World Bank Whistle-blower. Confidence in the Dollar as an International Currency Is Waning. The End of Bretton Woods?

Karen Hudes is an attorney and economist who served 20 years in the World Bank’s legal department. The World Bank refused to provide the report of the Executive Search Firm to U.S. Congress following Hudes’ disclosure of internal control lapses during her interview for General Counsel of the World Bank. Karen Hudes describes the corruption in the international financial system and threat to democracy in the U.S. as follows:

Karen Hudes (nsnbc):  The failure of the press to report accounting scandals at the World Bank involving the U.S. Treasury Department, the Federal reserve, U.S. Congress, and the federal courts is eroding confidence in the dollar as international currency.

Legislation in U.S. states to recognize gold and silver bullion coins as legal tender and requests by countries to repatriate their gold held by the Federal Reserve are exposing financial institutions who control the media and the Federal Reserve.

Convertibility of Dollar into Gold

The German Federal Bank, Bundesbank, announced on January 16, 2012 that Germany is repatriating 300 tons of gold from the New York Federal Reserve. The U.S. took gold for “safe keeping” from more than 60 countries at the end of World War II. Germany´s announcement followed three months after the Federal Reserve refused Germany´s request for a physical inspection of vaults in which Germany´s gold was stored. Instead, the U.S. Treasury Inspector General´s Office published a paper audit. (1

The Federal Reserve´s refusal to return German gold before the end of seven years prompted four Swiss parliament members in March to propose legislation to repatriate Switzerland´s gold reserves. The Netherlands´Christian Democratic Party is also calling for repatriation of Dutch gold held in foreign vaults.

There is a bill in the Texas legislature to allow state pension plans to invest directly in physical gold. Utah, Missouri and Idaho already have laws recognizing gold and silver bullion coins as legal tender, Arizona´s law is awaiting signature, and a dozen more states have introduced similar bills. (2

The Federal Reserve is an entity owned by private banks to serve as the central bank for the United States of America. In 1934 the Federal Reserve banks transferred ownership of their gold to the U.S. Treasury in exchange for gold certificate credits on the books of the Treasury.

Since then, the U.S. dollars that are issued in the form of Federal Reserve Notes are backed solely by the full faith credit of the U.S. In 1971 the U.S. informed the International Monetary Fund (IMF) that it would no longer buy and sell gold to settle international transactions.

This resulted in the 1973 decision of the European Community countries and the U.S. to introduce a joint float of European currencies against the U.S. dollar. Nevertheless, the U.S. dollar maintained its role as “international currency”.

Federal Reserve Note legends on dollars, 1928 and 1934

The World Bank and IMF were established at the end of World War II to prevent future wars, provide monetary stability, and restore economic growth. The World Bank and IMF are named the Bretton Woods institutions after the ski resort in the state of New Hampshire in the U.S. where the conference of 44 founding countries was held.

Credibility of U.S. Treasury and Federal Reserve

Credibility in the U.S. Treasury Department was already at an ebb after fifteen years of unsuccessful efforts by the U.S. Congress and World Bank´s Audit Committee to obtain audits of the World Bank´s internal control over financial reporting in accordance with Generally Accepted Accounting Principles and Auditing Standards. A company with good internal controls has reliable financial reporting, timely feedback on achieving its goals, and it complies with laws and regulations.

The World Bank continues to refuse to cooperate with an inquiry into corruption by the U.S. Government Accountability Office (GAO). The General Counsel of the UK´s Financial Reporting Council (FRC) denied the FRC had jurisdiction over KPMG´s violation of Generally Accepted Auditing Standards and Auditing Standard No. 5 of the Public Company Accounting Oversight Board (PCAOB).

The same entities that oversee the Federal Reserve are also responsible for regulating securities markets. Regulatory agencies have not succeeded in bringing the International Bank for reconstruction and Development, the World Bank´s lending window for middle income countries, with bonds equivalent to USD 135 billion on the world´s capital markets, into compliance.

Under the gentlemen´s Agreement which lasted for 66 years, the President of the World Bank was appointed by the United States and the managing Director of the IMF was appointed by Europe. In 1998 188 countries that own the Bretton Woods institutions launched a reform coalition under the Strategic Compact to end corruption at the World Bank.

Jim Wolfensohn, President of the World Bank from 19-95 – 2005, refused accountability to the World Bank´s Board and member countries. Reform of the World Bank´s human resources policies was aborted in 2000 when measures to achieve transparency in promotion and hiring introduced under the Strategic Compact with the Board ended abruptly.

In 1999 I reported the corrupt take-over of the second largest bank in the Philippines. Lucia Tan, a crony of Joseph Estrada, then President of the Philippines, acquired stock owned by government employees in Philippines national Bank (“PNB”) valued more than 19 % of PNB´s outstanding capital without disclosure, as required by Philippines securities laws.

Tan owned Philippines Airlines, in default of its loans from PNB. The government of the Philippines loaned USD 493 million to PNB after PNB´s depositors made heavy withdrawals. USD 200 million of a loan from the World Bank and USD 200 million from a loan from japan were cancelled. Estrada was ultimately impeached, and in 2007 an anti-corruption court in the Philippines required Estrada to refund graft he had plundered.

The World bank´s Country Director in the Philippines reassigned me when I asked him to sign a letter warning the Philippines´government that the World Bank could not disburse its loan without a waiver from the Board of Executive Directors since the loan conditionality was not met.

The World Bank´s Internal Audit Department refused to correct the satisfactory evaluation of the World Bank´s supervision performance or the flawed report of the Institutional Integrity Department to the Audit Committee of the Board of Executive Directors.

I sent the evaluation on the Philippines project to the Deputy General Counsel of the IMF. The IMF was involved with the Philippines banking sector. The IMF´s Deputy General Counsel confirmed my analysis of what had happened, but advised me to drop the matter because it would be difficult for me to prevail.

Instead on 4 March, 2003 he sent a reference to the World Bank, “I regard Ms. Hudes as a distinguished professional whose substantial contribution in the field over many years deserves recognition”. 

Two days after informing the Board´s Audit Committee of the cover-up in the Philippines, I was reprimanded and placed on probation. In 2005 the Joint Economic Committee of the U.S. Congress wrote to the World Bank about “problems involving the  [World Bank´s] borrowing, investment and lending activities over a number of years”. (3

In 2006 I reported to the Senate Committee of Foreign Relations: 

“As a member of the World Bank´s Legal Department for twenty years, and a member of the DC Bar, I was obliged by the DC Rules of Professional Conduct to report a weak control culture in the Bank. On June 2, 2004 I informed the Audit Committee of the Board of Executive Directors about sensitive governance issues concerning interference in the Board´s access to information... Mr. Eckhard Deutscher, Dean of the Board [and Germany's Executive Director], has informed me that the World bank is treated like a mushroom, ´kept in the dark, and covered with fertilizer´.”

The Senate Committee on Foreign Relations followed up with three letters to the World Bank. The World Bank forged documents and fired me in contempt of Congress. The World Bank also fired the Staff Association’s lawyer.

The Staff Association stated that what had happened to me had damaged staff morale and prevented others from reporting misconduct. The World Bank’s Ethics’ Officer left in frustration after her request for an investigation by the World Bank’s Institutional Integrity Department was turned down.

When the World Bank did not answer the Joint Economic Committee’s concerns, U.S. Congress responded with legislation requiring the World Bank to end retaliation against staff who reported illegality and to provide external arbitration to its staff. The World Bank ignored this legislation. (4

The Dutch Ministry of Foreign Affairs requested the World Bank’s Audit Committee to look into the cover- up.  Instead, the Chair of the World Bank’s Audit Committee requested an inquiry into the World Bank’s Institutional Integrity Department. Paul Volcker headed a panel in 2007 exonerating the Institutional Integrity Department. The independence of the Volker Panel was later discredited. (5

In 2007 Herman Wijffels, then the Dutch Government’s representative on the World Bank’s Board, as well as Ad Melkert, the Dutch Government’s former representative, reported in a Dutch newspaper and television show that Board members who patronized the same prostitution ring as former New York Governor Eliot Spitzer were warned that this information would be made public. At that time Herman Wijffels was leading a Board inquiry into a 35% pay raise to a staffmember at the World Bank with whom Paul Wolfowitz had a close personal relationship. After learning of this threat to Board members, at the request of the Senate Committee on Foreign Affairs, I informed the U.S. Treasury, “Now the members of the World Bank’s Board are subjected to intimidation for trying to restore rule of law at the Bank.” The Board ultimately required Wolfowitz’ resignation. U.S. moral leadership has been severely damaged.

In February 2007 I wrote to the Treasury Department:

“I mentioned to Mr. Berger an analysis that was carried out on the rule of law at the World Bank in 2004 by The Sentia Group using a previously classified analytic tool of the Central Intelligence Agency that forecasts policy outcomes using information on how stakeholders are positioned on an issue, how important the issue is to them, and how much power each stakeholder has. I am enclosing a copy of the outcome of this analysis, which predicted that the Bank’s Board of Directors would take back the authority delegated by them to the presidency under the Articles if the rule of law at the Bank was not respected. I also enclose an article describing the predictive power of this analysis, which is about 90%.”

I also advised Secretary of Defense Chuck Hagel, then Senator from Nebraska, that this stakeholder analysis was predicting that the Gentlemen’s Agreement would end if the U.S. did not stop its hegemony at the World Bank and that “playing cat and mouse with these serious governance issues at the World Bank is also a security risk to the world order.” (6

In 2008 Senators Lugar, Leahy, and Bayh called for the GAO to investigate the corruption, (7  and the Senate Committee on Foreign Relations held a series of hearings. (8   But the World Bank refused to cooperate with the GAO inquiry. In 2009 the World Bank’s Audit Committee commissioned KPMG to audit the World Bank’s internal controls over financial reporting following retaliation against staff who reported overcharges to borrowers, cost overruns on renovation of the World Bank’s headquarters, failed projects, and accounting errors.

Regulatory Capture

KPMG issued an unqualified audit opinion by limiting the scope of its audit, in violation of Auditing Standard No. 5 of the PCAOB. In 2010 the UK’s Serious Fraud Office (SFO) asked the Securities and Exchange Commission (SEC) about these auditing irregularities, but the SEC refused to answer the SFO’s questions. In 2010 I wrote to the Treasury Department’s Inspector General:

“As foreseen in the legislation establishing your office, as well as that establishing the Inspector General of the Securities and Exchange Commission, Inspector Generals are required to place this matter involving the sufficiency of U.S. regulatory capacity in an appropriate institutional context. The World Bank’s Institutional Integrity Department is unable to correct its own lapses in controls. The attached correspondence with the U.S. Congress and the World Bank’s other oversight agencies establishes that an appropriate response to the compliance issues of the International Bank for Reconstruction and Development is long overdue.”

With corruption at the World Bank, in 2010 the U.S. lost the 66 year old Gentlemen’s Agreement for the U.S. to appoint the president of the World Bank. (9

The EU and UK Parliaments published reports of the World Bank’s accounting irregularities on their websites: http://www.publications.parliament.uk/pa/cm201213/cmselect/cmintdev/writev/402/contents.htm and

http://www.publications.parliament.uk/pa/cm201213/cmselect/cmpubadm/writev/publicpolicy/m03.htm

http://www.europarl.europa.eu/document/activities/cont/201105/20110518ATT19540/20110518ATT19540EN.pdf

Contempt of Congress

In legislation signed on December 23, 2011, U.S. Congress required a report from the Secretary of the Treasury prior to disbursement of the U.S. contribution to the World Bank’s capital increase whether the World Bank is making substantial progress in achieving results that eliminate the effects of retaliation prior to disbursement of the U.S. contribution to the World Bank’s capital increase. (10 Secretary Geithner misled the U.S. Congress in his November 21, 2012 report. (11

I bought a World Bank bond and sued in the federal courts to bring the World Bank into compliance. On February 11, 2011 I asked the Secretaries of State and Treasury as well as Ben Bernanke, the Chairman of the Federal Reserve, who serve on the National Advisory Council on International Monetary and Financial Policies (the National Advisory Council), whether KPMG was entitled to give false and misleading audit opinions to IBRD’s bondholders in its Independent Auditor’s Report, filed with the SEC. (12

When no response was forthcoming, I asked the same question to the rest of the World Bank’s Board of Governors. On December 20, 2012 the World Bank and IMF Development Committee settled my bondholder litigation, but the clerk of the DC Circuit Court of Appeals refused to recognize the settlement.
On January 19, 2013 I informed the Federal Judicial Conference of the clerk’s error and that the Ombudsman and Inspector General of the Federal Reserve had refused jurisdiction over the World Bank’s compliance issues, notwithstanding Ben Bernanke’s membership on the National Advisory Council.
On April 18, 2013 the Chairman of the Federal Judicial Conference Executive Committee refused to correct error in the District of Columbia Court of Appeals disregarding the settlement of this litigation by the World Bank’s shareholders.

I informed the 50 state Governors, attorneys general, and the chief justices of state supreme courts, as well as the National Governors Association and National Association of Attorneys General, of this governance crisis. The states are legally obligated to protect the rights of the World Bank’s bondholders and U.S. taxpayers to accurate financial reporting in their respective states.

Maryland’s Secretary of Labor, Licensing and Regulation instructed me on behalf of Governor Martin O’Malley to follow up with U.S. Congress to obtain the World Bank’s compliance with the securities laws. But U.S. Congress abdicated its oversight responsibilities, and the SEC failed to correct inaccurate financial reporting at the World Bank.

Instead, on April 1, 2013 the President of the World Bank hired Ethiopis Tafara, Director of International Affairs for the SEC since 2003, to serve as General Counsel of the International Finance Corporation (the IFC). It was Tafara who stonewalled the 2010 inquiry from the UK’s SFO into KPMG’s failure to follow Generally Accepted Auditing Standards. Bondholders can have no confidence in the accuracy of the World Bank’s financial statements with this revolving door of failed regulation.

Media Cover-Up

Roughly three-quarters of the American public consistently prefers that the U.S. act jointly with other nations in foreign affairs. But neither the New York Times, nor the Wall Street Journal, nor the Washington Post, nor National Public Radio, nor Forbes, nor the Broadcasting Board of Governors, nor the National Press Club, nor any of the many other journalists I requested would inform the public of the regulatory capture of the SEC or of the Federal Reserve’s and Treasury Department’s malfeasance.

The only exceptions to the cover-up of corruption were from the National Taxpayers Union, (13 Veterans Today (14, nsnbc international, (15 and several pirate radio shows. (16

The group identified in http://arxiv.org/PS_cache/arxiv/pdf/1107/1107.5728v2.pdf , which bought up the media in the U.S., has censored the scandal. Three systems theorists (17 at the Swiss Federal Institute of Technology in Zurich, ranked as the best university in continental Europe, examined the interlocking ownership of the world’s 43,000 transnational corporations.

A core group of companies, mostly banks, controlled forty percent of the entire system and 60% of total revenues.  Because of interlocking directorships, the highly concentrated core was ten times more powerful than warranted.  According to the study, “the top holders within the core can thus be thought of as an economic “super-entity” in the global network of corporations.” 

In the last twenty years the number of corporations owning the majority of U.S. media outlets went from 50 to 5:

Time Warner, Walt Disney, News Corporation (Murdoch), Viacom and Bertelsmann (Germany).  Diversity in the news is further restricted by the interlocking members on boards of directors of these media giants. ( News Corp, Disney, Viacom and Time Warner have 45 interlocking directors).

A network analysis of the boards of directors of the ten big media organizations in the U.S. revealed that eight out of ten big media giants share common memberships on boards of directors with each other. The 118 persons on the boards of directors of the ten big media giants are the same individuals who serve on interlocking directorships of the core “super-entity” in the global network of corporations which owns the Federal Reserve.

Future Prospects

The powerful stakeholder analysis which predicted in 2004 that the U.S. would lose the Gentlemen’s Agreement for appointment of the World Bank president began to predict that the rule of law would prevail when the UK and European Parliaments published my testimony.

Goldman Sachs announced two downgrades in the price of gold, first at the end of February, and again on April 10, 2013. Then on April 12, 2013 the Federal Reserve assaulted the price of gold through uncovered gold certificate short sales of 500 tons.

Although the Development Committee admitted me to the Spring Meetings of the World Bank and IMF on April 19, 2013, the Director of the U.S. Secret Service disregarded a letter cleared by the World Bank’s shareholders, and illegally denied me access to attend the final two days of meetings on April 20 and 21.

It is not clear whether U.S. Congress is prepared to “take on” the economic power revealed by Vitali, Glattfelder and Battiston whose misconduct I and other World Bank whistleblowers have been reporting to the legal authorities.

On April 24, 2013, Senator Sherrod Brown, a liberal Democrat from Ohio, and David Vitter, a conservative Republican from Louisiana, introduced a bill to require so-called “megabanks” with more than $500bn in assets to meet a new capital requirement of 15 per cent. (18

Senators Brown and Vitter are on the Senate Banking Committee, which oversees the SEC. Senator Kevin Brady, Chairman of the Joint Economic Committee, on the other hand, also recently introduced a bill with the opposite effect of ratifying the Federal Reserve’s manipulation of the price of gold. (19

Brazil, Russia, India, China and South Africa (the BRICS) decided to set up their own development bank. The World Bank’s Board of Governors must bring the World Bank into compliance, also in order to qualify for the U.S. contribution to the World Bank capital increase under § 7082 of the Consolidated Appropriations Act of 2012 (Pub. L. 112-74).

I have also informed U.S. Defense Secretary Hagel that the Federal Reserve’s procrastination in returning what is legally Germany’s gold and other breaches in the rule of law must be rectified in order to prevent a currency war.

Karen Hudes

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