Private Sector


IFC funding to financial intermediaries: unfit for purpose

31 March 2014

The International Finance Corporation (IFC), the Bank’s private sector arm, is again in the spotlight over investments in the financial sector, with accusations that these investments are not transparent and have resulted in harm to local communities (see Update 84, 81, 79). In a recent example it has been linked to poor due diligence of a financial intermediary (FI) that has been accused by campaigners of financing a “massive land grab” to create sugar plantations in Cambodia.

An IFC investment in ANZ Royal Bank (ANZRB), a Cambodian private bank, and its loans to a 23,000 hectare sugar plantation in Kampong Speu province are at the centre of the land grabbing allegations. In December 2010 the IFC approved a $15 million credit risk guarantee, partly subsidised by a grant from the Bank, to “allow ANZRB to expand its loan portfolio to agriculture sector in Cambodia with reduced risks”. The agreement included the provision that “ANZRB will be required to designate individuals to monitor environment and social aspects of its portfolio activities, and will need to submit an annual environmental performance report to IFC.”

In late January it became clear that ANZRB, a controlled entity of the Australian bank ANZ and part owned by Cambodian conglomerate the Royal Group, had invested in plantations run jointly by Phnom Penh Sugar Company and Kampong Speu Sugar Company. According to a September 2013 report by Cambodian NGO Equitable Cambodia and US NGO Inclusive Development International, the plantation “encroaches on more than 2,000 hectares of farmland belonging to approximately 1,100 families in ten officially recognised villages of Amliang commune, Thpong district and at least another five unrecognised villages.”  The report also alleged that the plantation had a raft of other violations including widespread use of child labour.

The FI model is a serious challenge to IFC's supposed commitment to environmental and social sustainability.Lakshmi Premkumar

Given ANZRB’s failure to oversee its own client’s activities, at issue is whether the IFC appropriately enquired about and supervised the bank. Eang Vuthy of Equitable Cambodia, said: “The 2010 environmental and socio-economic assessment that ANZ appears to have relied upon for its due diligence is a whitewash.” Natalie Bugalski of Inclusive Development remarked that “this certainly calls into question the rigour of IFC’s due diligence on ANZ’s social and environmental system before taking them on as an FI client.”

IFC facing yet more formal accusations

Three further IFC investments in the financial sector are continuing to cause controversy. In early February, the IFC’s accountability mechanism, the Compliance Advisor Ombudsman (CAO), registered a case related to claimed land grabs in Cambodia by Vietnamese rubber companies, which NGOs have linked to the IFC through its financial sector client Dragon Capital (see Update 86). The complaint details how the Jarai, Tampoun, Kachok and Kroeung people in Ratnakiri province of Cambodia have lost land and suffered devastating impacts to their livelihoods, cultural practices and way of life at the hands of the IFC’s sub-client.

In a February open statement, the Guatemalan NGO Departmental Assembly of Huehuetenango (ADH) referred to a five-year conflict over two hydroelectric projects on the Cambalam river being built by Hidro Santa Cruz, a subsidiary of Spanish company Hidralia Energía, and financed by an IFC financial sector client Corporación Interamericana para el Financiamiento de Infraestructura (CIFI). The NGO said the projects caused “persecution, intimidation, and co-option of community leaders. There have been assassinations, imprisonment; there is fear and terror” (see Bulletin Feb 2014).

Doubt is being cast on the IFC’s January action plan to address the CAO’s findings that it violated policies in a loan to Dinant Corporation, a palm oil producer with direct IFC investment and investment through IFC financial sector client FICOHSA (see Observer Winter 2014). The action plan called for “collaborat[ion] with proper authorities to investigate any credible allegations of unlawful or abusive acts”, but a February report by international NGO Human Rights Watch found that “regardless of whom the victims or suspected perpetrators were, or whether the crime appeared to be linked to land disputes, prosecutors and police consistently failed to carry out prompt and thorough investigations. Indeed, public prosecutors, police, and military officials acknowledged in meetings with Human Rights Watch that investigations into these cases had been inadequate or nonexistent.”  A CAO investigation into IFC financing of commercial bank FICOHSA is due in June.

The Bank and Cambodian land disputes

The World Bank has a history of very public disputes over land acquisition in Cambodia. Before the current controversy over rubber and sugar plantation land grabs, the Bank ceased lending to Cambodia over previous forced evictions. Starting in 2006 the Boeung Kak lake community in the Cambodian capital Phnom Penh challenged their forced displacement, linked to a World Bank land titling project, including a request for investigation by the Bank’s Inspection Panel. A February 2011 letter from the Boeung Kak community to then Bank president Robert Zoellick demanded a cessation of Bank lending to the country until restitution was provided. The Bank briefly stopped lending and insisted on resettlement for the community, though some of the families have still not received compensation for their land. (see Observer Spring 2014, Update 86, 81, 75).

Flawed FI action plan

In mid March, 26 NGOs, including Equitable Cambodia and Oxfam International wrote to Jin-Yong Cai, head of the IFC, about the IFC action plan that was developed in September 2013 in response to a February 2013 CAO audit of the IFC’s FI lending portfolio. The groups said that the plan was “not yet adequate.” The groups “do not accept” the IFC’s current approach. The letter urged Cai to “immediately revise this action plan to comprehensively address the CAO audit’s findings” and “to fundamentally rethink the nature, purpose, modalities and limits of” the IFC’s investments in the financial sector.

In a briefing attached to the letter, the groups asked for better sequencing of capacity building and investment, better risk categorisation of FI projects, stronger contractual arrangements with clients, more transparency, enhanced supervision, and third-party verification of outcomes and impact.

Lakshmi Premkumar of Indian NGO Programme for Social Action said: “The use of financial intermediaries by the IFC has created unaccountable and non-transparent channels of funding. In the case of GMR Kamalanga Energy Limited [GKEL, see Update 85, 76] in Odisha, it was difficult enough to merely track the fund back to the IFC. Had the project been directly funded by the IFC it would have been in violation of at least six of IFC’s eight performance standards. The FI model is a serious challenge to IFC’s supposed commitment to environmental and social sustainability.”