War in the Bank

Paul Wolfowitz at a news conference on the final day of the World Bank-International Monetary Fund spring meeting in Washington on April 15.-YURI GRIPAS/REUTERS

Revelations of President Paul Wolfowitz's outrageous favours to his girlfriend ignite a "civil war" in the World Bank.

A SCANDAL of unprecedented proportions stalks the World Bank. Its president, Paul Wolfowitz, regarded as "the neocon's neocon", is embroiled in an unseemly controversy over favours dished out to his girlfriend, after he took over the reins of the Bank in June 2005. As the scandal unravelled from early April, Wolfowitz found himself besieged on all sides. Indeed, there is now talk of "civil war" in the Bank.

The scandal surfaced at the most inopportune time for the Bank, when it was preparing to host the semi-annual meeting with the International Monetary Fund (IMF) in Washington (on April 12-14), which brought together delegations from the 185 member-countries of the Bank. Moreover, Finance and Development Ministers of the G-7, a grouping of the richest countries, were also to meet to consider Wolfowitz's demands for funds.

It would appear that Wolfowitz has been less than candid about the details of the multiple "conflicts of interest" relating to his partner, Shaha Ali Riza. As the evidence started to come in from all directions - from staff represented by The World Bank Group Staff Association, the media, and from top-level former and serving Bank officials - Wolfowitz's instinct was first to deny, then blame someone else, and then accept his mistake. Indeed, sin at will, deny in haste and repent at leisure appears to have been his strategy throughout this sordid drama.

After much dithering, by which time his reputation had already been dented, Wolfowitz issued a statement on April 12 accepting that he had "made a mistake for which I am sorry". His bottom line, in the face of massive and unprecedented opposition from within the ranks, was that he would not resign. By the middle of April it was evident that United States President George W. Bush held the last string that kept Wolfowitz at his job in the Bank. On April 18, White House spokesman Tony Fratto said, "We still have full confidence; the President has full confidence in President Wolfowitz." The World Bank's board met the next day in a "private" session to discuss what to do about its President. However, it soon became apparent that Wolfowitz, who was the Deputy Secretary in the U.S. Department of Defence before he took the job at the Bank, was becoming too big a liability for the Bush administration.

The controversy involving Wolfowitz's partner dates back to 2005. When he took over the leadership of the Bank, Riza, a British citizen of North African origin, who joined the Bank in 1997, was working at the Bank as a communications specialist in the Middle East and North Africa (MENA) Department. World Bank rules prohibit staff members from working under the authority of those with whom they are "romantically involved". Wolfowitz - it appears from hundreds of pages of documents released by the Bank's Board, the staff association and the media - cited a potential conflict of interest to the World Bank's General Counsel even as he prepared to join the World Bank in 2005. He said that he wanted to recuse himself from "any personal actions or decisions" relating to his partner's employment at the Bank.

However, the then Ethics Committee chairman, Ad Melkert, a Dutch politician who is now a senior official at the United Nations Development Programme, pointed out that an arrangement of the kind proposed by Wolfowitz would be inadmissible under the Bank's rules. Melkert himself suggested three options, among them the possibility of external service while being on the Bank's payroll. Also included in the package was a promotion to compensate Riza for the sudden change in her career. While details up to this point have come readily from Wolfowitz and his supporters, the real bombshell has been the terms on which Wolfowitz arranged the "remedy" to the serious conflict of interest. Wolfowitz also said he would withhold information relating to Riza in order to protect her "confidentiality".

The details of Riza's appointment are, to say the least, interesting. Recently released documents show that Wolfowitz played a direct hand in securing a State Department job for Riza in September 2005. In fact, she reported to Elizabeth Cheney, daughter of the U.S. Vice-President, Dick Cheney. Before the transfer, Riza was earning close to $133,000 per annum; her salary jumped to $193,590 as a result of the deal. In fact, Riza's payroll details show that her salary increased from $104,420 in April 2001 to $193,590 when she joined the State Department in 2005 - an increase of 85 per cent in less than five years. It is important to remember that these are tax-free salaries. In fact, Secretary of State Condoleezza Rice earns a gross annual salary of $188,000, which is subject to taxes.

Among the elements contained in the compensation package was the stipulation that Riza would be entitled to the rank of Country Director if and when she rejoined the Bank at the end of Wolfowitz's five-year term. If Wolfowitz continued for another term, she would be entitled to join the Bank at the level of Vice-President, for which, according to staff members, Riza is certainly not qualified.

The most damaging detail is the fact that Wolfowitz actually directed the terms of Riza's appointment at the State Department. In a memo dated August 11, Wolfowitz wrote to Xavier Coll, Vice-President, human resources; he "directed" Coll "to provide her a choice between her proposal and your (Coll's) alternative of financial compensation in lieu of promotion... " In effect, the "choice" that Wolfowitz "directed" Coll to offer Riza was completely one-sided, which indicated that Wolfowitz promoted the interests of his friend at the expense of the institution he headed.

Wolfowitz also said that the Ethics Committee approved the deal. However, Melkert told the Dutch newspaper Der Handelsblatt that neither he nor the Ethics Committee knew "about the terms and conditions of the contract of Mrs.[sic] Riza for her transfer outside the World Bank." Moreover, a statement released by the staff association on April 12 included the "testimony" of the Bank's former general counsel, Roberto Danino, which showed Wolfowitz in even poorer light. Danino, the statement claimed, had advised the President and the Ethics Committee on what could be "appropriate and fair terms for Ms. Riza's reassignment." However, the statement said that "these terms were rejected" and Danino "was barred by the President from the actual negotiations."

The payroll data show that Riza received a 35.5 per cent raise after Wolfowitz arrived. This was followed by a 7.5 per cent increase in 2006. Says Government Accountability Project (GAP), an organisation protecting whistleblowers: "If World Bank staff rules had been respected, she was not to receive percentage increases greater than 12 per cent and 3.7 per cent, respectively."

"It's ironic that Wolfowitz lectures developing countries about good governance and fighting corruption, while winking at an irregular promotion and overly generous pay increases to a partner," said Bea Edwards, GAP international director. Riza remains on the World Bank's payroll even though she left the State Department job in 2006 and now works for Foundation for the Future, an international organisation that gets some money from the department. "I have now been victimised" for agreeing to the arrangement, Riza said in a memo to the Bank.

But Wolfowitz's woes did not end there. On April 17, GAP released documents that showed that Wolfowitz played a key role in getting Riza employed by a private defence contractor in Iraq between March and May 2003, just as the country was invaded by the U.S. Riza was employed by Science Application International Corporation (SAIC) as a "subject matter specialist". The documents released by GAP also show that a Department of Defence official "specifically requested Shaha Riza to work on the contract".

The reaction from the Wolfowitz camp was quick. Riza's attorney insisted that Riza was not paid a salary but only expenses during the period of her work in Iraq. However, on April 18 GAP pointed out that the payment to Riza figured under the head `labour costs' in her contract and amounted to $17,100. Media revelations of an inquiry by the Pentagon indicated that Wolfowitz "recommended" his friend for the job in Iraq.

Bea Edwards said: "Considering that Riza was reportedly romantically involved with Wolfowitz at the time, that the Iraq War was imminent, that SAIC was a defence contractor, and that the World Bank had active projects in Iraq, multiple conflicts of interest probably existed."

In the face of the rising tide of protests from Bank staff, Wolfowitz sent an email to the staff on April 9 pointing out that he had "acted on the advice of the Board's Ethics Committee" in order "to balance the interests of the institution and the rights of the staff member in an exceptional and unprecedented situation".

On April 15, the Bank's Development committee, representing the 24-member Board of Governors, which acts as a bridge between the Bank and the IMF, issued a statement that was unprecedented for its tone, especially in relation to the head of the institution. The committee said that it had to ensure that the Bank's "credibility and reputation as well as the motivation of its staff" remained intact. While expressing the hope that the Bank would "adhere to a high standard of internal governance", it noted that "the current situation is of great concern to all of us". It became obvious that the man who played a key role in igniting the war on Iraq had one of another kind on his hands.

Wolfowitz has antagonised almost every section with which he has dealt with since assuming office. Even before he joined the Bank there was opposition from the staff. A survey conducted soon after he was nominated by Bush to head the Bank in early 2006, showed that "nearly 90 per cent of the staff opposed Wolfowitz's nomination." But the real conflict extends beyond the walls of the Bank. He has alienated borrowing member-countries, his own board, and even his senior staff representatives.

Soon after taking over, Wolfowitz made eradicating corruption a critical template of his agenda for the Bank. Often, the crusade against corruption masked his intent to pursue the neoconservative agenda that he has held so dear throughout his political career. As Bank President he suspended lending to several countries - notably Chad, Kenya and Bangladesh - citing corruption. Instead, he laid out the Bank's lending agenda in countries where the U.S. had intervened militarily - most notably in Iraq. What made Iraq such a favoured destination for Bank funds, given the serious allegations of corruption involving contracts in occupied Iraq, asked his critics. He cut off lending to Uzbekistan in September 2005, bypassing the Bank's board. Dennis de Tray, Country Director for Central Asia, who later resigned, told The New Yorker, "It came out of the blue. I got a call while I was on vacation and was told that he just did it. He didn't even talk to the regional Vice-President. We were all pretty shell-shocked."

The swirl of speculation has also provided an India angle to the scandal. There have been reports that the former India Country Director, Michael Carter, may have resigned over the manner in which funding for a World Bank project in India was held back, upon Wolfowitz's insistence, citing corruption allegations. In fact, Wolfowitz's high-handed approach resulted in a spate of resignations by senior Bank staff.

On April 18, Graeme Wheeler, Managing Director, speaking at an "informal" meeting of the top brass, asked Wolfowitz to resign. In the face of mounting protests Wolfowitz struck a conciliatory note. He apparently offered to change his management style. He also offered to make changes to the "structure" of his office, which, according to his critics, he had packed with associates from his Pentagon and Bush establishment days.

The Bush administration has drawn up a list of names of potential successors. Prominent among them was Ashraf Ghani, Chancellor of Kabul University, who worked as an advisor to the Bank in Afghanistan between 1991 and 2002. He was Finance Minister for two years after the fall of the Taliban regime. Ghani played a key role in implementing liberal reforms in Afghanistan, notably the issuance of a new currency and a regime of balanced budgets. He was a candidate to replace Kofi Annan as Secretary-General of the United Nations last year but lost out to Ban Ki-moon.

One thing remains clear: Whether Wolfowitz remains or goes the issues raised by the storm have nothing to do with reforms at the Bank. Indeed, his misdeeds at the Bank appear to be trivial in relation to what he did during the rest of his career, most notably in Iraq. While at the Pentagon he played a critical role after making a misleading case for war, including the "sexing up" of intelligence reports about Iraq's weapons of mass destruction before the invasion. He also trivialised the cost of the war - in human and financial terms. In short, he displayed an utter lack of a moral compass, which has resulted in the loss of thousands of lives.

If sending Wolfowitz back home from the Bank is punishment, it would, as David Corn (who writes for The Nation) remarked in his blog, "be like nabbing Al Capone on tax evasion".