Wolfowitz 'broke World Bank rules over girlfriend's pay'

The World Bank president Paul Wolfowitz said today a report declaring that he broke bank rules to arrange a huge compensation package for his girlfriend was "unfair and unwarranted".

The former Pentagon number two and chief architect of the US-led war on Iraq lashed out after the bank's special panel said the situation had caused a "crisis in the leadership" at the institution, according to its report released in the early hours of today.

The panel said the bank's full 24-member board must consider whether Wolfowitz, who was recommended for the post by US president George Bush, "will be able to provide the leadership" to ensure that the bank achieved its mission of fighting poverty around the world.

The board will ultimately decide Wolfowitz's fate.

The special panel concluded that Wolfowitz's involvement in the details of the package "went beyond the informal advice" given by the bank's ethics committee and that he "engaged in a de facto conflict of interest", the report stated.

But Wolfowitz said: "It is highly unfair and unwarranted to now find that I engaged in a conflict of interest because I relied on the advice of the ethics committee as best I understood it."

Board members have discussed a range of disciplinary options. It could sack Wolfowitz, ask him to resign, signal that it lacks confidence in his leadership or reprimand him. Board members have been leaning towards an expression of no confidence or other tough language that would make it difficult - if not impossible - for Wolfowitz to stay on.

Wolfowitz, who said he acted in good faith in arranging his girlfriend Shaha Riza's pay package, has accused his critics of launching a "smear campaign" against him.

He is due to make an appearance before the board tonight, US time. The proceedings are not public and a decision could come as early as tomorrow.

The controversy that has put Wolfowitz's job in jeopardy involves his handling of the 2005 compensation pay package for Riza, a bank employee.

Wolfowitz said he did not attempt to hide details of the arrangement from bank officials. "I did not have it locked up or placed in a secret drawer; it was a contract of the bank," Wolfowitz wrote in his submission to the panel.

Riza worked for the bank before Wolfowitz took over as president in June 2005. She was moved to the US State Department to avoid a conflict of interest but stayed on the bank's payroll. Her salary shot up from nearly £66,500 a year to £90,000. With subsequent rises, it eventually rose to nearly £97,000.

The panel concluded that the salary increase Riza received "at Mr Wolfowitz's direction was in excess of the range" allowed under bank rules.

Wolfowitz "placed himself in a conflict of interest situation" when he became involved in the terms and details of Riza's assignment and pay package and "he should have withdrawn from any decision- making in the matter", the panel said.

The panel acknowledged, however, that the informal advice provided by the ethics committee "was not a model of clarity".

In addition, the panel said it was of the view that the controversy "has had a dramatic negative effect on the reputation and credibility" of the bank, had raised "serious questions" about the bank's governance and ability to carry out its mission and was contributing to "erosion in the operational effectiveness" of the bank.

The panel also raised fears that the fracas could hinder the bank's ability to raise billions of dollars from countries around the world to provide financial help to poor countries.

European World Bank members - led by Germany, France and the Netherlands - are pushing for Wolfowitz to resign. Other countries, however, would still like to avoid a pitched battle with the US, the bank's largest shareholder.

Many of the bank's staff, former bank chiefs, aid groups and Democratic politicians also have called on Wolfowitz to resign.

But US vice president Dick Cheney said last night that Wolfowitz should remain chief of the bank. The White House has repeatedly expressed confidence in Wolfowitz.

By tradition, the World Bank has been run by an American, while the International Monetary Fund has been run by a European. President Bush tapped Wolfowitz, a move that was approved by the bank's board.

The Bush administration continued to stand by Wolfowitz today.

"A clear reading of the facts in this report demonstrates that this was a unique situation, missteps occurred on all sides and communication may not have been clear enough," said US Treasury spokesman Brookly McLaughlin.

"The facts reveal that President Wolfowitz acted to find a pragmatic solution and to carry out the direction he received from the ethics committee.

"Treasury Secretary Henry Paulson spoke to some of his colleagues today from other countries and expressed that he does not think the facts merit dismissal."