Review slams culture of fear, potential fraud, other failings at UNOPS

An independent review found a breathtaking breakdown of financial oversight at a United Nations agency whose rapid expansion created a risky business model, a culture of fear, and “indications of fraud” in one of its marquee investment projects.

The auditing giant KPMG’s Finland office painted a damning portrait of dysfunction by top managers at the little-known U.N. contracting agency known as the U.N. Office for Project Services, or UNOPS, as it expanded its role into the high-stakes, and lucrative, world of impact investing, according to a pair of draft reports released.

The two KPMG reports detail how the management concentrated power at the top and dove into the riskier financing model despite a lack of know-how, accountability, and a slew of “red flags” about its questionable choice of investment partners. The reports also describe an intimidating atmosphere among UNOPS staffers, who fretted that dissent could result in their dismissal, and the complete breakdown of the U.N. whistleblower process.  

“A culture of fear created an environment that allowed for management override of controls,” according to one of the reports. “The way of working by top management further indicates an abuse of power.”

“Interviews indicate that the whistleblowing mechanism was not functioning due to a lack of trust in the confidentiality of processing the complaints and fear of retaliation among staff,” the report added.

The revelations — which come in advance of a special session on Wednesday of the U.N. Development Programme, or UNDP, the U.N. Population Fund, or UNFPA, and UNOPS — are being disclosed several months after Devex first reported in April on irregularities in a UNOPS initiative called Sustainable Investments in Infrastructure and Innovation, known as S3i.

One KPMG review focuses on the failings of S3i, which was established by UNOPS to provide seed financing for private investments in affordable housing, and promote renewable energy and health infrastructure. The second review proposes structural reforms at UNOPS aimed at better managing risk.

"This is a positive step and I welcome the findings,” Acting UNOPS Executive Director Jens Wandel told Devex. “It is a necessary part of our commitment to a rigorous and comprehensive process to address any possible misconduct and mismanagement claims.”

After news broke out about the problems at UNOPS earlier this year, the United Nations said it would review the matter for any disciplinary action, including possible legal referrals “to relevant criminal authorities of one or more jurisdictions.”

High-risk expansion

The S3i program was the result of a new risk-taking strategy that UNOPS adopted.

UNOPS was established in 1973 and for years acted as a general contractor, managing and implementing infrastructure and procurement projects for the U.N. system, international financial institutions, and governments. The Copenhagen-based contractor had $1.2 billion in revenue in 2021, and carried out operations valued at $3.4 billion.

Unlike other U.N. agencies though, UNOPS’ funding did not come from donors; its income depended on fees from the customers who hired it.

The agency built up reserves from the fees, and while some reserves were clearly vital for a self-funding agency, the size of the money pile raised questions among U.N. member states and auditors.

In 2014, the mandate shifted so that in addition to performing practical services like building roads and buying office equipment, it began dabbling in investments.

“The changes were primarily driven by senior management’s ambition to increase the visibility of UNOPS and pursue a role in impact investing,” the KPMG report said.

Under the leadership of Grete Faremo, who was appointed executive director of the agency in 2014, UNOPS’ investment portfolio grew from $159 million in 2017 to $360 million in 2021, an increase of 126%.

A fear of dismissal

A key part of the new strategy, which sought to do more with less by leveraging private sector resources, was S3i. The initiative invested $63 million in eight projects, with the hopes of ultimately leveraging that into $20 to $50 billion in investments.

S3i, which was run by Vitaly Vanshelboim, aimed to secure private financing to build 1.3 million affordable homes over the next decade in Ghana, Guinea, Nigeria, India, Pakistan, and across the Caribbean. Vanshelboim, who also served as deputy executive director of UNOPS, is currently the target of investigation by the U.N. Office of Internal Oversight, or OIOS. He declined a request for comment.

In April, Vashelboim was placed on “administrative leave due to an investigation into possible misconduct.” Faremo resigned on May 8, admitting that failures “occurred on my watch and I acknowledge my responsibility and have decided to step down.”

KPMG is particularly scathing in its account of how the top leadership at UNOPS increasingly concentrated power within a small circle of top officials and weakened the agency’s oversight procedures as the agency ventured on a series of high-risk investments aimed at building 1.3 million affordable homes in a handful of low- and middle-income nations.

It said the agency’s rapid growth was not matched by an increase in staff, or expertise. “No investments in people or processes were made prior to making the first significant investments,” the report states. “The management did not fully comprehend the risks involved.”

It said that staffers feared retaliation and the possible loss of their jobs if they challenged leadership’s efforts to rapidly grow the organization and increase its revenues.

Among staff, “there was broadly a fear of being replaced or fired in case decisions or management agenda were challenged,” the report stated. “Overall this created a culture of fear in the organization that had a significant impact on the failures that later occurred.”

The red flags were discarded

KPMG argues that a lack of transparency, due diligence, and competitive bidding contributed to those failures.

Among the concerns that KPMG also identified were significant exposure to one partner, no collateral on loans, contracts that did not include basic financial protections for UNOPS, and reputational risks.

For example, it cites the selection of SHS Holdings as an S3i partner without proper technical vetting of the company’s claim of having unique new affordable technology — despite the fact that UNOPS had strong infrastructure expertise. Yet the agency continued to invest in SHS and associated entities that were all directly or indirectly owned by a single British businessman David Kendrick, according to KMPG.

The reports also claim that UNOPS officials repeatedly ignored warning signs that trouble was amiss, including a complaint by a whistleblower in 2019 that contracts were overwhelmingly going to a single partner without competitive bidding.

"All of these red flags were disregarded," the report said.

Long-term transformation

“Increased revenues were preferred even if it meant venturing further from the original mandate of UNOPS and taking on more risk,” according to the report, which argued the organization lacked the expertise or capacities to run an initiative like S3i. “Changes in management focus were combined with a systematic approach by the management to reduce transparent sharing of information.”

Pointing a finger at the executive board, made of U.N. member states, KPMG said no one board could oversee UNOPS, UNDP, and UNFPA and suggested ending the era of a single oversight body for three sprawling U.N. agencies.

The report concludes that while immediate changes are needed in the short term, “considering the damage caused by the failures and the time needed to change an organizational culture, UNOPS and its management need to commit to a long-term transformation process.”

That includes refocusing on UNOPS’ original contracting mandate, adopting a less top-down management approach, overhauling the whistleblowing process, collaborating with other U.N. agencies on ethics practices, and making risk management central to decision making.

In response to the KPMG reports, UNOPS issued a statement saying it “takes all findings extremely seriously and is committed to address all recommendations under the direction of the Executive Board.”

“If any allegations are confirmed, in whole or in part, appropriate disciplinary and corrective actions will be made to restore the trust and confidence of our personnel and partners,” it added.

UNOPS said in a separate statement that the U.N. Office of Legal Affairs would seek to recover any lost funds from S3i.