UPDATE – EIB and corruption: The Ibori case

“In poor countries [corruption] can kill. Money meant for drugs for a sick child, or to build a hospital, can be siphoned off into overseas bank accounts or to build a luxury house”,

Hilary Benn, former UK Secretary of State for International Development

 

Corruption – broadly defined as “the abuse of public or private office for personal gain” – takes many forms, from petty extortion to the amassing of personal wealth through embezzlement or other dishonest means. Its corrosive impacts on development and on democratic accountability have been widely documented. As a financial institution promoting development, excluding corruption is vital.

The EIB has made strong statements against corrupt practices in recent years. Launching the EIB’s revised Anti-Fraud Policy in 2008, EIB president Philippe Maystadt stated that, “It is our responsibility to ensure the proceeds of EIB loans are not misused and this policy therefore reflects our determination to be ever vigilant in seeking to combat fraud and corruption in EIB-financed activities.”

The Anti-Fraud Policy states the EIB’s commitment to “‘zero tolerance’ of corruption, fraud, collusion, coercion [and] money laundering”. It adds too that: “The EIB is committed to ensuring that its loans are used for the purposes intended and its operations are free from prohibited practices,” and that, “the Bank will work to prevent and deter prohibited practices [and] money laundering.”

Every now and than however the EIB forgets what it means in practice to have ‘zero tolerance’ policy on fraud and corruption. In Nigeria for example a lot of money was invested in companies related to former Delta State Governor James Ibori and his associates, all alleged of large scale corruption and money laundering both by the Nigerian anti corruption service and the London Metropolitan Police.

The Ibori case

Through a private equity fund, Emerging Capital partners Africa Fund II (ECP Africa Fund II) the EIB together with other Development Financial Institutions (DFIs) among which UK’s CDC has invested in Nigerian companies reported to be “fronts” for the alleged laundering of money said to have been obtained corruptly by the former governor of Nigeria’s oil rich Delta State, James Ibori.

Nigeria’s Economic and Financial Crimes Commission (EFCC) has alleged links between these ECP-backed companies and Ibori and/or his associates. Specifically:

  • In October 2007, EFCC, Nigeria’s prime anti-corruption enforcement agency, named three companies – Notore, OandO and Celtel – in a sworn affidavit as companies through which funds are alleged to have been corruptly moved on behalf of James Ibori, the former governor of Nigeria’s Delta State. Emerging Capital Partners (ECP) invested in these companies. The affidavit also referred to a fourth ECP-backed company, Intercontinental Bank, as party to an alleged illegal payment.
  • Ibori pleaded guilty for a UK court to 10 charges related to corruption, money laundering and the embezzlement of money in Februari 2012. He already had a criminal record in the United Kingdom. In 2007, a UK court froze assets allegedly belonging to him worth $35 million (£21 million). Ibori fled Nigeria in April 2010, following charges brought against him by the EFCC for allegedly selling off Delta State assets illegally to pay off a private loan from Intercontinental Bank while he was still governor. He is accused of stealing $290 million (£196 million) from Delta State. Ibori’s dealings with Intercontinental Bank (on which ECP had board representation) are central to the charges. On 13 May 2010, he was arrested in Dubai at the request of the London Metropolitan Police. On the 15 April 2011 he has been extradited to the UK where he has been brought to court
  • Two directors of ECP-backed companies – Henry Imasekha and Michael Orugbo – were also named by the EFCC as part of its 2007 investigations into Ibori’s alleged “corruption, diversion and misappropriation of public funds, stealing and money laundering”. In EFCC ’s October 2007 affidavit, Imasekha was described as “the character moving funds in Celtel, OandO and Notore Chemical Industries.” Imasekha has also been charged as a co-conspirator in the money-laundering case against Ibori and several of his associates that have been sentenced to jail in the UK in the autumn of 2010. In May 2010, Imasekha was reported to have fled to Ghana, following fresh corruption charges against Ibori.
  • Intercontinental Bank, in which ECP invested, collapsed in 2009 and had to be bailed out by the Central Bank of Nigeria (CBN) – in effect, by Nigerian citizens to the detriment of the country’s development. CBN sacked the bank’s executive directors and ordered an investigation into a number of non-performing loan portfolios, including unsecured loans to Ibori’s associates. Thomas Gibian, ECP’s current Executive Chair, has reportedly been a board member of Intercontinental since 2007.

The links that Nigeria’s EFCC and other law enforcement agencies have alleged between ECP-backed companies in Nigeria and associates of James Ibori raise many questions about the due diligence performed by ECP and the EIB.

James Ibori and his associates named in the widely spread EFCC affidavit can be considered as Politically Exposed Persons and thus it can be logically assumed that their identity was also known to the EIB and the ECP. Nevertheless both the EIB and ECP didn’t bother to investigate the case and instead kept on disbursing money to the companies mentioned in the affidavit.

This didn’t change when Dotun Oloko, a Nigerian anti-corruption campaigner, repeatedly tried to get in contact with the EIB and other DFIs involved to alert them about the companies receiving EIB money in Nigeria. Not only did the EIB and other DFIs initially refuse to meet with Mr Oloko in the presence of a confident, it was proven that the UK’s Development agency DfID didn’t properly protect Mr Oloko’s identity as a whistleblower.  This is a serious violation of the the duty to protect whistleblowers as they take considerable risks especially in countries where the rule of law is weak, like Nigeria. As a consequence Mr Oloko is not able to return to his mother country Nigeria.

Because of the seriousness of the allegations the case was brought to the UK parliamentary ombudsman who investigated how DfID and CDC, the UK’s DFI which is fully owned by DfID, handled this case. At the end of 2013 it presented its sometimes devastating conclusions:

Both DfID and CDC have been accused of maladministration for handling the case. First of all Mr Oloko’s identity should have been much better protected. Additionally, CDC should have referred the allegations made against ECP to the police, which it didn’t.  The Ombudsman also concluded that CDC failed to communicate effectively, didn’t “act openly and accountable” and didn’t deal with the case in a transparent way. The report was very critical for the lack of due diligence of the beneficiary companies of the private equity fund and the lack of power CDC or DfID have over these funds’ managers.

More specifically the Ombudsman’s report reveals that:

  • Many fund managers have simply refused to implement CDC’s Business Principles, without CDC being able to take any action against them;
  • Even after CDC made it a contractual obligation for fund managers to sign up to their new investment code, CDC has only “limited rights” to the accounts and records of fund managers;
  • CDC has no rights whatsoever to force a fund manager to withdraw from an investee company

Until now very little was known about the relationship between an investor in a private equity fund and the manager of that fund. In the report CDC clearly admits it has almost no power over the manager and where the intermediary invests in. This is obviously problematic especially when using public money aimed for development. The ombudsman warned especially for these types of intermediated lending and the related corruption risks. As an investor in the same fund using the same instruments, these problems also apply to the EIB and other public investors investing in private equity.

Surprisingly around the same time OLAF, the EU anti-fraud office, finalised its investigation about the EIB, coming to the contradictory conclusion that it didn’t find any evidence of fraud. OLAF also stated that it might consider administrative recommendations. We are awaiting these and a more detailed explanation how it came to these conclusions.

As always transparency and corruption are two sides of the same coin. In other words, transparent lending is indispensable to avoid corruption. And this is exactly what the mechanisms used by the EIB fail to do. Lending through private equity funds and other financial intermediaries such as commercial banks, is a practice opaque by nature, as it is only possible to follow the money until the financial intermediary in question. What happens afterwards remains covered under the veil of business confidentiality. Consequently the final beneficiary as well as the social, environmental or economical impact of these loans remains mostly unknown.

In addition, by outsourcing some of its tasks in this way, the EIB is also outsourcing some of its responsibilities. Therefore the reliance on third parties for the carrying out of due diligence is a dangerous trend that can seriously undermine the quality and positive outcome of the EIB’s lending.

Finally this case shows the need for more democratic control over EU development funds. The money the EIB lends in Africa comes from the European Development Fund and is invested through the Investment Facility. This instrument is not under the control of the Court of Auditors’ Statement of Assurance. This means it can not be controlled by the EU/EP. Bart Staes has denounced this in the Parliament while he was the rapporteur on the discharge in respect of the implementation of the budget of the Eighth, Ninth and Tenth European Development Funds for the financial year 2009.

Related reports:

  • Hit and run development:
    Some things the EIB would rather you didn’t know about its lending practices in Africa, and some things that can no longer be covered up

Related events:

Related Articles:

Related Blogs:

Fueling an anti-development machine

Related policy briefing:

Briefing paper on Emerging Capital Partners case and review of European law on money laundering

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