Harvard will not conduct an internal investigation into a scandal involving Harvard Institute for International Development (HIID) that may cost the University $14 million in government grants, Provost Albert Carnesale said last week.

The U.S. Agency for International Development, which administers a program to aid Russian development, released the preliminary findings of a report accusing two employees of HIID, Professor of Economics Andrei Shleifer and Jonathan R. Hay, an HIID associate, of using the institute's resources for their own personal gain.

Carnesale said Shleifer will remain in his position as a tenured professor, although he has been relieved of his HIID responsibilities. Dale W. Jorgenson, the outgoing chair of the economics department, declined to comment on the situation.

Hay, who is also director of the Institute for a Law-Based Economy (ILBE), a non-profit subsidiary of HIID, has also been relieved of his HIID responsibilities, according to Jeffrey D. Sachs '76, director of HIID.

Although Harvard officials have repeatedly stressed that they are cooperating fully with USAID's investigation, it is likely the Institute's work in Russia will end.

According to Sachs, HIID is cooperating with USAID in the investigation.

"They raised serious concerns. We are doing everything we can to facilitate their investigation," Sachs said.

"HIID has for a long time and in all of its activities maintained scrupulous standards," Sachs said. "This [incident] is an abberation."

According to The New York Times, Russia's Deputy Prime Minister Anatoly B. Chubais said in a press conference last Friday that he would no longer work with HIID because he did not want to be influenced by U.S. government funds.

"We are currently in discussion with the people at HIID and the Russian government on how to best finish up the work that has been started," said Donald L. Pressley, deputy assistant administrator of USAID.

"We're working to figure out what is the best next step," Pressley added. "A possible next step may not involve Harvard."

HIID's project, which involves four key steps, was originally granted $57 million by USAID. Three of these steps are nearly completed: assistance in the privatization of state-owned enterprises, the development of a of a commercial law center and support to capital markets, involving such projects as the establishment of a security secretariat.

The fourth area of the project-reform of the tax system-is the area with the greatest potential for continued support from Harvard, according to Pressley.

USAID had informed HIID that its funding was limited, and that "over time they needed o find ways that they could be self-sustaining.

It would have to find ways to support itself," according to Pressley.

To solve its long-term funding problem, HIID established a for-profit consulting arm, ILBE. A large portion of ILBE-Consulting's initial funding came from HIID. Additional funding was provided by the World Bank.

ILBE-Consulting provides advice to private companies and individuals on how to invest in the Russian economy,

The decision by Schleifer's wife, the president of Fixed Income Associates Inc., to hire ILBE as a consultant for her investment in Russia would be considered unethical because Shleifer was in a position to advise the Russian government on economic policies, Pressley said.

Nancy Zimmerman, Shleifer's wife, did not return calls requesting comment. Shleifer, who has previously denied any wrongdoing, also did not return calls.

Conflicts of interest of this type are prohibited by HIID conflict-of-interest policy, according to Sachs. The rules of the Faculty state that if a member "has significant financial interests...that could reasonably appear to present significant conflict...if it is deemed necessary after consultation, [he or she should] modify his or her activities appropriately." Dean of the Faculty Jeremy R. Knowles said that "every member of the Faculty is sent a copy of this document."

According to a press release, HIID's policy states that "people working on an overseas project for HIID, as well as their family members, may not make financial investments within the country where the project is taking place."

The press release also states that "this broad policy is meant to avoid any possible appearance of impropriety."

Sachs denied HIID's connection to ILBE-Consulting.

"We do not have subsidiaries making investments," Sachs said. "We have no subsidiaries."

"Investing is completely contrary to our rules and our policy," Sachs said. "We act on it immediately and stop it."

USAID officials say Zimmerman, as well as Hay, allegedly used HIID resources for personal reasons.

"I think that the symbol we have always been trying to give to the Russian government is that this capital economy is based on a transparent market where people have an equal opportunity to participate in that market," Pressley said.

"A market where no special benefit comes from being close to the system," he added.

Pressley, who said Friday in an interview that he did not know any of the specifics about ILBE-Consulting until recently, said that USAID has not yet finalized the results of its investigation.

"The information that we used for the basis of our decision to suspend the grant is based on preliminary information," Pressley said.

"There are several people who need to be able to tell their side of the story," he said.

Pressley said that USAID's funding of other HIID projects would continue.

--Matthew W. Granade contributed to the reporting of this story.