-Caveat Lector- NY TIMES August 19, 2004 A Secretive Bank Faces Calls for Transparency By DOREEN CARVAJAL
International Herald Tribune LUXEMBOURG - The world's largest and most obscure public bank rises above the Kirchberg Plateau here in the Grand Duchy of Luxembourg like a cream and concrete layer cake, sheltering a potent blue-chip financial institution that has, ever so discreetly, managed to outspend and outborrow the much better known World Bank in Washington. Like the World Bank, the European Investment Bank is a nonprofit institution whose member-owners are governments - in this case, the 25 nations of the European Union. On almost any given day at the bank's hushed, art-filled headquarters, its executives borrow millions in the international money markets - a ceaseless torrent of everything from euros to Polish zlotys - and lend it out again, financing power stations in Northern Ireland and shiny trams in Barcelona, oil pipelines in Pakistan and geranium plantations in Kenya. Most of the people who ultimately benefit from the projects have no idea that the European Investment Bank is behind them. But without the bank and its immense resources - it advanced more than 42 billion euros in loans last year ($51.8 billion) - many of them would not have flourished. Those who know about the bank are not necessarily grateful. Critics call the bank a phantom power, the most secretive public institution lending money around the world, and say that its lack of transparency has made it possible for conflicts of interest to remain unchecked. The bank zealously guards its documents, and reveals little information about an activity that accounts for a third of its lending, so-called global loans. Until now, it has refused to disclose information about the backgrounds or votes of part-time board members who make decisions about loans that may affect their own business interests. Nor is the bank forthcoming about some outside activities of its executives. But it has come under increasing scrutiny from a mixed assortment of critics - environmental advocates, a former banker, a fired civil servant - who have individually sought to piece together a record of the bank's decision-making. Critics cite several examples of potential conflicts of interest connected with the bank's lending activities: �The bank's published records indicate that an open-pit copper mine in Kansanshi, Zambia, benefited from a low-interest loan of 34 million euros ($42 million). The bank did not disclose that a chief shareholder in the open-pit mine was also a joint owner of a copper mine whose chairman was a member of the bank's board. �In Italy, bank records show that a cultural organization, the Treccani Institute, received a 22-million-euro loan to publish new encyclopedias and digitize its database. One board member of the institute was a director of the bank. �In France, the bank approved a loan of 100 million euros ($123 million) earlier this year to help Air France buy 15 Airbus A-318 aircraft. One of Air France's board members was a director of the bank. In other cases, members of the European Investment Bank's board presided over commercial banks that received millions of euros from the European bank in the form of credit lines or global loans. The commercial banks act as intermediaries, relending the money in smaller amounts to local borrowers and collecting fees in the process. In one case, a French-Belgian commercial bank, Dexia, received more of the global loans than rival banks in France over a five-year period ending this year. During the term, Dexia's chairman was on the European bank's board. Executives of the bank say that it has safeguards against self-dealing. "Directors have to report positions elsewhere" to the bank, the bank's spokesman, Orlando Arango, said. "At the beginning of each board meeting, members must declare their potential conflicts of interest, as well as leave the room before discussion begins." Created in 1958 under the Treaty of Rome, the bank has evolved into an international financial player on the strength of its ability to borrow very cheaply and its willingness to make long-term loans at low rates for capital projects, backed by 163 billion euros ($201 billion) in subscribed capital from its member nations and its freedom from the need to return a profit to shareholders. "They're kind of this ghost bank of Europe," said Hannah Ellis, who has been pressing for more information as a representative of Friends of the Earth, an environmental group, in London. "They have this unusual status of being a bank and a public institution," Ms. Ellis said, "and they tend to play off both roles when it suits them." The bank was originally created mainly to help knit Europe together by financing development in its poorer regions, and Europe is scattered with landmark projects that it backed, including the soaring Vasco da Gama Bridge in Lisbon and the high-speed rail tunnel linking France and Britain. But the bank long ago outgrew its original, fairly modest ambition, and its objectives have expanded to include support for research, health and education, and economic development inside and outside Europe. It now makes loans in more than 150 countries, with 10 percent of its lending outside Europe. It is considering whether to take a role in financing the reconstruction of Iraq and whether to back Galileo, a proposed European satellite navigation system to compete with the American-run Global Positioning System. As its purpose evolves, the bank is moving into a shimmering postmodern steel and glass building meant to be a symbol of openness. "The mission of E.I.B. is to bring long-term financial support to projects that contribute to the policy objectives of the European Union," the bank's president, Philippe Maystadt, said. "It's a bank, but not an ordinary bank." Mr. Maystadt, who has run the bank since 2000, said that one pillar of his strategy was transparency. But critics say the bank lags comparable institutions like the World Bank that are also facing pressure to become more open. The World Bank's board, for example, is considering a proposal to release minutes of its private meetings and votes. Ann Florini, a senior fellow at the Brookings Institution, a Washington research group that focuses on economics and foreign policy, said that typically, institutions like the European bank follow a "diplomatic model." "Everything is secret till there's a reason to release it," Ms. Florini said. But she said the approach tended to breed suspicions that "if they're secretive, they have something to hide," and that the bank would be better off operating more openly. A coalition of some 60 advocacy groups, including Friends of the Earth and the CEE Bankwatch Network, have been pressing the bank to release more information. Last fall, a small Dutch bank, ASN, sold off its holdings of European Investment Bank bonds - some 4 million euros' worth - as a form of protest; it did the same with its World Bank bonds. The European bank makes its lending decisions at a monthly meeting of its board, which has 26 part-time directors and 16 alternates. Last year, the board approved about 300 loans, deciding the size, the interest rates, the repayment terms and the guarantees. The bank's policy is to keep details of the board's votes secret. But it is clear that as the bank's scope has widened, its loan priorities have been interpreted broadly. Today even the wealthiest areas can qualify for its help, including tiny Luxembourg, one of the most prosperous nations in the world. In 2002 a local company, Cargolux, received a 73.6 million euro loan to buy Boeing cargo jets. According to Ewald Nowotny, a former vice president of the bank, the Cargolux loan sparked a contentious debate behind the scenes. "Couldn't they go to the capital markets and get it commercially? Yes, of course," Mr. Nowotny recalled of the discussions. Even so, he said, "every country wants to see that some loans go to its own country." Mr. Maystadt, a former finance minister of Belgium whose understated manner is as low-key as the bank he heads, said that its basic rule was to finance projects only if the bank could add unique value. Within limits, he said, the bank is becoming more open. In June, he added, its board endorsed a new policy calling for the bank to post short biographies of new directors on its Web site, and to publish information about abstentions from board votes. But the policy will not be applied retroactively to current directors or past votes. "We are not interested in publicity," Mr. Maystadt said. "I think it's a long tradition in the bank. It was low profile, but that means also sometimes there was some isolation." Earlier this year, the bank's relationship with the European Parliament was severely tested by a Spanish legislator, Monica Ridruejo. A former executive in the banking industry, Ms. Ridruejo drafted a report that criticized the European Investment Bank for failing "to comply with good corporate governance rules." Ms. Ridruejo also tried, without success, to obtain information about the revenue that commercial banks earned by acting as intermediaries for the European bank. "These global loans are subsidizing the banking community," Ms. Ridruejo said. "The banks that get these loans are not passing on the good interest rates to the beneficiaries, so they get an additional profit." Other members of the Parliament objected to Ms. Ridruejo's draft, which they characterized as a publicity stunt, and it was transformed with amendments that praised the bank for transparency. As that debate was winding down, another was brewing. A Luxembourg accountant, Robert Dougal Watt, who had been dismissed from the European Union's financial watchdog, the Court of Auditors, after he disclosed evidence of nepotism at the court, came across information about a senior bank executive's outside business activities that seemed to violate the bank's ban on "professional activity outside the bank" without authorization. In Luxembourg public business records, he found that Patrick Klaedtke, then the bank's financial controller and now its chief of information technology, had held a series of board positions at five small, interconnected holding companies, including one, Simon S.A., where his board term was scheduled to run through 2006. Asked about the matter, a spokesman for the bank at first denied that Mr. Klaedtke had served on any company boards. But Marius Kaskas, another director of the five companies, confirmed that Mr. Klaedtke, who he said was a longtime friend, had joined the boards as a favor to him. Mr. Klaedtke now says that he had an old verbal agreement with Mr. Kaskas, a relationship that "slipped my mind." He said he had never attended meetings at the companies and knew nothing about their activities. Mr. Kaskas said that Mr. Klaedtke would be dropped from the boards. In the case of the loan to the Zambian copper mine, it is the outside affiliations of a member of the bank's board, not an executive at the bank, that have drawn criticism. Barrie Ireton, chairman of Koncola Copper Mines, served on the board at the time the loan was approved; a joint owner of Koncola, ZCCM Investment Holdings, also owned a 20 percent stake in the mine that benefited from the loan. In an interview, Mr. Ireton said that although it was common for members of the bank's board to declare an interest in a project at the outset of a loan approval meeting and then go on to take part in discussions about it, he did not participate in the discussion of the copper-mine loan, and abstained from the vote. "I was being rather a purist, perhaps," he said. Mr. Ireton said he could not recall another case in which a board member withdrew from the approval process as he had. With such a large board, Mr. Ireton said, the directors do not always know the backgrounds of their colleagues - like Pierre Richard, the chief executive of Dexia, the French-Belgian bank who is also a director of Air France. Dexia received three global loans totaling 450 million euros in the last two years, and Air France received loans this year to buy aircraft. Mr. Richard's press office said he was unavailable for comment and referred questions to the European Investment Bank. Earlier this spring, the European bank's entire board resigned, so that it could be reshuffled to include representatives of new nations joining the European Union. The bank has not made announcements about the backgrounds of the new members. Mr. Richard, it turns out, is no longer on the board; now he is an expert consultant to the bank. 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