By Anna Yukhananov
WASHINGTON, Aug 11 (Reuters) - The World Bank's private sector arm did not pay enough attention to environmental and social risks when it lent to Honduras' largest bank, Ficohsa, an internal bank watchdog said on Monday.
The finding marks the second time this year that the International Finance Corporation's own ombudsman has chided it for flaws in Honduran investments.
The IFC acknowledged some problems with its initial investment in Ficohsa, which has also drawn fire from non-profit groups, but said it has since improved.
The IFC approved $70 million for Ficohsa in 2011 despite the bank's risky operating environment and clients, including a palm oil company linked to multiple killings and drug trafficking, the IFC's Office of the Compliance Advisor Ombudsman (CAO) said in the report.
In fact, the IFC had itself earlier approved a $30 million loan to the palm oil company, called Dinant, despite the firm's troubling history, the CAO found in a previous report.
Honduras, one of Central America's poorest countries, is embroiled in one of the thorniest land disputes in the region. Human rights groups have accused Dinant and its guards of human rights violations, including killings and forced evictions of peasants occupying disputed land.
The CAO said IFC had "at best, a superficial understanding of the environmental and social risks that are attached to Ficohsa's client base," even though some IFC employees who lent to Dinant knew about the risks and the wider problems in Honduras.
The IFC said the report correctly focused on past problems, but that it has since improved its practices, which the CAO acknowledged. It hired three full-time people to focus on environmental and social risks with Ficohsa, compared with one part-time employee before.
The IFC also said it now visits risky projects more often, better shares information among different parts of the organization, and by the end of the year plans to train all its employees in environmental and social risk management.
"When there are gaps in our approach, as was the case with our investments in Ficohsa, we remain committed to acting quickly, learning from our mistakes and making the necessary course corrections," the IFC said in a letter.
The IFC aims to develop the private sector in poor countries to reduce poverty and boost economic growth.
But the organization's growing loans to financial intermediaries - which now make up more than half its portfolio - have come under fire from non-profit groups, which say IFC lacks a good way of tracking their impact on development.
The CAO also said the IFC may put financial considerations first, generally focusing more on the credit risks of its portfolio rather than on environment and social risks.
It said its findings "raise concerns that IFC has, through its banking investments, an unanalyzed and unquantified exposure to projects with potential significant adverse environmental and social impacts." (Reporting by Anna Yukhananov)