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New report raises alarm bells about World Bank investments in Vietnam’s financial sector

Added 23 May 2013

In early May, the UK-based organisation Global Witness published its latest report, Rubber Barons, which includes alarming findings about the impact of investments by the World Bank’s International Finance Corporation (IFC) in Vietnam’s financial sector. The report illustrates some of the failures highlighted in the recent Compliance Advisor/Ombudsman’s audit report and supports calls made by civil society organisations (CSOs) for a review of IFC lending to financial intermediaries. 

Although the land-grabbing crisis in Cambodia and Laos is the core focus of the report, its findings also expose the role of international financiers as key drivers of these land grabs. Natural rubber is a precious resource, as is the land where it can be grown. High rubber prices are increasing the pressure to allocate large areas of land for rubber plantations.

According to Rubber Barons, the IFC and Deutsche Bank have been instrumental in the acquisition of vast amounts of land for growing rubber in Cambodia and Laos by Vietnamese companies operating abroad. Two of the most significant players in the rubber sector are the privately owned company Hoang Anh Gia Lai (HAGL) and the state-owned Vietnam Rubber Group (VRG).

The role of the international financiers: what about IFC’s standards and mandate?

Rubber Barons is a timely illustration of the findings of the audit published by the Compliance Advisor/Ombudsman – IFC’s arm’s length watchdog – and challenges IFC’s strategy for investment in the financial sector and its assertion of being a global leader in environmental and social responsibility.

The report identifies various relationships between the IFC, the private sector lending arm of the World Bank and Deutsche Bank, a German global banking and financial services company that is signatory to the UN Principles of Responsible Investing, and the rubber companies themselves:

  • The IFC provides financing to HAGL through Dragon Capital Group Ltd (Dragon Capital), a Vietnam-based investment group specialising in emerging financial markets.
  • The IFC has been an institutional shareholder in Dragon Capital since 2002 and currently holds an 8.8% share in the group.
  • Deutsche Bank holds US$4.5 million in shares in HAGL through its DWS Vietnam Fund Ltd.
  • Deutsche Bank holds 1.2 million shares in Dong Phu, a member of VRG, which are currently worth US$3.3 million.

However, the IFC is not the only public institution involved in Dragon Capital. The group’s website mentions that the French government’s development finance entity, Proparco, is also an institutional shareholder. Additionally, the Asian Development Bank and several European development finance institutions, among them the Dutch FMO, the Finnish Finnfund and the Belgian BIO, have also invested in the Mekong Brahmaputra Clean Development Fund L.P., a fund managed by Dragon Capital that describes itself as “the first fund focused on development using Clean Technology in the Mekong River Region” (South-East Asia).

To make matters worse, the report also mentions that “companies also appear to be hiding their beneficial ownership [the ultimate owner] of these rubber plantations behind complex layers of shell companies and through opaque concession management processes”. This has allowed them “to disguise the fact that they have massively exceeded Cambodia’s legal limit on land holdings”. The problem of using hidden ownership to facilitate tax evasion, corruption and other bad practices has been highlighted by Eurodad, and is the focus of a civil society coalition push to change EU rules to make this impossible for European companies.

As the report clearly mentions, these investments and practices conflict with IFC and Deutsche Bank’s public commitments on ethics and sustainability, as well as the World Bank’s core mandate to end global poverty.

Specifically, IFC performance standards require that all recipients of investment (directly or through financial intermediaries) “comply with national laws and minimise negative environmental and social impacts”. The revised 2012 Sustainability Framework has even expanded the IFC’s specific environmental and social objectives to having a “positive development outcome”. However, since the performance standards were only introduced in April 2006 and the IFC does not apply them retrospectively, its financial investments in HAGL – although still current – are not covered by any of these policies. According to the report, “projects approved before 2006 apply the IFC’s less robust 1998 Environmental and Social Review Procedure”.

In line with the CAO audit report, Rubber Barons concludes that “the IFC failed to undertake adequate due diligence or oversight to ensure that projects it is financing are in compliance with national laws or IFC’s own commitments”.

Key recommendations and next steps

According to Global Witness’ report, “it is critical that the IFC and Deutsche Bank both urgently take action firstly to require HAGL and VRG to bring their operations in line with national law and their own environmental and social commitments”. If nothing happens within six months, “the IFC and Deutsche Bank should immediately divest from all its financial interests”.

Additionally, and in line with Eurodad’s report on secret structures, Global Witness also calls to “end secrecy and improve accountability around [land] concession, allocation and management”, specifically by establishing, disclosing and updating registries of companies’ beneficial ownership.

Given these findings, and the lack of IFC’s commitments in its response to the CAO audit, 45 CSOs from around the world, including Eurodad and its members, have recently sent a letter to the World Bank President calling for “a revised IFC response to the CAO audit that acknowledges the fundamental flaws found in financial sector investment and makes a commitment to develop a new strategy for investments in this sector”. Eurodad hopes that the IFC will develop an effective action plan to respond to these concerns in a timely manner.