Now is the Time for DFC to Shore Up Its Accountability

Last month, the U.S. House Foreign Affairs Committee passed legislation to reauthorize the U.S. International Development Finance Corporation (DFC). The legislation, which received bipartisan support, would give DFC seven more years to operate, increase its lending cap to 120 billion USD, and extend its geographical reach. For DFC to meet the lofty development goals of its mandate, a strong accountability system is crucial, especially as it increases its ambitions.

Fortunately the proposed legislation maintains a key accountability requirement that was also in the 2018 law that created DFC from the Overseas Private Investment Corporation (OPIC) and portions of USAID – an independent accountability mechanism (IAM). An IAM, a common governance feature at development finance institutions, is an office where communities can raise concerns about environmental and human rights impacts of projects. An IAM can conduct a compliance investigation to see if the institution’s environmental and social requirements were fully implemented, or a dispute resolution process that brings together parties to negotiate mutually agreeable solutions to the grievances. Unfortunately, although DFC has been operating since 2020, it still hasn’t fully operationalized the IAM requirement. This has left communities affected by DFC’s financing uncertain about how they can bring a complaint and have it effectively addressed.

DFC recently took steps to finally address this gap by launching a public consultation on the terms of reference or the procedures that will guide the IAM complaint process. These rules are important for ensuring that communities know what makes a complaint eligible, the steps of a compliance investigation or a dispute resolution process, and the transparency of the process. The draft terms of reference are largely based on the policy for the International Finance Corporation’s Compliance Advisor Ombudsman (CAO), which is a strong IAM policy for ensuring an effective accountability process. Despite these strong provisions, there are key areas where the IAM’s rules need to be improved:

• Independence: As with most IAMs, the DFC IAM reports to the DFC’s Board of Directors, who makes decisions about key outcomes of complaint processes. However, unlike with most IAMs, the DFC CEO sits on his own Board. This undermines the very independence of the mechanism whose task is to critically examine the behavior of the DFC. Independence for the IAM is all the more important at a time when DFC has been rocked by scandals concerning retaliation against whistleblowers who raised concerns about DFC’s operations. For the IAM to maintain its independence, the terms of reference must require the DFC CEO to recuse himself from all decisions on the IAM.
• Accessibility: IAMs must be able to hear complaints about projects before they are approved for financing to prevent harm from occurring and must allow complaints after the institution exits a project to ensure that residual harm is fully remedied. The DFC should want its IAM to be a tool for preventing harm, and if people can raise potential issues ahead of time, DFC has the opportunity to consider preventative measures. The DFC IAM’s proposed rules on when communities can bring complaints prohibit complaints before the DFC Board approves a project and limits complaints after DFC exit to “exceptional circumstances” and are therefore too restrictive and out-of-step with other IAMs. This needs to be corrected to ensure that the mechanism is hearing the complaints it needs to.

Our full set of recommendations for the TOR can be found here. We call on the DFC IAM to implement our recommendations to better ensure a fair and effective process for communities affected by DFC’s projects.

Although the development of the IAM’s TOR will go a long way in ensuring justice for harms caused by DFC projects, it alone isn’t enough. DFC must also commit to responding to the findings of its IAM.  Right now, DFC has no public policy in place explaining how it will address findings of noncompliance and harm for specific projects, or how it will learn from prior mistakes to improve future projects. Further, it has no public policy in place that explains how DFC will require its clients to engage with and respond to the DFC’s IAM, including by contributing to remedial actions.

So, even with the fairest IAM process, communities could still be left out in the cold. This is the case with communities who faced livelihood destruction, employment discrimination, damage to water sources, and sexual exploitation caused by OPIC’s investments into the Buchanan Renewables project in Liberia. Although OPIC’s IAM, the Office of Accountability, confirmed that the communities had been harmed, OPIC never committed to any remedial actions. 10 years later, these communities continue to suffer from the project impacts. DFC must address this remedy gap by developing a comprehensive remedy framework through public consultation that details how it will ensure that the institution and its clients contribute resources to facilitate the full remediation of environmental and human rights harm stemming from its investments.

As the DFC moves forward with its reauthorization process – the legislation will be taken up by the full House of Representatives and the Senate – it must ensure that accountability to project-affected communities is at the heart of the institution. The operationalization of an effective IAM is a key first step, and we call on the institution to take the next step and ensure that environmental and human rights harms are remedied.