Documents May Give Wolfowitz New Lifeline in World Bank Scandal

World Bank President Paul Wolfowitz’s career was hanging by a thread today, but new revelations in internal bank documents released by the bank seemed as if they would provide him a stronger lifeline.

Since Thursday, the 24-member board of directors of the bank – the world’s largest and most influential anti-poverty institution — has been locked in meetings that might decide whether to censure or sanction Wolfowitz — or even demand his resignation.

The issue: whether Wolfowitz broke or bent bank rules in 2005 to enable a large salary hike for his girlfriend, a longtime bank staffer named Shaha Riza, at the same time that he helped to arrange her transfer to the U.S. State Department to avoid a conflict of interest. Her net wages jumped from $132,660 to $193,590 by 2006, which made her – by far — the highest paid person at the State Dept.

Amid the controversy, calls for his resignation have come from the bank’s staff association – which makes up half the bank’s 10,000 employees – as well as from anti-poverty organizations, former bank officials, and even the editorial board of the Financial Times.

But one question among many was whether the alleged scandal had become a way to push back at Wolfowitz, who had angered many insiders, including board members, with his aggressive campaign to cut back on corruption at the $20 billion-per-year-year lending institution. Many of those most irked at Wolfowitz’s tough stance were sitting on the board that is now judging his actions.

The White House, which appointed the former No. 2 man at the Pentagon to the job traditionally held by an American, says it is standing firmly behind Wolfowitz, and predicted he would serve out his full five year term. And on Friday evening, Canada’s Finance Minister, James Flaherty, also stepped into the fray, declaring his view that Wolfowitz had done nothing wrong.

Earlier, the bank board released a short statement saying it had determined that Wolfowitz dictated the terms of Riza’s promotion and salary increase to the bank’s head of human resources without a review of those terms by an ethics committee or the board’s chairman. The board promised it would “move expeditiously to reach a conclusion” about what actions to take next.

But FOX News has analyzed more than 100 pages of internal bank documents dating to 2005 that paint a far more complex portrait of the case – and suggests that the bank’s own ethics committee had known the terms of the settlement with Riza for at least a year.

The documents show that while Wolfowitz did indeed dictate the lucrative terms of Riza’s salary to the bank’s human resources chief, he also took steps to try and determine if what he was doing was right – seemingly trying to navigate his way through an arcane bureaucracy with a maze of unusual rules and procedures.

The documents also show that, while many board members have claimed that they only learned the details of Riza’s case – and salary hike — this week in newspapers, the board’s Ethics Committee has been fully aware of all the details since early 2006, when it conducted a probe and determined that the allegations “did not appear appropriate for further consideration.”

The documents paint a more sympathetic picture of Wolfowitz and his efforts to deal with the situation than what’s been revealed in the press thus far. And they shine a light on the bank’s board as having far more knowledge of the case than members have let on in off-record talks with the media.

They also raise the specter of whether politics is driving at least some aspects of the scandal – as Wolfowitz and the board have long had a tense and sometimes acrimonious relationship over such vital issues as how to deal with corruption among bank borrowers who are also the institution’s membership.

The tale begins in mid-2005 when Wolfowitz was nominated by the Bush Administration to run the bank. Before signing his own contract, he notified the bank’s general counsel and the board’s Ethics Committee that a potential conflict of interest existed, due to his longstanding relationship with Riza, who had joined the bank in 1997.

Wolfowitz didn’t start his presidency until July 1st of that year. But tensions were brewing about the Riza matter even before then, according to a letter to the bank’s general counsel in May 2005 from Wolfowitz’s lawyer at the firm of Williams & Connolly. “Given the attitude that the bank has expressed with respect to this matter, we believe that this matter must be resolved before a contract is signed,” his lawyer wrote.

The records show that it was partially resolved: Before his first day on the job, Wolfowitz on his own provided a statement to the board recusing himself from “any personnel actions or decisions” regarding Riza.

His next step – which he worked on through the summer – was to try to negotiate a solution in which Riza could remain at her job – allowing the two to continue to have “professional contact” at the bank – and to insulate himself from any personnel and salary decisions relating to her. But the chairman of the bank’s ethics committee at the time, Ad Melkert, wrote back that bank rules prevented such an arrangement. (Melkert, a former Dutch politician, is now the No. 2 official at the United Nations Development Program.)

To solve the dilemma, Melkert suggested three options: External service at another agency (with Riza remaining on the bank’s payroll, along with a promotion to make up for her sudden career predicament), a re-assignment to a bank unit that didn’t fall under Wolfowitz’s domain (an unlikely option, since there were very few such spots), or a separation agreement with a lump-sum payment that would probably have given Riza up to $66,000, according to the documents.

“A larger payment could be made at managerial discretion,” according to a document identified as an “Ethics Committee Discussion.”

The ethics committee left it to the bank’s management to work out the details of Riza’s deal, after which it would inform the full board that the matter was resolved.

Riza ultimately concluded that the external service option was the best, but she wasn’t happy about being forced to leave. Nor was Wolfowitz, whose communications with Melkert were sometimes testy, according to the documents.

The paper trail plainly shows that the Wolfowitz-Riza employment problem was hardly a big secret among top officials at the bank. The records show that the board’s ethics committee held its own meeting at the time with the bank’s human resources chief, Xavier Coll, and with the bank’s internal anti-corruption unit.

“Resolution of the present case is of great interest to staff who are watching to see whether ‘special people get special treatment,’ ” states an account of that meeting. “Indeed, the ethics officer has been approached in the corridors and asked questions about the case under consideration by the ethics committee.”

The documents also show that the ethics committee was sensitive to the need to compensate Riza for her trouble, which she hardly brought on herself. In a memo from Melkert to Wolfowitz on July 27, 2005, the ethics committee chairman proposed “that management [Wolfowitz] provide some form of additional personal benefit to offset the negative career impact of the staff member [Riza]…Possible benefits include promotion, or additional salary increase.”

In fact, Wolfowitz helped Riza to get both items – a promotion and a salary hike – and it’s the amount of the salary hike that is most in question today.

But FOX News’ examination of the documents shows that in many ways, Wolfowitz was left to himself to decide what would make sense— despite the fact that he had initially asked to be recused from any such involvement.

Click here for July 2005 letter from Wolfowitz seeking recusal from Riza personnel matters

In August 2005, ethics committee chairman Melkert told Wolfowitz that bank rules prevented him (Melkert) from having direct talks with Riza, as Wolfowitz had suggested. Instead, Melkert proposed that human resources chief Coll do it — and he and the bank’s then-general counsel, Roberto Danino, briefed Coll on the matter.

That paved the way for Riza herself to meet with Coll, and that’s where the tale gets murky as to whether Wolfowitz stumbled and overstepped his reach. Rather than allowing Coll to work out a deal with Riza, the records seem to show that Wolfowitz directed it.

In a letter on August 11 to Coll, Wolfowitz wrote: “I now direct you to agree to a proposal which includes the following terms and conditions…she has qualified for and should receive a promotion…and salary of $180,000 net.” At the time, Riza's salary was slightly more than $130,000.

Click here for August 2005 memo from Wolfowitz regarding terms of Riza deal, and follow-up note to Ethics Committee

But before the ink dried on the deal Wolfowitz also instructed an aide to hire an outside law firm to review the terms. The ethics committee chairman had “instructed the president to resolve the case consistent with the guidance they offered,” wrote Robin Cleveland, one of Wolfowitz’s aides, in September of 2005. “In order to assure the bank’s interests were adequately protected, [he] asked me to look at outside law firms.”

The law firm Gibson Dunn & Crutcher was retained and after reviewing the Riza deal, they determined it was a “reasonable resolution,” according to a letter from a Gibson partner, who added that U.S. State Department lawyers reviewed and were about to sign off on the deal, too.

In essence, the case against Wolfowitz today is whether he was under any obligation to report back to the ethics committee on the specific financial terms of the deal that Riza received. But the documents now reveal that the board members on that committee regularly debated the pros and cons of various solutions to the Riza matter, and also discussed how big a salary jump she might get. And there was apparently nothing to stop Melkert himself from picking up a phone and asking Wolfowitz how it had worked out.

In fact, in October 2005, Melkert wrote to Wolfowitz to formally acknowledge the case was closed. (The board was also informed that the “conflict of interest was dealt with appropriately.”) And in November, in a handwritten note, Melkert wrote Wolfowitz “just to confirm the outcome regarding this extraordinarily difficult issue,” and to thank him “for the very open and communicative spirit of our discussions, knowing in particular the sensitivity to Shaha.” He even invited Wolfowitz and Riza to join him at “our place” for a social gathering.

Finally, in January 2006—some 14 months before the scandal exploded this week— the ethics committee had another opportunity to revisit the issue. An anonymous whistle-blower calling himself John Smith wrote a lengthy letter to the committee taking exception to Riza’s deal in great and accurate detail.

The ethics committee, led by Melkert, met on the subject with the bank’s anti-corruption unit – which investigates internal wrongdoing. According to the documents examined by FOX News, after what Melkert called a “careful review,” the committee decided that the case had been resolved back in autumn 2005 and didn’t “warrant any further attention.” Case closed – again.

Click here for February 2006 letter to Wolfowitz from Ethics Committee dismissing Riza allegations

Has this week’s furor over Wolfowitz’s actions been all a tempest in a boardroom teapot? Wolfowitz himself has apologized to the bank’s staff for mistakes in his handling of the issue, and has said he would accept the board’s decision on what would come next.

The scandal was clearly exacerbated this week by shifting explanations by Wolfowitz’s top aides, as well as his own dodging of questions from reporters. Yet with the public declaration by Canada that he was blameless – the country’s finance minister says that “selective leaks” have colored the situation — the political tides may have turned decisively in his favor.

But one intriguing issue still unexplained was why the pay hike question suddenly boiled up again, just as the World Bank was holding its annual spring meeting, and Wolfowitz was ripe for embarrassment.

The long-term question was whether the fuss had weakened Wolfowitz’s already diminished ability to push through a reform agenda for the bank—and whether that, indeed, had been the point of the leaks in the first place.