CAO ASSESSMENT REPORT Regarding Complaint in Relation to IFC’s Indorama Kokand, Hamkor Equity/SL, Hamkorbank RIs, Hamkorbank SL, GTFP Hamkor, Projects (#38266, 27615, 30893, 32024, 35062, 36170, 33596, 30657) March 2018 Office of the Compliance Advisor Ombudsman for the International Finance Corporation and Multilateral Investment Guarantee Agency www.cao-ombudsman.org About CAO The Office of the Compliance Advisor Ombudsman (CAO) is the independent accountability mechanism for the International Finance Corporation (IFC) and the Multilateral Investment Guarantee Agency (MIGA), members of the World Bank Group. CAO reports directly to the President of the World Bank Group, and its mandate is to assist in addressing complaints from people affected by IFC/MIGA-supported projects in a manner that is fair, objective, and constructive, and to enhance the social and environmental outcomes of those projects. For more information, see http://www.cao-ombudsman.org/ – 2 – TABLE OF CONTENTS LIST OF ACRONYMS ................................................................................................................................. 4 1. OVERVIEW ......................................................................................................................................... 5 2. BACKGROUND .................................................................................................................................. 5 2.1. The Projects ........................................................................................................................... 5 2.1.1. IFC’s project with IKT ................................................................................................... 5 2.1.2. IFC’s projects with Hamkorbank .................................................................................. 5 2.2. The Complaint ....................................................................................................................... 6 3. ASSESSMENT SUMMARY ................................................................................................................... 6 3.1. Assessment method .............................................................................................................. 7 3.2. Summary of issues .................................................................................................................. 8 3.2.1. Complainants’ Perspective .......................................................................................... 8 3.2.2. IFC Clients’ Perspective ................................................................................................ 9 3.3. Agenda for Dialogue ............................................................................................................. 10 4. NEXT STEPS ...................................................................................................................................... 11 ANNEX A. CAO COMPLAINTS HANDLING PROCESS ............................................................................... 12 – 3 – LIST OF ACRONYMS CAO Office of the Compliance Advisor Ombudsman ESAP Environmental and Social Action Plan GTFP Global Trade Finance Program IFC International Finance Corporation IKT Indorama Kokand Textile ILO International Labour Organization ILRF International Labor Rights Forum MIGA Multilateral Investment Guarantee Agency MSME Micro, Small, and Medium Enterprises NGO Non-governmental organization UGF Uzbek-German Forum for Human Rights – 4 – 1. OVERVIEW In June 2016, CAO received a complaint related to several International Finance Corporation (IFC) projects in Uzbekistan. CAO found the complaint eligible for further assessment in August 2016 in relation to two IFC clients: Indorama Kokand Textile (IKT), a cotton yarn producer that received financing from IFC to expand its textile plant; and Hamkorbank, a licensed commercial bank headquartered in Andijan, Uzbekistan, with which IFC has seven active projects. The complaint was filed by a coalition of non-governmental organizations (NGOs) on behalf of Uzbek human rights monitors and alleged victims of forced labor in the cotton fields (the “Complainants”). The complaint raises concerns about the existence of forced labor in IKT’s supply chain. In regards to Hamkorbank, the complainants state that there is significant risk that Hamkorbank participates in a “coercive financial system and is not conducting adequate due diligence to ensure its participation is not supporting forced labor and the related attacks against independent labor monitors.” The complaint also states that IFC’s investment in Hamkorbank may finance companies that utilize or benefit from forced labor in the cotton system, and that IFC has not fulfilled its due diligence and supervision responsibilities. CAO found the complaint eligible in August 2016 and began an assessment of the issues raised in the complaint. During the assessment, the Complainants and the IFC clients agreed to engage in a voluntary dispute-resolution process facilitated by CAO. This Assessment Report provides an overview of the assessment process, including a description of the project, the complaint, the assessment methodology, and next steps. 2. BACKGROUND 2.1. The Projects 2.1.1. IFC’s project with IKT IFC has an active project with IKT, a cotton yarn producer, to finance the expansion of a textile plant in the Fergana Valley, Uzbekistan. IFC’s investment is a senior A Loan up to US$40 million to IKT. According to IFC disclosures, the purpose of the investment is to allow IKT to further expand its capacity in Uzbekistan, leading to increased exports of local cotton yarn and availability of good quality raw material for the local weaving and knitting industry, thus enhancing the growth of the local textile industry and increasing industrial employment. Upon project completion, IFC indicates that IKT will become Uzbekistan’s third largest domestic consumer of cotton, increasing its current annual ginned cotton consumption of 38,000 tons to 50,000 tons per year. As a result, IKT will consume five percent of the country’s one million tons of total annual ginned cotton production. The project was approved by the Board on December 17, 2015, and disbursement of the full amount took place on May 17, 2016. 2.1.2. IFC’s projects with Hamkorbank IFC has seven active projects with Hamkorbank – a combination of equity and loan investments, as well as a Global Trade Finance Program (GTFP). According to IFC disclosures, Hamkorbank was originally formed as a regional bank in the Fergana Valley, and has been transformed into a nationwide financial institution offering small – 5 – and medium enterprise (SME) loans, micro loans, consumer loans, and leasing products. Its shares are traded on the Tashkent stock exchange. The equity investment aims at broadening Hamkorbank’s funding base and will be used for expansion of its financing of micro and small entrepreneurs in Uzbekistan. It also aims at supporting the Hamkorbank’s strategy and assisting in its expansion. IFC indicates that its loans aim to enable Hamkorbank to expand the scope of its lending program to micro, small, and medium enterprises (MSMEs), with a focus on remote areas, which is aligned with IFC’s financial markets strategy for Uzbekistan. Finally, IFC’s Global Trade Finance Program (GTFP) supports selected Hamkorbank export/import transactions. 2.2. The Complaint1 The complaint to CAO was filed by the International Labor Rights Forum (ILRF), the Uzbek- German Forum for Human Rights (UGF), Human Rights Watch, and the Cotton Campaign, acting on behalf of four Complainants: three Uzbek human rights defenders, whose work focuses on combatting the risk of forced labor and child labor during the cotton harvest; and one laborer, who reports being forced to pick cotton on multiple occasions. Six other Uzbek human rights activists asked to add their names formally to the complaint during the assessment phase, bringing the total to ten. The nine complainants who did not request confidentiality requested CAO to disclose their names: 1. Elena Urlaeva, Human Rights Alliance of Uzbekistan, from Tashkent; 2. Dmitry Tikhonov, an Uzbek human rights defender in exile; 3. Uktam Pardaev2, a human rights defender from Jizzakh; 4. Utkir Pardaev, a volunteer from Jizzakh who assisted in monitoring the cotton harvest; 5. Azimbay Ataniyazov, a human rights defender from Nukus, Karakalpakstan Autonomous Republic; 6. Malokhat Eshonkulova, a human rights defender and journalist from Samarkand; 7. Aryslanbay Otepov, a human rights defender from Nukus, Karakalpakstan Autonomous Republic; 8. Haitbay Yakubov, "Najot" (Salvation) human rights organization from Khiva; and 9. Surat Ikramov, chairman of the Initiative Group of Independent Human Rights Defenders of Uzbekistan, from Tashkent. 3. ASSESSMENT SUMMARY The purpose of a CAO assessment is to clarify the issues and concerns raised by the complainants, to gather information on how other relevant stakeholders see the situation, and to determine which process—dispute resolution or compliance—the complainants and the IFC clients would like to initiate to address the complaint. CAO does not gather information during assessment to make a judgment on the merits of the complaint. 1 For the complete 21-page complaint letter, please see http://www.cao- ombudsman.org/publications/documents/Cao_submission_public_version.pdf 2 Uktam Pardaev is an original complainant who initially requested CAO to keep his identity confidential and subsequently granted permission