WORLD BANK FINDS CORRUPTION IN CAMBODIA PROJECTS

C O N F I D E N T I A L SECTION 01 OF 02 PHNOM PENH 001036

SIPDIS

SIPDIS

DEPARTMENT FOR EAP/MLS AND EB
DEPARTMENT PLEASE PASS USAID/ANE
GENEVA FOR RMA

E.O. 12958: DECL: 05/31/2016
TAGS: EAID PGOV PREL CB
SUBJECT: WORLD BANK FINDS CORRUPTION IN CAMBODIA PROJECTS

Classified By: Charge Mark C. Storella for reasons 1.4 (b) and (d).


1. (C) Summary: A World Bank (WB) audit has found evidence
of procurement fraud in seven out of nine WB programs
investigated in Cambodia, involving kickbacks to Cambodian
government (RGC) officials and rigged bidding. The WB
estimates that 10-15% of $5.0 million already disbursed was
skimmed. The RGC has preemptively suspended funding for
three of the four active WB programs affected and pledged to
investigate. However, in a May 30 meeting, Senior Minister
Keat Chhon took a hard line with the WB, insisting the WB
provide detailed evidence of fraud, something the WB's
auditors are reluctant to do out of concern for their
sources. While WB auditors have reportedly found similar
fraud in Indonesia and Vietnam, fraud in Cambodia may be more
widespread. Donor chiefs of mission generally agreed the
onus for investigating the fraud must remain with the RGC,
but also were inclined to press the WB to be more forthcoming
in providing information to the RGC information. Some donors
seemed inclined to minimize the importance of the problems
uncovered. WB President Wolfowitz was briefed May 4 and
reportedly agreed that the WB could continue operations in
unaffected programs and continue to implement new programs,
as well. End Summary.


2. (C) World Bank regional director Ian Porter and WB
country director Nisha Agrawal briefed major donor chiefs of
mission May 30 on the results of a fiduciary audit of WB
Cambodian programs conducted by the WB investigative unit.
The audit -- which follows similar audits in Indonesia and
Vietnam -- uncovered procurement fraud in seven out of nine
WB programs reviewed. (Three of the projects were already
completed.) The fraud typically consisted of kickbacks and
rigged bidding, often involving the same companies and
relatives of senior ministry officials, including ministers
in some cases. Four RGC ministries are involved: Rural
Development; Public Works and Transport; Land Management; and
Industry Energy and Mines. The projects valued at over $64.0
million deal with land management and administration, rural
infrastructure and provincial water and sanitation projects.
Porter told us in confidence that fraud had been detected in
$15.0 million worth of procurement, of which $5.0 million had
already been disbursed. The WB plans to ask the RGC to repay
the entire $5.0 million. The WB estimates that skimming may
have amounted to 10-15% of disbursements, but also noted that
rigged bidding might also have involved shoddy or substandard
construction. The contractors involved are all small
Cambodian businesses. Thus far, there have been no links
established to the Prime Minister or his family.


3. (C) According to Porter, WB staff, including himself,
briefed senior WB officials Wolfowitz, Cleveland and Jackson
May 4. Wolfowitz reportedly expressed concern, agreed
funding for the affected projects should be halted, but also
agreed that WB should continue operations in Cambodia,
including opening a couple of new projects.


4. (C) Senior Minister and Minister for Economy and Finance
Keat Chhon suspended funding for the four active affected
projects on May 22, following an interim briefing by WB
staff. In a meeting with Porter May 30, during which he
spoke with the Prime Minister directly by phone, Keat Chhon
pledged that the RGC would investigate the alleged fraud. He
said that the RGC did not want a repeat of the WB
demobilization project scandal and sought to cooperate with
the WB in the investigation and asked that he WB suggest
independent auditors who could participate. However, Porter
said the PM insisted that the WB provide detailed evidence of
the fraud. If the Bank did not do so, the PM threatened to
halt its relationship with the WB, indicating he would seek
funding for the projects elsewhere. In separate public
statements, Minister of Rural Development Lu Lay Sreng
complained that there might be corruption among WB officials
and asked why WB auditors who have covered these projects for
several years only now found problems.


5. (C) Porter noted that the WB Investigative Unit was
reluctant to provide its evidence to the RGC since it relied
on sources who might be in jeopardy if their comments were
known. While the WB had provided summaries of evidence to
the Indonesian and Vietnamese governments, the investigative

PHNOM PENH 00001036 002 OF 002


unit reportedly felt that corruption was sufficiently
widespread that it did not want to provide any information to
the RGC. Porter confided that there were differences of
opinion about this inside the WB and said that the Bank would
provide formal notification of the audit results to the RGC
in about one week, at which time the WB would at least
provide the names of the projects involved and the names
contractors believed to have been involved in fraud.


6. (C) Comment: It is not a surprise that the WB audit
uncovered procurement corruption. This case follows on
corruption scandals in a WB demobilization project in 2003
and a World Food Program project in 2004. We are encouraged
that the RGC permitted the audit in the first place, has not
denied the allegations and has promised to investigate. At
the WB briefing May 30, some donors seemed eager to minimize
the importance of the corruption uncovered and reluctant to
press the RGC hard. All expressed some sympathy for the RGC
demands for broader disclosure of evidence by the WB, even if
names could not be named. We take the allegations seriously
and believe that the onus must remain on the RGC to conduct
an effective investigation and punish those responsible. We
plan to encourage other donors to press the RGC to take
advantage of this audit as an opportunity to demonstrate real
commitment to deal with official corruption. We also hope
that revelation of this problem will stiffen the spine of
donors to press for passage of an anti-corruption law which
meets international standards. Wrangling over this scandal
is likely to go on for months. It will be important to keep
public rhetoric down and focus on getting the RGC to take
effective measures to deal with the corruption that has been
uncovered. End Comment.
STORELLA