Wolfowitz Attacks Bank Rules as Panel Finalizes Investigation

By Christopher Swann and Robert Willis

May 4 (Bloomberg) -- World Bank directors put the finishing touches on their report into the pay raise for Paul Wolfowitz's companion as the agency's president blamed ``ambiguous rules'' for his involvement in her promotion.

The panel, led by Dutch representative Herman Wijffels, is scheduled to deliver its report to the full 24-member board next week. Wolfowitz, back from an education conference in Brussels, will have a chance to present his response at the same time.

The committee met again yesterday in Washington to discuss its findings, which officials say are likely to be unfavorable to the former U.S. deputy defense secretary. A conclusion that Wolfowitz broke ethics rules would make it difficult for him to keep his job, said three bank officials who asked not to be identified.

``It's abundantly clear he has to go, the question is under what conditions and how soon,'' said Michael Mussa, a former chief economist at the International Monetary Fund and now a senior fellow at the Peterson Institute for International Economics in Washington. ``I don't think it matters much whether it is two days or two weeks.''

Wolfowitz, writing to the panel investigating the matter, repeated that he was merely carrying out the instructions of the bank's ethics committee when he arranged to transfer Shaha Riza to the State Department in 2005 to avoid a conflict of interest. Riza, who remained on the World Bank payroll, received a 36 percent pay increase, to $180,000, and guarantees of further 8 percent annual raises.

Vehement Denial

``I vehemently deny that I went beyond what I understood to be the guidance received from the committee,'' Wolfowitz, 63, wrote in a letter released by his attorney yesterday and dated May 2.

He was responding to an assertion earlier this week by Ad Melkert, the former chairman of the ethics committee, who said the group ``was not consulted, nor did it approve, the terms and conditions'' of the deal with Riza.

Wolfowitz said the dispute was ``the product of ambiguous bank rules and unclear governance mechanisms,'' and he called on directors to clarify bank policies on conflicts of interest.

He also said the unusually large salary increase represented a ``settlement of potential claims'' by Riza, who was being transferred against her will and whose career at the World Bank was ``effectively ended.''

Wolfowitz's fate will be determined by the lender's board, which has the authority to remove him and ultimately answers to governments of the bank's 185 member nations.

Secret Ballots

Some directors have suggested conducting a series of non- binding secret ballots to reach a consensus, according to a bank official who represents a developing country.

In the ballots, directors might be asked whether Wolfowitz violated bank policies, what the consequences should be, and whether he could remain an effective leader of the World Bank, said the official who asked not to be identified.

European governments including France, Germany, the Netherlands and the U.K. have been critical. President George W. Bush, who nominated his Wolfowitz in 2005, is the only world leader to publicly say he should stay.

Among bank directors, Europeans are leading the push for Wolfowitz's removal, while African and Latin American members have been reluctant to take sides, said the official from the developing country. Asian countries are yet to declare their hand.

Anger with Wolfowitz has been amplified by perceptions that he has used his post to promote the White House foreign policy agenda and by appointments of key staffers recruited from the Bush administration.

Bennett's Influence

Wolfowitz, who apologized for his role in Riza's raise on April 12, has since taken a more aggressive stance, hiring Washington attorney Robert Bennett to represent him.

This week, Wolfowitz lashed out at the investigating panel, declaring he wouldn't quit in the face of a ``bogus charge'' and saying he'd been the victim of a ``smear campaign.''

In an interview yesterday, Bennett continued that line.

``It is murder by stealth,'' Bennett said. ``Unnamed people, leaking of information, creating a phony scandal and then pointing at that scandal and saying he can't serve.''

While staff members have taken to wearing blue ribbons as a symbol of their calls for his resignation, Wolfowitz has avoided mention of the controversy.

``Let me express my appreciation to all who work so hard to fulfill our obligations to those most in need,'' he wrote in a bank-wide e-mail this week that listed accomplishments including construction of a dam in Africa and approval of a new plan to improve financial systems in low-income countries.

This week, he attended a conference in Brussels on education in poor nations and repeatedly brushed off questions about his future.

``The work of the bank goes on,'' he said. ``There are millions of poor people who depend on us.''

To contact the reporters on this story: William McQuillen in Washington at bmcquillen@bloomberg.net ;

Last Updated: May 4, 2007 00:13 EDT

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