World Bank body breached standards for palm oil financing, says internal audit

The International Finance Corp (IFC) has breached standards on palm oil financing in providing loans and guarantees to one the world's biggest palm plantation owners, according to an audit by the organisation's own ombudsman.

The audit report, released earlier this month, focuses on four financing facilities made by the IFC between 2003 and 2008 to Singapore Exchange-listed Wilmar International, which runs palm plantations in Indonesia and Malaysia and is a leading global producer and trader of palm oil.

IFC, the private investment arm of the World Bank, provided $33.3m (£20.3m) in investment guarantees and $17.5m in loans during the five-year period.

In 2007 a coalition of 19 green groups, smallholders and organisations representing indigenous Indonesians filed a complaint to IFC's ombudsman over Wilmar's business activities. It claimed that Wilmar did not comply with applicable national laws in Indonesia, lacked publicly available social and environment impact assessments and had inadequate compliance with IFC operating procedures and due diligence requirements.

The complaint further alleged that Wilmar illegally used fires to clear land in Indonesia and seized land of local indigenous people without due process. It also purportedly failed to carry out or wait for official approval on legally required environmental impact assessments before expanding plantations and had cleared tropical peat and forests without legally required permits.

The ombudsman concluded that "despite extensive documentation of social and environmental issues in the oil palm sector in Indonesia, as well as IFC's own experiences with several other investments in the sector in Indonesia, IFC took a de minimis approach so as to exclude assessments of the supply chains ".

The approach was "counter-productive to IFC's mission of reducing poverty and improving lives", it said.

In response to the audit findings, the IFC said it "recognises the deficiencies identified in the [ombudsman's] report and that there are lessons to be learned for future investments in the palm oil sector". It added that it was "already moving to improve its practices".

The ombudsman said it had succeeded in encouraging Wilmar and community members to hold talks in a bid to resolve the conflicts. As a result, Wilmar has instigated a moratorium on further land clearance and agreed to compensate households for appropriation of land, said the ombudsman.

However, the signatories of the initial complaint are unhappy at the fact that "no comprehensive action plan [has been] presented to clarify what IFC staff will actually do to ensure future compliance with standards".

In a letter sent to IFC president Robert Zoellick last week, the group called on the multilateral finance institution to freeze financing for all Indonesian palm oil projects until a number of "deficiencies" in its policies are addressed.