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