WASHINGTON, Jan 22 (Reuters) - The World Bank's private-sector arm on Wednesday accepted criticism from its internal watchdog that it should have done more due diligence on a loan to a Honduran company allegedly linked to multiple killings.
The bank's International Finance Corporation (IFC) said earlier this month that it disagreed with some of the findings of the watchdog report, which said it should have done more careful research before approving a $30 million loan to Tegucigalpa-based Corporacion Dinant, a palm oil company.
IFC backed away from its initial disagreements on Wednesday and said it would cancel the loan if Dinant did not agree to strengthen its community engagement and review its security practices.
It gave the company half the $30 million loan in 2009, but has not disbursed any funds since.
At issue is just how much due diligence IFC should do before giving money to companies in conflict areas, and how it should react to escalating violence after a deal goes through. The World Bank arm aims to spur private investment in developing countries.
The topic is likely to become even more important as the World Bank plans to work more closely with the private sector in order to fight poverty.
The report by the IFC's Office of the Compliance Advisor Ombudsman (CAO) said a standard news article search, as required by World Bank rules, would have turned up accusations that Dinant's owner had masterminded the murder of an environmental activist and that his properties were staging posts for drug traffickers.
The CAO said it had not tried to verify the reports and noted the businessman had been acquitted of murder charges. But in one of its harshest critiques to date, the CAO said the accusations should have raised red flags because they could damage the World Bank's reputation.
"IFC acknowledges that there were shortcomings in how we implemented our environmental and social policies and procedures in the Dinant investment, and accepts the recommendations made in the CAO audit," the institution said in a statement.
"As noted in the audit, IFC must take a broad view of the country and sector risks when considering projects."
The World Bank's board held an informal meeting last week about the CAO audit and IFC's investment, according to the bank's website.
A letter from a coalition of nine local and international human rights groups said their "outcry," along with criticism from the bank's board and negative media coverage, prompted the IFC to admit the errors on Wednesday.
The IFC approved a loan program in 2009 to help Dinant develop its palm oil and food business. The CAO launched an audit of the project in 2012.
Through the loan, IFC indirectly got involved in one of the thorniest land disputes in Central America. Dinant operates in a fertile region near Honduras' Caribbean coast that has been the site of clashes that have left more than 100 people dead since 2009, according to the Honduran National Commission for Human Rights.
Human rights groups have accused the company and its guards of human rights violations, including killings and forced evictions of peasants occupying disputed land.
The coalition of human groups welcomed the IFC's admission of mistakes, but said the lender had not done enough to change its institutional culture and hold staff responsible.
"The IFC's new response still falls seriously short of laying out a plan to ensure that communities' human rights are respected in future," nine groups said.