World Bank Spent More Than a Year Covering Up Destruction of Albanian Village

Managers at the World Bank provided false information to the agency's board of directors about a $39 million, politically-connected European "coastal cleanup" project that led to the destruction and destitution of a powerless village in Albania in 2007 — and then spent nearly two years trying to cover it up, FOX News has learned.

Bank insiders also misled and stonewalled a panel of independent investigators commissioned by the board to investigate the scandal, according to the investigators themselves.

World Bank sources tell FOX News that the panel's report, submitted to the 24-member board in late November, is one of the most damning independent assessments of the anti-poverty agency's behavior in the bank's 60-year history. The bank, the world's largest and most influential anti-poverty institution and part of the U.N. system, is doling out $100 billion over the next three years for development projects.

For its part, once the report leaked in Albania last week, the bank announced that further disbursements of the loan for the Albanian project had been temporarily suspended on Jan. 9 "due to certain outstanding policy and operational issues." A World Bank spokesman did not comment to FOX News by press time.

The scandal, laid out in documents also leaked to FOX News, paints a sharply-detailed picture of how the bank has responded to its own discovery of misconduct and potential corruption.

It also shows how projects ostensibly intended to improve the environment and living conditions in far-flung parts of the world can be abused and distorted in the name of the bank.

Moreover, as FOX reported in a series of articles since October, the bank has suppressed information on many other critical matters — from serious computer security breaches inside the institution to its troubling relations with Satyam Computer Services Ltd., the Indian outsourcing giant that collapsed last month in a billion-dollar accounting fraud.

In the case of Satyam, the bank concluded in 2005 that Satyam had engaged in improper financial relations with a top World Bank official, but did not suspend Satyam as a crucial supplier until February 2008, a suspension that turned into an eight-year ban in September.

Even then, the bank concealed both its corruption probe and the outcome from all other U.N. institutions, some of which also had contracts with Satyam.

But concealing data and dodging questions is now being called "an institutional and systemic issue" in a blistering 115-page report of the Albania incident by the World Bank's independent Inspection Panel, an investigative body created in 1993 by the board to try to ensure accountability in bank operations.

Indeed, the panel's chairman, Werner Kiene — a former U.N. World Food Program investigator and Ford Foundation official — took what he called "the unprecedented step" of sending the board a six-page personal memo chastising the bank's management and staff for having "hampered" and obstructed the probe.

"The Inspection Panel could not have imagined when it recommended an investigation to the board ... that this was going to become one of the most difficult investigations in its 14 years of operation," wrote Kiene. "Had the panel relied on the [initial] categorical assertions of bank management, this important investigation might not have gone forward."

• Click here for the Inspection Panel report and the chairman's memo (Warning: large file).

News of the panel's report was first revealed last week by Balkan Insight, a publication run by investigative journalists in southeast Europe. FOX has obtained the panel's report, as well as Kiene's letter and a separate 12-page "legal note" — ordered up by bank president Robert Zoellick — that was written by the bank's acting general counsel and presented to the board on November 6 — three weeks before the inspection report was issued — in an effort to pre-empt and blunt the inspection panel's explosive conclusions.

It remains unclear just why the World Bank board (and the investigation panel) was misled — and who in Albania or perhaps even Washington may have benefited from misleading it. Senior agency officials and each of the bank's two dozen board members have repeatedly declined to speak with FOX.

But what is crystal clear are the attempts by bank officials to hide something. The panel's report is filled with allegations of the bank obstructing investigators in their year-long probe — in language highly unusual for a bureaucratic document.

Among the litany of charges:

"A sequence of misinformation ... recurrent forms of hampering the panel's access to data ... a seemingly unusual lack of recollection of crucial project events ... a systematic effort to fend off the panel's access to necessary information ... omission of critical facts during staff interviews ... the impression [by the panel] that there had been pre-interview 'coaching' ..."

Summarized the group: "Both at Headquarters [Washington] and in the field it [the panel] received unusually consistent but sometimes factually not correct or misleading information ... [that] contrasted with what the panel already knew."

The essence of the Albania scandal involves Jale, a pinprick of a hamlet occupied largely by poor and elderly inhabitants on a beautiful stretch of Adriatic beach known as Albania's Riviera.

In 2005, according to the investigative report, $18 million in financing was provided for a vaguely-worded $39 million "coastal zone management" project that would clean up the area's shoreline, "strengthen governance" of the zone, "enhance cultural resources," and "encourage community support for sustainable coastal zone management." It would also eventually help turn a section of the coast at Jale into a privately owned tourist resort. (Additional funds would come from the European Commission, Japan, Austria and the Netherlands.)

The World Bank only agreed to the financing after its board of directors in Washington was first assured that the Albanian government, headed by socialist Prime Minister Sali Berisha, had reached an agreement on a "moratorium" on demolitions of the houses of the Jale residents.

That assurance came in the form of a critical sentence in what is known as a "project appraisal document" (or PAD) — the key analysis from staffers that the World Bank's board relies on before agreeing to finance any project.

In the case of Jale, the PAD included a statement that Albania's government and the bank had reached an "agreement" that no structures would be demolished until "certain procedures and criteria" were in place to assist affected citizens.

But the statement was false. No such deal had been struck.

Compounding the lie, in what the panel calls a "Bank Management speech" to the board in 2005, bank officials made no mention that the written statement in the PAD was untrue, even though a draft copy of the same speech (later obtained by the panel) contained a crucial paragraph correcting the faulty PAD.

Just why that paragraph was omitted from the speech, and by whom, remains a mystery to the panel, as well as the bank's acting general counsel — according to both documents.

While never mentioned by name in any of the reports or memos, the Albanian responsible for coordinating the World Bank-financed project was Jamarber Malltezi, an official with the country's Ministry of Public Works — and the son-in-law of prime minister Berisha.

In March 2007, just weeks before Jale was demolished, Malltezi sent a letter to the head of the country's "construction police" — on the official letterhead of the Bank-financed project, according to the panel's report — discussing potential demolitions, "the importance of sustainable development" and the need for the police to act "as fast as possible." Attached to the letter were two CDs with aerial photography — financed with World Bank funds — indicating the houses to be destroyed.

In a second letter, Malltezi stated that he gave the construction police a digital camera, GPS and computer "to control the situation in the field" — as well as vehicles (also financed by World Bank money) to transport and remove the debris after the demolitions.

On April 3, 2007, the villagers were notified that their houses would be demolished. They were given five days to appeal to a local court, which they did, but the construction police did not wait for the hearing. They surrounded the village and — over a four-day period starting on April 17 — demolished the community, amid heart-wrenching scenes of screaming and resistance.

According to the investigators, many of the dispossessed were told they should be happy, as the World Bank would soon be giving them better homes and lifestyles.

Since the World Bank board had been wrongly assured that there would be no demolitions without a formal agreement, there were, of course, no World Bank-financed homes on the horizon. (Moreover, the panel report notes, the bank has done nothing since the demolitions to assist the victims in any way.)

The bulldozings caused an immediate furor in the Albanian media and parliament — if not in Washington — with one politician after another arguing they were illegal under Albanian law.

While there is no proof that the World Bank imprimatur was used for private gain, allegations to that effect have swirled around the country ever since the bulldozing. The government, on the other hand, has tried to hide behind the World Bank ever since.

"The demolition was a must because of the World Bank project in the area," the country's Minister of Transportation insisted to parliament a week after the demolitions. "The bank asked for it."

On the other side, Vangjel Dule, a politician representing Jale in the Albanian congress, has argued that that the demolition was done on behalf of business interests close to Prime Minister Berisha. Both Berisha and son-in-law Malltezi have denied the allegations.

The World Bank's management insisted at the time (and repeated to the inspectors) that there was no connection "direct or indirect" between the bank project and the demolitions. But the panel found a direct link in the bank's financing of the aerial surveys, and described the project's role as "paving the way" for the demolition — which it said was also a violation of the bank's longstanding policy against "involuntary resettlement."

In May 2007, two weeks after the demolitions, the World Bank sent a "fact-finding mission" to the village. But the team didn't speak to any affected residents, and its report to senior management in Washington left out any mention of the furor in the local news media and in parliament.

The report also omitted the role of Malltezi in getting the Albanian police involved in the expropriations. The World Bank did draft a press release to address the allegation that it was linked to the demolitions, then decided in the end not to issue it.

But then, more recently, bank officials tried to cover their tracks with the agency's board.

In September 2008, nearly 17 months after the demolitions, bank managers wrote a retroactive "corrigendum" (or correction) of the PAD — stating that Albania's government would not agree to a moratorium on demolitions — and that such a claim had been "inadvertently" included in the original 2005 PAD.

The "correction" was then hurried to the board of directors before the inspection panel could release its harsh report.

But, astonishingly, no rational explanation was provided in the correction about what had happened over those three years — which the panel warned "may set a very serious and disturbing precedent" for future after-the-fact modifications of PADS.

The correction noted that management had informed the panel about the misrepresentation in the PAD. But even that was untrue — as it was the panel itself that "had to take significant efforts on its own to learn about this misrepresentation."

Not content to leave it at that, the bank's acting general counsel, Scott White, issued a legal note to the board on behalf of bank president Zoellick just weeks before the panel sent its report to the board.

• Click here to see the legal note.

White's carefully-crafted letter concedes some problems while also downplaying their significance. He said he had conducted his own investigation of the incident, including detailed interviews with 20 staffers, and yet concluded that the reasons the PAD presented to the board was never corrected at the time "remain unclear and not fully explained to us."

White went on to ascribe the likely reasons for the inclusion of the false information, and the mysterious decision not to correct it until three years later, as resulting from "errors" or "widespread confusion" or "staff turnover" or "staff inexperience." At one point, he argued that a factor was the holiday schedule of key staffers (including himself) at critical points, leaving decisions to underlings.

The one possibility that White noticeably did not consider is that information was deliberately falsified, and the correction deliberately suppressed.

On the other hand, he conceded that the false PAD could be "a broader tip of the iceberg regarding the confidence that directors can place in PADS more generally, as these are the primary documents on which they rely to inform their decisions on projects."

In conclusion, White said there was "potential for erosion of long-term trust" if the bank's behavior in the Jale case "is not addressed head on."

Unfortunately, the bank is showing no signs of addressing anything head on — at least not publicly. In the wake of the revelations at Jale, and the damage to its relations with the board, bank officials were saying as little as possible — and even that only after the investigative panel report leaked.

"Mistakes were made," said the bank in a statement made last week, and "ways to address the alleged grievances of those affected are under active consideration." It added: "The World Bank is concerned about the errors that were made by World Bank management and staff in the context of the project. In accordance with our internal processes, the Bank is reviewing actions of its staff, and, if warranted, will take appropriate action."

In Albania, meanwhile, Prime Minister Berisha accused the bank investigation panel of slandering his government with a report "full of falsities which come as a result of internal rivalries of certain groups inside the World Bank." He added that the project and his government acted wisely in order to avert control of Albania's southern coast from an unnamed "land mafia."

Berisha then flew to Washington for a whirlwind series of meetings with American political figures. Among other things, he attended a Thursday, Feb. 5 national prayer breakfast addressed by President Obama, as well as individual meetings with Vice President Biden, Secretary of State Hillary Clinton, and Republican Sen. John McCain.

And the World Bank's board? It will meet February 17 to discuss the panel's report and management's official response to it. FOX News has also learned that the agency’s Department of Institutional Integrity has begun its own probe of possible corruption within the Albanian project.

Meanwhile, World Bank president Zoellick is arguing that the bank should distribute even more money on behalf of the world's dispossessed.

In a column in London's Financial Times on Jan. 25, he called for an "Age of Responsibility" that would include developed countries giving nearly 1 percent of their economic stimulus packages to the world's poor.

"The World Bank could manage the distribution of the cash with the United Nations and the regional development banks," he wrote. "We could use existing mechanisms to deliver the funds fast and flexibly, backed by monitoring and safeguards so the money is well spent."

He's certainly right about being able to do it fast, at least. The bank is looking to lend yet another $20 million to Albania, aimed at improving governance and public services. "Negotiations were completed last week between the Bank and the Albanian government on the new project," a bank spokesman told FOX News. "It goes to the Bank's board on March 17 for approval." The specific details of that loan have not been made public.