IMF launches probe into director's affair with employee

The International Monetary Fund has opened an investigation of its director Dominique Strauss-Kahn and his intimate ties to a subordinate employee -- an affair that echoes the scandal that ousted Paul Wolfowitz from the World Bank last year.

The IMF, one of the main players in coordinating global attempts to tamp down the explosive financial crisis, acknowledged Saturday it had hired the law firm of Morgan, Lewis & Bockius to conduct the investigation, expected to be completed by the end of the month.

The inquiry was set in motion at the initiative of a long-serving member of the institution's governing board, Shakour Shaalan of Egypt.

Shaalan "has asked external counsel to conduct an independent investigation and determine the validity of the allegations," IMF spokesman William Murray said.

"All allegations -- particularly those involving senior management -- are taken extremely seriously," he added.

Strauss-Kahn, 59, considered one of the preeminent European political figures on economic matters, was appointed in September 2007 to head the IMF and help reform the institution.

Murray declined to confirm details reported overnight in The Wall Street Journal, which said the investigation focuses on Strauss-Kahn's relationship with Hungarian-born Piroska Nagy, a married former senior official in the IMF's Africa department.

The daily, citing individuals familiar with the matter, reported that Strauss-Kahn began approaching Nagy in December 2007 to have an intimate relationship.

The two are said to have exchanged emails about a possible affair, which apparently began early this year during a conference in Europe, according to The Journal.

It said the emails were discovered by Nagy's husband, prominent Argentine-born economist Mario Blejer, who has worked at the IMF.

Strauss-Kahn has acknowledged the probe but said he did nothing that compromised his work at the IMF. "The IMF is examining an incident which occurred in my private life in January 2008. I have cooperated and am continuing to cooperate with outside counsel to the Fund concerning this matter," he said. "At no time did I abuse my position as the Fund's managing director."

The sex scandal is horrible timing for the IMF, which has been in the global spotlight in the past weeks as governments grapple with the extent of the worst financial meltdown since the Great Depression of the 1930s.

The probe is looking into whether or not Strauss-Kahn, a former French finance minister, abused his power as IMF boss and showed any favoritism to Nagy, and whether or not he sought retribution once their relationship ended.

The investigation also seeks to know if Nagy's severance package was excessive for a person of her position and tenure.

Nagy resigned in August, when the fund slashed about 600 positions.

Her attorney Robert Litt said she had not been pressured to leave the IMF and took a buyout package that was available to others of her pay grade and seniority, The Journal reported.

The probe comes 15 months after former World Bank president Wolfowitz was forced to quit because of alleged favoritism to a staffer with whom he had a long-standing relationship.

The American resigned after an internal World Bank report found that he had violated bank rules in arranging a generous promotion and pay package for his girlfriend shortly after he assumed the bank presidency in 2005.

On Friday British Prime Minister Gordon Brown renewed his call for revamped global institutions including the IMF and World Bank to hold a more prominent role in dealing with the current fiscal meltdown, writing in The Washington Post that "the old post-war international financial institutions are out of date" and must be "rebuilt for a wholly new era."

© Wire reports