By Christopher Swann in Washington

Published: August 21 2005

Financial Times

The World Bank has come under fire from one of its own internal watchdogs over its role in funding a gold mine project in Guatemala.

The venture has been seen by some as a test case of the bank's ability to handle successfully such projects following its rejection of a recommendation by an independent report to pull out of extractive industries.

The confidential draft report, obtained by the FT, charges that the bank failed adequately to consult the local community or properly evaluate the environmental and humanitarian impact of the mine.

The Compliance Adviser Ombudsman argues that the International Finance Corporation (IFC) the private finance arm of the bank was lax in following its own procedures.

Although only in draft form, the report is likely to be an embarrassment to the bank, which only recently completed a review of its involvement in extractive industries. Last year it rejected the recommendation of an independent report it commissioned by Emil Salim, Indonesia's former environment minister, that it withdraw from extractive industries.

Glamis Gold, the Canadian company constructing the mine, has said the venture has broad support from the indigenous Mayan Indians. But the project has been plagued by controversy. In January a 40-day protest by locals ended in bloodshed when security forces clashed with protesters, resulting in one death. On March 13 a villager was shot dead by an off-duty employee of Grupo Golan, a company providing security for Glamis. And in June a referendum in a nearby municipality showed 98 per cent opposed moving forward with the project.

The draft report charges that the IFC failed to give sufficient time "to allow a reasonably informed consultation". "The IFC should have considered more systematically the potential risk on human rights at the project level; should have taken appropriate measures to mitigate these risks." Rashad Kaldany, director of the bank's oil, gas and mining division, refused to comment directly on the report but said there would be a process of review to clear up potential inaccuracies. "We feel that the company has done extensive consultation and that they have met our standards," he said. "The company has done a lot of good in the community and has been creating job opportunities in a place where it is very hard to make a living."

The project had generated more than 1,000 jobs, most of which went to locals, he said. The bank's audit had concluded that the project would have no significant adverse environmental impact, he pointed out. Kevin McArthur, president and chief executive of Glamis Gold, said: "We have a signed document from the indigenous leadership early on in the project that they wanted to go ahead. We are convinced this will be good for the local community."

He added the company would ensure the highest levels of safety for workers, and once the project was finished the mine would be reclaimed. "Once the work is done, a casual observer for the most part will not be able to tell that there was ever a mine there at all."

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MiningWatch Canada - Friends of the Earth Canada - Halifax Initiative

Leaked Review Slams World Bank Over Canadian Mine

(Ottawa, 22 August, 2005) A leaked internal audit assessing the World Bank's involvement in a controversial Canadian gold mine in Guatemala has exposed glaring deficiencies in the due diligence undertaken by the Bank prior to approving a $45 million loan for the mine.

Glamis Gold's Marlin mine in the Western Highlands of Guatemala has been plagued with controversy since the outset. In March, the Compliance Advisory Ombudsman (CAO), the internal auditor for the Bank's private sector lending arm, the International Finance Corporation (IFC), began an investigation after receiving local complaints about the mine.

According to the CAO, the IFC's failure to adopt a policy regarding human rights and the use of security forces at project sites contributed to rising tensions in the region. The CAO blames the IFC for not addressing the project's potential impact on human rights and failing to adopt measures to mitigate this risk.

"The leaked review describes a tragedy waiting to happen," said Graham Saul, Director of International Programs at Friends of the Earth Canada. "The Canadian Government should ensure that this project is suspended until communities are properly consulted and the environmental problems and human rights conflicts are addressed."

The CAO reveals that Glamis failed to deliver IFC-required studies and management plans on time. Two plans, concerning tailings dam operation and emergency response, have never been submitted. The CAO characterizes the tailings dam as a "high risk structure" and warns that the dam not be used until the missing plans are inspected by the IFC Tailings Dam Review Board.

The CAO investigated allegations concerning the mine's environmental and social impacts. Complaints concerned the failure to respect indigenous rights and the role the mine has played in creating an increasingly tense environment that has led to violence. The CAO accuses the IFC of failing to enforce its own social and environmental policies, and neglecting to guarantee that adequate, timely and informed consultations were carried out with local populations.

According to the Ombudsman report, Glamis does not "appear to be committed to working proactively with the local population to build a clear understanding of the appropriate protocols for the dissemination of information and consultation." The CAO advises that Glamis undertake focused, culturally-appropriate consultations with all directly-affected communities.

"The Canadian government should tell the Bank to clean up its act, stop supporting projects that run roughshod over human rights, or shut down the mining department at the IFC altogether." said Jamie Kneen of MiningWatch Canada.

In June, the House of Commons Standing Committee on Foreign Affairs and International Trade adopted a report on mining and human rights. The report recommends that Canada work with like-minded countries to apply international human rights standards to the World Bank, in accordance with the recommendations of the recently-completed Extractive Industries Review.

Internal Review Slams World Bank Over Lapses at Guatemala Mine

Backgrounder - August 22, 2005

A forthcoming report by the Compliance Advisor Ombudsman (CAO), a body responsible for conducting internal reviews at the World Bank's private sector lending arm, the International Finance Corporation (IFC), identifies glaring deficiencies in the due diligence the institution conducted for a controversial new gold-mining project in Guatemala.

The project, currently under construction by Canadian company Glamis Gold in Guatemala's indigenous western highlands, has been surrounded by controversy and conflict since before the IFC approved $45 million in support for the project in June 2004. In January of this year, a forty-day protest by local villagers worried about the mine's potential environmental impacts ended in bloodshed as security forces clashed with protesters, resulting in one death and dozens of injuries.

The CAO report is the latest in a series of blows against Glamis' flagship project in Guatemala. On March 13, a villager was shot dead by an off-duty employee of the Grupo Golan company providing security for Glamis. Mine opponents and company staff have both received death threats and other forms of harassment. In May, a report issued by the Guatemalan Human Rights Ombudsman argued that the license for the Glamis mine should be revoked because of the government's violation of International Labour Organization Convention 169 (ILO 169) on Indigenous and Tribal Peoples. This treaty grants indigenous peoples the right to prior consultation regarding the use of natural resources on their lands. In June, the rural municipality neighbouring the mine site staged a referendum on the project in which 98% of the more than 2000 participants voted against project development. Similar referendums in other nearby communities are planned.

Report Finds Major Flaws

Following the violence earlier this year, Madre Selva, a Guatemalan environmental organization, filed a formal complaint with the IFC's Compliance Advisor Ombudsman, a mechanism set up to aid groups affected by IFC projects by reviewing compliance with the Corporation's social and environmental policies, and seeking to resolve conflicts.

The complaint charged that: 1) the high volume of water needed for the mine would limit community access to this resource; 2) the mine would potentially contaminate the environment and water supply; 3) the project violated the rights of indigenous peoples who had not been adequately consulted about the proposed development and its impacts; and 4) the mine's existence exacerbates social tensions, violence and insecurity. The complaint called on the IFC to cancel its loan to the mining company.

The Ombudsman's officials carried out an investigation in May, during which they visited the project site, and met with community groups, the company and the Guatemalan government. Their report (which has not yet been publicly released) finds that the IFC failed to enforce its own policies requiring thorough assessments of the potential social and environmental impacts of the project and did not guarantee that adequate consultations were carried out with local populations.

The CAO characterizes the Marlin project as a "high risk investment." However, according to the report, the IFC failed to assess the Guatemalan government's capacity to effectively mitigate conflicts and regulate the project, a capacity which the report describes as virtually nonexistent.

The CAO report also reveals the lack of clear, enforced IFC procedures for project evaluation and oversight, generally. According to the CAO, the IFC lacks explicit criteria for evaluating such critical project documents as social and environmental impact assessments and management plans. Mechanisms do not exist to ensure that recommendations made by external auditors and third-party evaluators are implemented, and IFC requirements are waived without justification. Faced with this regulatory void, the CAO found that Glamis applies its own, improvised protocols and develops its activities on an ad hoc basis.

The report states that, in general:

Greater clarity and rigor on the part of the IFC would have been a great help in resolving many of the issues raised by the claimants (unofficial translation).

With respect to consultation, the report states that:

Given the newness of mining in Guatemala, the rural location of the potentially affected populations and the complexity of the social and environmental impacts associated with open-pit mining, [the amount of time dedicated] was insufficient to allow a reasonably informed consultation. Above all, there has not been sufficient time or space to build trust, and reconcile disputes and concerns related to the project and with granting mining concessions in general (unofficial translation).

Consequently, the report calls on IFC to support new independent studies of potential impacts of the mine's operations on water quality and quantity and engage in new, culturally-appropriate consultations on these studies with all of the local, directly-affected communities.

The report also finds that IFC took no account of the potential for local conflict and violence related to the project, a particular concern given the unresolved tensions from Guatemala's civil war in which an estimated 200,000 people, mainly indigenous, were killed by government forces. In fact, the CAO blames much of the rising tensions and violence on the "significant omission" within the IFC (and the company) of a policy to address human rights and the use of security forces.

With respect to security the report states that the IFC should have considered more systematically the potential risk to human rights at the project level, should have taken appropriate measures to mitigate these risks, and should have provided clearer directives to the company with respect to both issues.

In light of this and the absence of any IFC policies that address human rights and the use of security forces, the report argues that the IFC should have required the company to do a human rights assessment, and recommends that the IFC require project proponents adopt the US/UK Voluntary Principles on the Use of Security Forces.

The report closes by reiterating key recommendations from the World Bank's Extractive Industries Review, a 3-year process completed last year that analyzed the Bank's support for the oil and mining sectors.

These include:

o Better evaluation of cumulative strategic environmental impacts of projects o Transparency regarding investments and the distribution of payments to beneficiaries o Ensuring that communities are well informed about the social and environmental impacts of projects o Supporting only projects that have the full support of affected communities o Ensuring that security forces respect human rights o Evaluating the country context, and the risks and benefits of the project

Questions, Concerns Raised from the Beginning

Prior to IFC's approval of the project in May 2004, local organizations in Guatemala and international non-governmental organizations (NGOs) raised concerns with the IFC about the lack of adequate consultations with affected communities and the exacerbation of tensions as a result of the project. The IFC's own board of directors expressed unusually strong reservations about the project and sharply questioned its development benefits to Guatemala, noting that the $261 million project (to which IFC is providing a $45 million loan) would only create 160 long-term jobs and would pay royalties of only 1% of its revenues. The board also expressed concern that IFC was relying on information from the company, rather than an independent assessment, to refute concerns presented by NGOs.

In previous correspondence with IFC, NGOs have strongly questioned the suitability of Glamis Gold as an IFC partner. The company's project in Honduras has been plagued by serious environmental problems and has been the focus of large community protests in recent years, including some led by the country's Catholic archbishop. Glamis has also filed a claim against the US government under NAFTA, arguing that environmental regulations designed to protect sacred indigenous sites, which affect its proposed mine in California, constitute an "expropriation" of its investment interest.

Key Test for New Bank Policies on Oil and Mining Projects

The Guatemala project represents an important test for the World Bank's newly reformed policies on lending to the oil and mining sectors, as it is the first major mining project approved by the Bank following completion of the Extractive Industries Review. That review, which the Bank agreed to in 2001 under pressure from NGOs, found major weaknesses in the Bank's social and environmental management of its projects in these sectors. It called on the Bank to implement a sweeping set of reforms, including taking measures to ensure that affected communities benefit from Bank-funded extractive projects, establishing indicators for measuring these benefits, and only supporting projects that have the support of affected communities. The Bank has committed to partial implementation of some of these recommendations.

Local and international organizations allege that IFC is failing to comply with even these limited commitments in the Guatemala project. They also note that the project is one of a series of problematic mining projects that IFC has supported in recent years in Peru, Mali, Ghana, Kyrgyzstan and elsewhere that have generated serious environmental problems leading to community protests. Last year, the IFC-funded Yanacocha mine in northern Peru was nearly forced to shut down by villagers protesting the mine's plans to expand operations in an environmentally-sensitive protected area.

Recommendations:

- The IFC should call on Glamis Gold to suspend operations at the project until a process can be established for appropriate consultations with affected communities about the project's impacts.

- An independent assessment of the mine's overall potential impacts on water quality and quantity should be carried out with the participation and support of local civil society organizations.

- The project should only continue with the consent of affected populations.

- If Glamis does not accept IFC's request for a suspension, IFC should recall its loan to the company.

- The IFC should suspend mine-related lending until it has established clear, publicly-accessible criteria and procedures that guide project evaluation and oversight. The IFC Mining Department should be held accountable for its failure to conduct adequate due diligence on the Marlin project as set out in the CAO report.