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OO RUEHCHI RUEHDT RUEHHM RUEHNH
DE RUEHPF #1036/01 1511110
ZNY CCCCC ZZH
O 311110Z MAY 06
FM AMEMBASSY PHNOM PENH
TO RUEHC/SECSTATE WASHDC IMMEDIATE 6787
INFO RUCNASE/ASEAN MEMBER COLLECTIVE
RUEHRL/AMEMBASSY BERLIN 0115
RUEHBY/AMEMBASSY CANBERRA 2220
RUEHLO/AMEMBASSY LONDON 0385
RUEHOT/AMEMBASSY OTTAWA 0521
RUEHFR/AMEMBASSY PARIS 0537
RUEHKO/AMEMBASSY TOKYO 3068
RUEHGV/USMISSION GENEVA 1460

C O N F I D E N T I A L SECTION 01 OF 02 PHNOM PENH 001036 
 
SIPDIS 
 
SIPDIS 
 
DEPARTMENT FOR EAP/MLS AND EB 
DEPARTMENT PLEASE PASS USAID/ANE 
GENEVA FOR RMA 
 
E.O. 12958: DECL: 05/31/2016 
TAGS: EAID PGOV PREL CB
SUBJECT: WORLD BANK FINDS CORRUPTION IN CAMBODIA PROJECTS 
 
Classified By: Charge Mark C. Storella for reasons 1.4 (b) and (d). 
 
¶1.  (C)  Summary:  A World Bank (WB) audit has found evidence 
of procurement fraud in seven out of nine WB programs 
investigated in Cambodia, involving kickbacks to Cambodian 
government (RGC) officials and rigged bidding. The WB 
estimates that 10-15% of $5.0 million already disbursed was 
skimmed.  The RGC has preemptively suspended funding for 
three of the four active WB programs affected and pledged to 
investigate.  However, in a May 30 meeting, Senior Minister 
Keat Chhon took a hard line with the WB, insisting the WB 
provide detailed evidence of fraud, something the WB's 
auditors are reluctant to do out of concern for their 
sources.  While WB auditors have reportedly found similar 
fraud in Indonesia and Vietnam, fraud in Cambodia may be more 
widespread.  Donor chiefs of mission generally agreed the 
onus for investigating the fraud must remain with the RGC, 
but also were inclined to press the WB to be more forthcoming 
in providing information to the RGC information.  Some donors 
seemed inclined to minimize the importance of the problems 
uncovered.  WB President Wolfowitz was briefed May 4 and 
reportedly agreed that the WB could continue operations in 
unaffected programs and continue to implement new programs, 
as well.  End Summary. 
 
¶2.  (C)  World Bank regional director Ian Porter and WB 
country director Nisha Agrawal briefed major donor chiefs of 
mission May 30 on the results of a fiduciary audit of WB 
Cambodian programs conducted by the WB investigative unit. 
The audit -- which follows similar audits in Indonesia and 
Vietnam -- uncovered procurement fraud in seven out of nine 
WB programs reviewed.  (Three of the projects were already 
completed.)  The fraud typically consisted of kickbacks and 
rigged bidding, often involving the same companies and 
relatives of senior ministry officials, including ministers 
in some cases.  Four RGC ministries are involved:  Rural 
Development; Public Works and Transport; Land Management; and 
Industry Energy and Mines.  The projects valued at over $64.0 
million deal with land management and administration, rural 
infrastructure and provincial water and sanitation projects. 
Porter told us in confidence that fraud had been detected in 
$15.0 million worth of procurement, of which $5.0 million had 
already been disbursed.  The WB plans to ask the RGC to repay 
the entire $5.0 million.  The WB estimates that skimming may 
have amounted to 10-15% of disbursements, but also noted that 
rigged bidding might also have involved shoddy or substandard 
construction.  The contractors involved are all small 
Cambodian businesses.  Thus far, there have been no links 
established to the Prime Minister or his family. 
 
¶3.  (C)  According to Porter, WB staff, including himself, 
briefed senior WB officials Wolfowitz, Cleveland and Jackson 
May 4.  Wolfowitz reportedly expressed concern, agreed 
funding for the affected projects should be halted, but also 
agreed that WB should continue operations in Cambodia, 
including opening a couple of new projects. 
 
¶4.  (C)  Senior Minister and Minister for Economy and Finance 
Keat Chhon suspended funding for the four active affected 
projects on May 22, following an interim briefing by WB 
staff.  In a meeting with Porter May 30, during which he 
spoke with the Prime Minister directly by phone, Keat Chhon 
pledged that the RGC would investigate the alleged fraud.  He 
said that the RGC did not want a repeat of the WB 
demobilization project scandal and sought to cooperate with 
the WB in the investigation and asked that he WB suggest 
independent auditors who could participate.  However, Porter 
said the PM insisted that the WB provide detailed evidence of 
the fraud.  If the Bank did not do so, the PM threatened to 
halt its relationship with the WB, indicating he would seek 
funding for the projects elsewhere.  In separate public 
statements, Minister of Rural Development Lu Lay Sreng 
complained that there might be corruption among WB officials 
and asked why WB auditors who have covered these projects for 
several years only now found problems. 
 
¶5.  (C)  Porter noted that the WB Investigative Unit was 
reluctant to provide its evidence to the RGC since it relied 
on sources who might be in jeopardy if their comments were 
known.  While the WB had provided summaries of evidence to 
the Indonesian and Vietnamese governments, the investigative 
 
PHNOM PENH 00001036  002 OF 002 
 
 
unit reportedly felt that corruption was sufficiently 
widespread that it did not want to provide any information to 
the RGC.  Porter confided that there were differences of 
opinion about this inside the WB and said that the Bank would 
provide formal notification of the audit results to the RGC 
in about one week, at which time the WB would at least 
provide the names of the projects involved and the names 
contractors believed to have been involved in fraud. 
 
¶6.  (C)  Comment:  It is not a surprise that the WB audit 
uncovered procurement corruption.  This case follows on 
corruption scandals in a WB demobilization project in 2003 
and a World Food Program project in 2004.  We are encouraged 
that the RGC permitted the audit in the first place, has not 
denied the allegations and has promised to investigate.  At 
the WB briefing May 30, some donors seemed eager to minimize 
the importance of the corruption uncovered and reluctant to 
press the RGC hard.  All expressed some sympathy for the RGC 
demands for broader disclosure of evidence by the WB, even if 
names could not be named.  We take the allegations seriously 
and believe that the onus must remain on the RGC to conduct 
an effective investigation and punish those responsible.  We 
plan to encourage other donors to press the RGC to take 
advantage of this audit as an opportunity to demonstrate real 
commitment to deal with official corruption. We also hope 
that revelation of this problem will stiffen the spine of 
donors to press for passage of an anti-corruption law which 
meets international standards.  Wrangling over this scandal 
is likely to go on for months.  It will be important to keep 
public rhetoric down and focus on getting the RGC to take 
effective measures to deal with the corruption that has been 
uncovered.  End Comment. 
STORELLA