INTERNAL AUDIT REPORT RE: CERNAVODA COMPLIANCE AUDIT - DISCLOSURE & CODE OF BUSINESS ETHICS

AUTHORIZED FOR ISSUANCE BY: Carman Lapointe-Young, VP, Internal Audit and Evaluation PREPARED FOR: FINAL ISSUANCE DATE: CONCLUSION: I. Gillespie, President & Chief Executive Officer; G. Ross, SVP Corporate Secretariat and Legal Services; E. Siegel, SVP MLTFS; A. Lawford, Compliance Officer March 26, 2004 In IAE's opinion, EDC satisfactorily complied with all relevant policy sections of the Code of Business Ethics in executing the Cernavoda transaction. Additionally, it is our opinion that EDC satisfactorily complied with the requirements of section D3 of the Disclosure Policy for this transaction.

TABLE

OF

CONTENTS

SECTION ONE: BACKGROUND SECTION TWO: PROJECT SCOPE SECTION THREE: ISSUES/FINDINGS SECTION FOUR: CONCLUSIONS SECTION FIVE: VICE PRESIDENT INTERNAI: AUDIT SIGNATURE

SECTION ONE: BACKGROUND

In a letter of complaint received by EDC's Compliance Officer dated July 28, 2003, the Halifax Initiative, a coalition of 19 nongovernmental organizations (NGO's), alleged that in supporting the Cernavoda 2 Nuclear Power Plant, EDC did not adhere to the following three internal policies: 1. Environmental Review Directive 2. Disclosure Policy 3. Code of Business Ethics In response to these allegations, pursuant to EDC's compliance program, the Compliance Officer recommended a compliance audit be conducted. On January 8, 2004, EDC Executive Management asked Internal Audit and Evaluation (IAE) to provide independent and objective assurance that the Corporation complied with two of these policies, namely the Code of Business Ethics and Disclosure Policy, in executing the Cernavoda transaction. In conducting this engagement, IAE has adhered to appropriate professional standards prescribed by the Institute of Internal Auditors (IIA). Work consisted of inquiry, analysis, and discussion related to information and documentation supplied.

SECTION TWO: PROJECT SCOPE

The scope of this compliance audit was defined by the written allegations against EDC with respect to the Cernavoda transaction as documented in the letter from the Halifax Initiative dated July 28, 2003. Excluded from the scope of this audit is assurance that EDC has complied with the Environmental Review Directive requirement as decided by Management. In conducting this audit, IAE: Interviewed Executive Management Developed assessment criteria Interviewed EDC employees involved with the Cernavoda transaction Reviewed file documentation Based on the specific written allegations in the Halifax Initiative letter, the following questions were posed and responses were analyzed against established criteria. 1. Is there evidence that EDC included reference to the international standards which are met or exceeded by the project's design?

2. Is there evidence that EDC encouraged all project sponsors to whom it provided support to release the full EIA? (or to release more available environmental impact information?) 3. Is there evidence that EDC took comments from Sierra Club's review of the AECL summary into consideration? 4. Did EDC base its review on the AECL study, a summary of which was made available to the public in December 2001? 5. In EDC's review of the Environmental Impact Assessment (EIA), did EDC encourage those with whom it was doing business to use best practice with the aim of raising international environmental standards? 6. Was there anything that gave rise to concerns with respect to ethical conduct of EDC employees during the execution of this transaction?

SECTION THREE: ISSUES/FINDINGS

It is essential to establish criteria to enable measurement of compliance to any subject matter. After thorough research and analysis, criteria for this audit were established. Questions regarding the intent and interpretation of the relevant policies and about guidance were posed and research was conducted with these criteria in mind. Complaint 1. Not clearly indicated in letter, but assumed to be that EDC did not make reference to the international standards which are met or exceeded by the project's design. Relevant EDC Policy Section Alleged Violation of Section D3 of EDC's Disclosure Policy Paragraph 4: "...EDC's individual transaction disclosure pursuant to D2, in respect of support to projects that would be classified as Category A projects under its Environmental Review Directive, will be expanded to include reference to the international standards which are met or exceeded by the project's design. IAE Criteria EDC must include reference to the international standards which are met or exceeded by the project's design. Prior to date of signing the transaction, did EDC document its proposed support (via EDC website) of the project? Within 90 days of signing the transaction, did EDC post to its web site reference to the international standards which were met or exceeded by the project's design? Evidence Verified

Based on an analysis of the evidence, it is IAE s opinion that EDC satisfactorily complied with the above section of the policy

2. AECL only ever made Alleged Violation of Section D3 of EDC's available a summary of its Disclosure Policy. EIA in December 2001. As EDC endeavours to act Paragraph 3: "... EDC will encourage according to high all project sponsors to whom it is international standards and providing support to publicly release the best prevailing practices, available environmental impact this would require the full information" release of the EIA. This is especially true since EDC s client in this case is a government agency, and financing for this project is through the Canada Account.

EDC must encourage all project sponsors to whom it provides support to release available environmental impact information. Does documentation exist that demonstrates EDC's encouragement to the project sponsor to publicly release available Environmental Impact information? Did EDC consistently describe activities that demonstrate encouragement?

Verified

Based on analysis of the evidence, it is IAE s opinion that EDC satisfactorily complied with the above section of policy. 3. The review that the Sierra Club conducted of the AECL summary was endorsed by over sixty international NGOs, representing a large constituency of stakeholders whose opinions EDC has apparently made no effort to weigh. There is little evidence that EDC, for example, took these comments into consideration in its review, despite its commitment to being fair and respectful to all stakeholders . Alleged violation of Code of Business Ethics, Commitment to legal and ethical conduct section. Paragraph 1: "...It is also corporate policy that communication and relationships with stakeholders be truthful and transparent in a way that will withstand the highest degree of public scrutiny. Working relationships will be based on candor and openness, treating each other fairly and with respect, while acting with integrity, and weighing responsibilities to all stakeholders. EDC must treat all stakeholders fairly and with respect. Does documentation exist that demonstrates fair and respectful treatment of the Sierra Club and their comments? Did EDC consistently describe activities that demonstrate fair and respectful treatment of the Sierra Club and their comments? Verified

Based on analysis of the evidence, it is IAE s opinion that EDC satisfactorily complied with the above section of policy. 4. It is our understanding that EDC based its review on the EIA conducted by AECL, a summary of which was made 4 available to the public in December 2001. However, according to the Romanian Ministry of Waters and Alleged violation of Code of Business Ethics, Commitment to legal and ethical conduct section. EDC must conduct its business and affairs in accordance with the letter and spirit of all applicable laws in the countries in which it does business. Verified

EDC based its review on the EIA conducted by AECL, a summary of which was made available to the public in December 2001. However, according to the Romanian Ministry of Waters and Environmental Protection, AECL was not certified to carry out such a study, and furthermore, the Environmental Impact Summary (EIS) issued by AECL did not meet the national requirements in this matter (according to Ministrey Order 278/1996 and 125/1996 respectively). If EDC based its review on the AECL study, it was therefore basing its review on a document that had breached Romanian law.

Ethics, Commitment to legal and ethical conduct section. Paragraph 1: EDC will conduct its business and affairs in accordance with the letter and spirit of all applicable laws in the countries in which it does business. If any EDC employee or representative is ever uncertain as to the interpretation or application of a particular law, he or she must seek advice from Legal Services before taking action. Compliance with the law may, however, fall short of the standard of ethical conduct expected by EDC.

and affairs in accordance with the letter and spirit of all applicable laws in the countries in which it does business. Did EDC consider applicable Romanian law in its review of the EIA?

Based on analysis of the evidence, it is IAE s opinion that EDC satisfactorily complied with the above section of policy. 5. Given the omissions in the EIAs and breaches to host country law highlighted, it appears impossible that EDC could have reviewed the EIA using the highest international standards. Yet EDC s Code of Business Ethics asks the crown corporation to encourage best practices among those with whom it does business, with the aim of raising international environmental standards. This has not been achieved. Alleged violation of Code of Business Ethics, The Environment. Sentence 4: EDC will encourage best practices among those with whom it does business, with the aim of raising international environmental standards. EDC must encourage best practices among those with whom it does business, with the aim of raising international environmental standards. In their review of the EIA, did EDC use standards that are generally accepted as best practice internationally? Did EDC encourage those with whom it does business to meet these standards? 5

with the aim of raising international environmental standards. This has not been achieved.

whom it does business to meet these standards?

Based on analysis of the evidence, it is IAE s opinion that EDC satisfactorily complied with the above section of policy.

SECTION FOUR: CONCLUSIONS

In IAE's opinion, EDC satisfactorily complied with all relevant policy sections of the Code of Business Ethics in executing the Cernavoda transaction. Additionally, it is our opinion that EDC satisfactorily complied with the requirements of the relevant sections of the Disclosure Policy for this transaction.

SECTION FIVE: VICE PRESIDENT INTERNAL AUDIT SIGNATURE Carman Lapointe-Young Vice President, Internal Audit and Evaluation May 7, 2004 Date