Tuesday, January 13, 2009

Exclusive: World Bank's Web of Ties to 'India's Enron'

Monday , January 12, 2009

By Richard Behar

FC1

Experts are calling it "India's Enron Moment," the biggest accounting fraud ($1 billion) and corporate governance failure in the nation's history.

But as investigators start sifting through the financial implosion of Satyam Computer Services for more information on the debacle, some of the most uncomfortable questions can only be answered on H Street in Washington — inside the marble fortress of the World Bank.

As FOX News revealed in a series of stories beginning last October, World Bank officials have known for more than three years about corruption involving the highest corporate levels of Satyam, but they felt no obligation to the global corporate community to share that information publicly until late last month.

Now, in the wake of Satyam's implosion — after FOX News's disclosure on October 10, 2008, that the company had been secretly banished from doing business at the World Bank in early 2008 — the anti-poverty institution is once again dribbling out crucial facts.

Click here for the Oct. 10 story.

In what it calls "the interest of fairness and transparency," the bank late Sunday night officially declared on its Web site that it had banned Satyam, as FOX News described.

The bank also named two additional high-tech companies that it debarred in 2007 from receiving contracts under its corporate procurement program. One of those firms is Wipro Technologies — India's No. 3 software services provider, with 95,000 employees around the world — which the bank says it barred for four years for "providing improper benefits to bank staff."

The second sanctioned firm is a Herndon,Va.-based company called Megasoft Consultants — the U.S. unit of a company called Megasoft Ltd that trades on India's Bombay and Madras stock exchanges. The bank banned it for "participating in a joint venture with bank staff while also conducting business with the bank."

The bank provided no further details.

Records obtained by FOX News, however, shed additional light on all three of the World Bank debarment cases, indicating that the affected firms shared corporate and even personal ties, and in the case of one firm may even have shared a collusive strategy for retaining World Bank business.

In a statement today, one of the newly named companies, Wipro — a $5 billion outsourcing behemoth that trades on the New York Stock Exchange — officially admitted it gave preferential stock to both a former World Bank chief information officer and another senior staffer as part, it said, of an SEC-approved program that allows "clients" to purchase such stock as a way "to expand our recognition and brand."

In an interview published in PC World this morning, a top Wipro official said the number of shares offered by the company were too few to amount to an inducement. The ban was prompted by the sale of about 1,750 shares for about $72,000. "It was a goodwill gesture," said Girish S. Paranjpe, joint CEO of Wipro's information technology business. Wipro did not reveal the World Bank ban itself, he said, since it was a World Bank policy not to discuss such investigations. Once the bank had changed its position, Wipro decided to issue a statement and clarify, he added.

Documents obtained by FOX News, however, show something Wipro did not mention: that the shares it provided to the bank officials were dispensed — just weeks after it first began bidding for World Bank technology contracts back in September 2000. A World Bank investigation report on the matter, which outlines the details, has never been made public.

In the case of Megasoft, FOX has learned that as far back as 2003, a Megasoft annual report states that the company's founder-chairman, Ravindra Sannareddy, "has also launched and successfully ran software services division in U.S. for Satyam Group." In 2004, in a deal that attracted scant attention, Satyam co-founder Srini Raju — the younger brother of the firm's chairman, Ramalinga Raju — merged one of his private Indian companies into Virginia-based Megasoft — which in turn began receiving World Bank business soon afterward.

The company was used as a vehicle to obtain World Bank contracts after bank officials had grown concerned that Satyam already had too many such deals — and some had voiced fears that the bank was becoming too dependent on the company.

Indeed, according to internal bank sources, Satyam was informed that it would not be able to bid on many future contracts. By that time, however, "many contracts that Satyam didn't bid on or get, Megasoft was getting," a former World Bank anti-corruption investigator told FOX News.

Then, beginning in 2005, according to well-placed bank insiders, Satyam began engaging in "body swaps" — where its employees working inside the World Bank were technically converted into Megasoft employees. Megasoft's own website states that it has "managed on an outsource basis" the U.S. division of Satyam.

According to sources reached by FOX News, the World Bank's relationship with Megasoft was facilitated by Ben Hu, a longtime World Bank technology official and former commissioner of China's main securities regulator, who became a director of Megasoft in 2003, at the same time as he was serving as a World Bank consultant. According to company records, Hu never attended a Megasoft board meeting. He left the board in 2007.

FOX News has learned that as far back as 2005 Hu was probed by World Bank internal investigators in connection with a "sham contract" performed by Megasoft's China office. The bank has not said whether Hu himself was banned as a consultant. Hu could not be reached for comment, but a Megasoft secretary said she would relay the request for comment to him.

Numerous World Bank sources have told FOX News that over the past decade — as Satyam's influence and presence grew — the bank slowly lost control and knowledge about its own computer systems.

As a result of its "strategic partnership,' Satyam became the bank's near-exclusive software contractor — building and controlling virtually all of the bank's far-flung global information network, including its accounting, finance and treasury software systems. "There were thousands and thousands and thousands of contracts," recalls one former World Bank lawyer.

At the same time, Satyam's prestige — and clientele — in the global corporate sector was also growing. By the time the company imploded in financial fraud six days ago, it claimed to have more than 150 FORTUNE 500 companies as clients — many of which had entrusted their most sensitive computer networks to the Indian firm. Satyam's clients ultimately read like a Who's Who of the global economy: from General Electric and Microsoft to Citicorp and Nestle, Fujitsu, Dell, Telestra, Quantas Airways and Merrill Lynch.

As a preferred World Bank vendor, Satyam's bills at the bank got special treatment. They were fast-tracked through an electronic invoice system that all but automatically approved all payments without a lengthy paper trail. That system ultimately made it harder for bank investigators to follow the money as they tried to trace any relationships between Satyam's dealings with World Bank officials and the company's business at the bank.

So deep had the relationship become that last February, World Bank President Robert Zoellick, according to inside sources, was not able to get all of Satyam's employees out of the bank as he commanded, after he was informed that one or more of the company's contractors had implanted spyware in the bank's systems. The spyware revelations came as the Bank, according to insider sources, was suffering a series of external hacker assaults that penetrated some of its most sensitive computer centers.

When informed of the employee spyware situation, staffers relate, Zoellick told his deputies, "I want them [Satyam] off the premises now." But as a bank insider close to the Satyam case told FOX News: "That was impossible to do. The whole thing would have ground to a halt. Literally. All the bank offices. Everything."

(After a FOX News report about the assaults, including the accusations against Satyam employees, on October 14, 2008, both the Bank and Satyam loudly denounced the revelations as untrue. A top bank security official restated in December that he was certain that Satyam was not involved in any way in the breaches. But bank officials decline to say how they arrived at that conclusion.)

It took seven months of "knowledge-transfer" — including the conversion of Satyam contract employees into employees of two other major Indian technology companies, Tata Computer Services and EDS — before Satyam was shown the door.

The intimacy of the Bank's ties with Satyam were one reason for the glacial pace of action toward Satyam's improprieties, following a probe that took three years. (An investigation report was finalized in the summer of 2006.)

"There was reluctance over the years to go after Satyam," says a former bank investigator, "because people honestly did not know how to extricate them from our system. We had no back-up system. There was an internal management decision not to pursue Satyam but just to correct all the controls."

But the bank was eventually forced to act.

The case that inspired the lengthy investigation, and ultimately led to the ban against Satyam involved the giving of preferential Satyam shares to one of the bank's most powerful officials, then Chief Information Officer Mohamed Muhsin. Muhsin retired from the bank in 2005, and was formally banned from every doing business with the institution in January 2007 as a result of the probe.

According to internal bank documentation that FOX News has examined, Muhsin was provided the opportunity to purchase "Friends and Family" stock in a Satyam subsidiary company called Satyam Infoway Limited, or SIFY — which conducted its first initial public offering of shares in the U.S. in October 1999, at a time when Satyam was already a major vendor of the World Bank.

The offer came at the height of the technology stock market bubble when such preferential stock was virtually a guarantee of instant riches. SIFY's "friends and family" stock was controlled and allocated by Satyam's co-founders, Ramalinga Raju and his brother Srini — both of whom were arrested and jailed on Jan. 9, 2009, in the wake of Satyam's collapse.

Muhsin purchased at least 1,100 shares of SIFY at the company's offering price of $18 per share, FOX News has learned. It was a very good deal: SIFY's IPO was oversubscribed by 27 times the available shares — at the time the greatest-ever oversubscription for an Indian offering in the U.S. The stock opened at $45.50 per share and skyrocketed to more than $400 per share in the months that followed. Muhsin pocketed $148,000 in profits.

Two years later, in May 2001, when stock in Satyam (SIFY's parent company) became available in the U.S., Muhsin or his wife purchased at least 1,000 shares at an initial offering price of $9.71 per share. This stock was bought, or owned, by Muhsin's wife at some point before it was transferred to Muhsin and later sold in August of 2001 for a loss of about $1,700.

Muhsin was also involved in the preferential stock deal with Wipro that ultimately led to that company's 2007 banishment from the bank. The timing was highly suspicious. Wipro submitted a bid proposal on Sept. 11, 2000 for a million-dollar World Bank contract for offshore technology development services. Wipro was one of three finalists in the competition, but Satyam was awarded the contract on Sept. 27.

Three weeks later, on Oct. 19, 2000, Wipro did an IPO in the U.S — issuing 2.75 million American Depositary Shares for trading on the NYSE. Wipro was the third non-U.S. company in the 200-year history of the exchange to have the honor of ringing both the opening and closing bells.

Muhsin purchased 300 Friends and Family shares at the offering price of $41. His holdings in Wipro initially rose in value, but, when the technology bubble's burst, Muhsin eventually sold the shares for a $4,420 loss in 2002.

That same year, Wipro became a supplier to the World Bank's technology department in New Delhi, which was controlled by Muhsin. There, it reaped about $250,000 in fees.

In 2005, the bank awarded Wipro a $650,000 contract to provide — of all things — Sarbanes-Oxley Compliance Implementation services. (The U.S. Sarbanes-Oxley Act was enacted in response to the Enron and WorldCom scandals to improve financial transparency, protect shareholders from fraud, and increase the penalties and accountability for top corporate executives who misstate financial results.)

While most of its clients were presumably unaware of misconduct at Satyam, inside the World Bank concerns about the firm were starting to heat up by 2004. A probe of Satyam's relationship with Muhsin grew out of a probe that began with Megasoft in 2005.

Following the biggest intensive investigation of an insider in its 60-year history, the bank in October 2005 quietly escorted Muhsin out of his office in Washington just weeks before he was set to retire. In January 2007, he was officially banned forever from the bank. Muhsin, who lives in Maryland, has repeatedly declined to speak with FOX News.

After administering its sanctions, the bank apparently felt no pressure at all to reveal its findings — until FOX News began its series of reports last October. In late December, bank officials finally admitted in conversations with a Washington-based watchdog organization, the Government Accountability Project, that it had taken the measures. But even then, public admission only came after GAP refused World Bank requests to keep the information under wraps.

"What we do know is that three years ago the bank had convincing evidence of very high-level corruption at Satyam," says GAP international program director Bea Edwards. "And they concealed it. And as recently as December, they were telling us to conceal it!"

The great irony is that for many years, the World Bank has pushed hard for countries and institutions that take its money to be transparent, engage in "good governance" and expose their own corruption at every turn. On its website, the bank lists of hundreds of vendors and individuals who it has sanctioned for corruption in bank projects. But the bank list has never included firms that work directly for the bank.

Last April, three U.S. Senators — Evan Bayh, Patrick Leahy and Richard Lugar — wrote to the Government Accounting Office, the investigative arm of Congress, to request an examination of the World Bank. The senators spoke of their fears of "increased graft and misallocation" of taxpayer dollars. "It is critical to ensure transparency in procurement," they added.

Almost a year later, that probe is still on the back burner, due to limited resources, according to a spokesman at the GAO.

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