The Work of the Independent Commission for Aid Impact - June 2012

Written evidence submitted by Karen Hudes

1.   I am a lawyer and economist who worked for twenty years in the legal department of the World Bank. Ten years ago, Board interventions under the Strategic Compact designed to build accountability into the Human Resources function at the World Bank were dismantled.   I was a member of the Committee appointed by the Board to formulate human resources reforms, and have continued to inform the World Bank's oversight agencies on these matters.  Mr. Luigi de Magistris, the Chairman of the European Parliament's Committee on Budgetary Control, stated in June 2011:  " I share the opinion expressed by the Members of the Committee that it was very interesting and inspiring to learn about your case at the World Bank and especially the ideas you have presented to us to make whistleblowing more effective."

2. The Independent Commission for Aid Impact has not been sufficiently rigorous in its examination of the UK Government engagement with the World Bank. ICAI concluded that "DFID provides effective oversight of the World Bank, as a shareholder and as a donor" without the required transparen cy, impartial ity or objectiv ity. How could ICAI find that DFID demanded accountability from the World Bank after ICAI was informed of serious internal control lapses currently before the World Bank's oversight agencies , including the UK's Executive Director, Governor, Ambassador in Washington, Serious Fraud Office, the International Organization of Supreme Audit Institutions, the International Organization of Securities Commissions, the National Advisory Council for International Monetary and Financial Policies, Fitch Ratings, Moodys, and Standard and Poors?

3. I n November 2005, Mr. Pieter Stek, then Executive Director of the Netherlands constituency and Chair of the World Bank Board Committee on Development Effectiveness, stated :

In a multilateral institution which should be governed by the rule of law and high standards of probity the charge of concealment from the Board of Executive Directors of information relevant to the exercise of its duty of supervising management and the persecution of the person who brings this to light is extremely serious. If correct, which I believe, this poisonous cocktail undermines good governance and ultimately the effectiveness of the Bank in fulfilling its mandate. I shall continue to assist Ms. Hudes in her efforts to have due process brought to bear, preferably by the Bank itself, on these issues of governance. 

4. After hearings on accounting irregularities at the World Bank, including cost over-runs on the renovation of the World Bank's headquarters and over-charges to World Bank borrowers, the US Congress required independent arbitration to protect whistleblowers in the Foreign Operations, Export Financing, and Related Programs Appropriations Act of 2005,119 Stat. 2172, the Lugar Leahy Amendment, 22 U.S.C. 262o-445 The reforms required by Congress in the appropriations legislation did not materialize. 

5. Instead, there was an investigation of the World Bank's Institutional Integrity Departm ent by Paul Volcker. The Volcker Panel report was discredited after "deliberate and substantial interference with this supposedly independent commission" came to light.

6. When the World Bank refused to cooperate with a US Government Accountability Office inquiry into transparency at the World Bank requested by three Senators, Congress refused to approve a capital increase for the World Bank.   and§iontree=4,12&itemid=983 The requirements in US 2012 Appropriations legislation are in Section 7082 of H.R. 2055:

7. On 5 February, 2012 I sent the following email to ICAI:

Dear Sirs,

      I am a lawyer and economist who worked 20 years in the World Bank's Legal Department and reported corruption and internal control lapses to the US Congress.  Three Senators requested a US Government Accountability Office inquiry into these lapses, but the World Bank stonewalled and the inquiry was scrapped.  I met with the UK Serious Fraud Office on September 28, 2010, and on October 12, 2010 the UK Serious Fraud Office called the US Securities and Exchange Commission about compliance of the International Bank for Reconstruction and Development on the capital markets.  I testified to the European Parliament's Committee on Budgetary Control on May 25, 2011.   The US Congress has required "substantial progress" prior to disbursement of the general capital increase.  I will keep you informed of further progress.


Karen Hudes

Law Offices of Karen Hudes

8 . ICAI did not investigate my serious allegations. Instead, ICAI justified it s decision to hire KPMG UK to participate in its review of DFID's relationship with the World Bank :

ICAI felt that it did not constitute a conflict of interest for the KPMG led Consortium to undertake a review on behalf of ICAI for a number of reasons. KPMG US are responsible for the World Bank audit, whilst KPMG UK, a distinct legal entity, is responsible for the ICAI review. Such potential conflicts arise regularly in KPMG's work and there are therefore strict procedures in place to provide safeguards in respect of any potential conflict of interest. KPMG have strong ethical dividers between different teams within KPMG and the IPMG ICAI team has no access to audit files used in the World Bank audit and vice-versa. There was no sharing of files, nor exchanging of data between the teams. KPMG US ha d no influence over our report.

9 . ICAI is incorrect that KPMG UK was able to carry out an independent review of the Bank's evaluation system to provide assurance on the quality of World Bank investments. There was no effective firewall between KPMG US and KPMG UK. The failure by KPMG US to observe Generally Accepted Auditing Standards in its audit of the internal controls over financial reporting of the International Bank for Reconstruction and Development was documented in detail both to the Chairman of KPMG International and to KPMG International's hotline.

10 . On March 29, 2012 the Economic Affairs Committee of the UK House of Lords recommended that funding to the World Bank should be reduced "while a more detailed re-evaluation is carried out."

11. Recommendation: that IDC consider issuing the following statement to the World Bank. This statement is also under consideration by the Committee on Budgetary Control of the European Parliament:

An 8th April, 2005 letter [1] from the Joint Economic Committee of the US Congress to the World Bank inquired whether "the Bank's Board of Executive Directors always is in possession of accurate and timely data on the Bank's accounting and financial position." The UK Parliament's Select International Development Committee [and the European Parliament's Committee on Budgetary Control] share[s] the Joint Economic Committee's goal "that the Board of Directors and the public are being presented with accurate and timely financial information and that any accounting irregularities are promptly discovered, disclosed and corrected....Under the World Bank's COSO framework, it is also necessary to determine whether the World Bank's internal control system has the necessary critical underpinnings.

June 2012

[1] (P oor ) online c opy :

Prepared 9th July 2012