Intermediating abuse? Human rights concerns in World Bank Group’s lending to financial intermediaries

A recent report found the World Bank’s private sector arm, the International Financial Corporation (IFC), has indirect exposure through one of its equity investments in financial intermediaries to human rights abuses associated to a Honduran agribusiness company. The report’s troubling findings should be cause for concern regarding the limits to due diligence in the behavior of private financial firms funded by public institutions such as the IFC.

The IFC’s exposure was unveiled in a recent audit by the Compliance Advisor Ombudsman (CAO), the accountability mechanism of the IFC. The office started an inquiry after one of its audits last January found serious human rights issues concerning the International Finance Corporation’s loan for USD 30 million to a Honduran palm oil project managed by Corporación Dinant. According to findings of that audit, the IFC knew about the allegations of Dinant’s involvement in human rights abuses –including the killing and forced evictions of farmers in a region where the company is operating– during and after it had invested.

But in the course of its compliance process in relation to Dinant, the CAO became aware that Dinant is one of the largest borrowers of Banco Financiera Comercial Hondureña (Ficohsa), a bank in which IFC has direct equity investments (in the amount of USD 66 million) and, as a result, IFC had a significant exposure to Dinant through its equity stake in Ficohsa.

The CAO found that the IFC took insufficient measures to identify environmental and social risks in Ficohsa’s portfolio or to ensure the financial intermediary’s capacity to implement IFC’s social and environmental requirements. As a result, 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 audit mentions the additional exposure to Dinant, “a company which IFC knew to be affected by a violent land conflict, as well as numerous other loans with potentially significant, but unassessed, [environmental and social] risk.”

In disbursing the loan, CAO found that IFC cleared disbursement without assuring itself that Ficohsa had submitted the environmental and social information that was required as condition of disbursement.

Analyzing supervision, the CAO stated that the environmental and social reporting format IFC provided to Ficohsa was not fit for purpose in terms of the detail that it required regarding the performance of borrowers, in particular those with high environmental and social risks. “As a result, IFC had . . . a superficial understanding of the environmental and social risks . . . attached to Ficohsa’s client base.”

Other issues had to do with internal cross-sharing of information in the IFC. Members of IFC’s team working on the Dinant investment did not share with key members of IFC’s Ficohsa team highly relevant information on the Dinant-related conflicts that was in their possession. The audit finds that this happened in spite of the fact “that there were staff working across both teams.”

Perhaps the most worrisome part of the report is the conclusion drawn by CAO that the 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’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,” says the audit.

The findings are significant because the investment through financial intermediaries such as Ficohsa is quickly becoming a predominant form of investment for the IFC. UK-based watchdog Bretton Woods Project reported that between July 2009 and June 2013 the IFC invested USD 36 billion in financial financial intermediaries, which represents, for instance, three times as much as the rest of the World Bank Group invested directly into education and 50 per cent more than into health care.

Thus, CAO’s findings should be a call to reconsider not just the particular investment that led to the IFC’s exposure to Dinant, but the overall practice of resorting to financial intermediaries for channeling IFC’s investments, and the limits to the feasibility of appropriately guaranteeing against their environmental and social risks.

A statement released by Oxfam and other groups called on World Bank President Mr. Kim to ask the CEO of the IFC to, among other things, rethink the IFC’s aproach to lending through financial intermediaries.

By Aldo Caliari.

Source: RightingFinance.