAMB to back off from its audit-based investigation into the DFI which, all signs indicate, has the potential to lead back to the Pentagon, Halliburton and even Wolfowitz himself.

On March 15, Waxman published what he called "evidence that Administration officials - acting at the request of Halliburton - intentionally withheld information from international auditors in violation of U.N. Security Council Resolution 1483." He said this "suggests that the United States used Iraqi oil proceeds to overpay Halliburton and then sought to hide the evidence of these overcharges from the international auditors."

The IAMB triggered the ongoing investigation at a meeting on March 17, 2004. The board decided to conduct a special audit of some sole-sourced contracts. Last April, the IAMB requested further information from the CPA on the $1.4 billion contract awarded to Halliburton, under a no-bid contract called Operation Restore Iraqi Oil (RIO). In June 2004, and again in September, the IAMB registered its "regrets" that CPA officials had not complied with its "repeated requests." Finally, in October 2004, the Bush/Cheney administration provided the IAMB with the audit, but only after Halliburton took out key information.

Halliburton itself edited the audit, according to the congressman. Waxman produced a September 28, 2004, letter from Halliburton to the U.S. Army Corps of Engineers, in which contracts manager Michael Morrow says Halliburton's KBR subsidiary has redacted information that "could be used by a competitor to damage KBR's ability to win and negotiate new work."

Waxman produced two versions of the audit, before and after Halliburton made the changes. In the final version, black boxes hide language that specified over $162 million in "questioned," "unsolved," and "unreasonable" payments to Halliburton subsidiary. References to many other KBR "noncompliances and inadequacies" also vanished. According to Waxman, independent experts said "both the redactions and the process by which they appear to have been made would be improper."

The Congressman has requested that the House National Security Subcommittee, chaired by Rep. Shays, issue a subpoena for documents related to Halliburton and government officials' attempts "to conceal the extent of the overcharges." The potential subpoena would force hearings and testimony by "Defense Department officials responsible for reviewing Halliburton's redactions and submitting the audits to the IAMB."

At the same time, the IAMB is continuing with its investigations.

If the investigations follow the chain of command, they could reach Wolfowitz. According to an e-mail dated March 6, 2003, later published by Judicial Watch, Wolfowitz himself authorized the award of the first sole-source contract (Operation RIO) to Halliburton, circumventing contract competition requirements. A U.S. Army Corps of Engineers official, whose name is redacted, writes that he or she secured "authority to execute RIO" after "DepSecDef [that is, Wolfowitz] sent us to UnderSecPolicy [Under Secretary of Policy Douglas] Feith and gave him authority to approve." The e-mail added that the "action has been coordinated with the Vice President's office." Vice President Dick Cheney, of course, was Halliburton's boss from 1995 to 2000. Cheney also has been Wolfowitz's political patron since the first Bush administration.

The underlying questions are those timeless Washington favorites: What did Wolfowitz know, and when did he know it?

These are questions that the world's governments should have considered before acceding to Wolfowitz's installation as the head of the World Bank.

Before approving development assistance, World Bank staff are supposed to exercise "due diligence," ensuring that a project complies with financial management and procurement guidelines. The failure to do so represents a "reputational risk" to the Bank itself. By hiring Wolfowitz as its chief, the Bank has risked the institution's reputation by failing to follow its own procedures. The new boss may have some answering to do on his role in the vast mismanagement of the UN-created Development Fund for Iraq. Worse, he is positioned to oversee, through the IAMB, an audit of actions in which he played a significant role in the Bush/Cheney administration.

As Joseph Stiglitz, the Nobel-winning former chief economist at the World Bank has suggested, the Bank under Wolfowitz's leadership is likely to "become an explicit instrument of US foreign policy" around the world. "It [the Bank] will presumably take a lead role in Iraqi reconstruction´┐Ż. That would jeopardize its role as a multilateral development body."

Charlie Cray is director of the Center for Corporate Policy and a collaborator with HalliburtonWatch, which is tracking the company's war profiteering in Iraq. Jim Vallette is research director of the Sustainable Energy and Economy Network, a project of the Institute for Policy Studies. Vallette is the author of The Wolfowitz Chronology, and several related articles, available at the IPS website.