FORUM: Fraud and corruption investigations in multilateral development banks
February 2016 | SPECIAL REPORT: CORPORATE FRAUD & CORRUPTION
Financier Worldwide Magazine
FW moderates a discussion on fraud and corruption investigations in multilateral development banks between Whitney Debevoise at Arnold & Porter LLP, Clare Wee at the Asian Development Bank, David Lorello at Covington & Burling LLP, and Mamta Kaushal at the World Bank Group.
FW: Could you provide an insight into the rise of multilateral development banks (MDBs) over the past decade or so?
Debevoise: The MDBs responded strongly to the global financial crisis of 2008, increasing disbursements significantly. MDB shareholders also responded by approving capital increases. Further, the last two years have witnessed the creation of new multilateral banks by the BRICs and Asia. The MDBs have also stepped up their game in the field of fighting corruption.
Lorello: According to the OECD, over 40 percent of all official development assistance funds spent globally on international projects are now channelled through multilateral organisations. Clearly, donors view MDBs as an important and useful aid platform. Although the multilateral system is not without its drawbacks, it has several features that make it an attractive alternative – or complement – to bilateral aid and have likely contributed to the rising prominence of the MDBs. For example, channelling funds through MDBs allows for the efficient pooling of resources from multiple donors, which allows the MDBs to provide aid on a larger basis than many bilateral agencies, and to take better advantage of economies of scale.
Kaushal: There has been an unprecedented shift in the fight against corruption over the past decade that can be attributed to several factors and players including the MDBs. Fighting corruption, particularly in the development sector, is no longer perceived as the sole responsibility of national enforcement authorities. Each MDB has an independent office tasked with investigating and feeding lessons learned to prevent fraud and corruption in projects financed by these institutions. At the World Bank, the integrity vice presidency has an independent reporting line to the president of the institution as do all of the investigative units at the other MDBs. Today, the assessment of integrity risks and mitigating action is part of the project cycle and a shared responsibility between MDBs, client governments, private sector and project beneficiaries. The integrity units of the MDBs meet regularly and we try to harmonise our approach to ensure that fraud and corruption risks do not compromise projects and development goals.
FW: To what extent have MDBs become an important part of global anticorruption efforts?
Wee: The ADB, along with other MDBs, have a long history of fighting corruption. However, it was recognised that in order for their efforts to be effective, a unified and coordinated approach to tackling corruption was needed. So in 2006, leaders of the African Development Bank Group, Asian Development Bank, European Bank for Reconstruction and Development, European Investment Bank Group, International Monetary Fund, Inter-American Development Bank Group and the World Bank Group came together and established the Joint International Financial Institutions (IFI) Anti-Corruption Task Force.
Kaushal: With their scope of operation and the level of cooperation they have achieved so far, MDBs today represent a major force in driving global anticorruption efforts. That said, the role of national governments and compliance by the private sector are critical to the success of these efforts. Most of the MDBs have, in one form or another, started to engage more with national law enforcement agencies on particular cases. Such collaboration has led to criminal prosecutions and the unveiling of complex international corruption schemes that would, otherwise, have remained hidden from MDBs and authorities alike. At the World Bank Integrity office, we are always looking for ways to leverage our convening power, and to share experiences and exchange perspectives on how to further this global capacity.
Lorello: In the 1980s and 1990s, the MDBs, by-and-large, adopted a passive approach, considering corruption to be a matter for national enforcement authorities to investigate and prosecute. In recent years, however, the leading MDBs – including the World Bank, the Asian Development Bank, the Inter-American Development Bank, EBRD, and the African Development Bank – have taken a more affirmative role, including through the implementation of sanctions and debarment regimes for contractors that engage in misconduct on MDB-financed projects. The MDBs have developed significant internal investigatory resources to evaluate allegations of misconduct and pursue sanctions, and some of the MDBs have been very active in imposing debarments. It is our sense that the MDB sanctions regimes have had an important impact on global anti-corruption compliance, in part given that the MDB regimes can reach companies that may not be subject to the more regularly-enforced national anti-corruption laws, such as the FCPA.
Debevoise: Following World Bank President James Wolfensohn’s famous 1996 ‘Cancer of Corruption’ speech, the World Bank has led the MDBs’ charge against corruption in developing countries. This MDB recognition of and efforts to prevent corruption is an important aspect of global anti-corruption efforts because MDBs are often the only institutions in a position to address corruption in developing countries, where domestic anti-corruption institutions may be weak. MDBs have two primary means of combating corruption. The first is governance reform, which attempts to improve a country’s means of acquiring and managing resources used to provide public goods and services, which in turn may result in domestic institutions that are less susceptible to corruption. The second is anti-corruption enforcement, by which the World Bank and other MDBs sanction and debar entities found to engage in misconduct connected to MDB-financed projects.
FW: How do the sanctions deployed by MDBs compare to those of the US FCPA and UK Bribery Act?
Kaushal: At the World Bank, the most common sanction is debarment with conditional release, which means an entity is declared ineligible from participating in activities financed by the institution for a specific period of time, but then can only be released from debarment and listing on the Bank’s debarment list, if they meet certain conditions which usually includes meeting the Bank’s Integrity Compliance standard before being released off the World Bank’s public debarment list. Debarment is also the most common sanction by all MDBs. This means they are ineligible to engage in any activity financed by that MDB during the period of debarment. Where there is evidence of misconduct by an entity relating to any activity financed by the World Bank Group or another MDB, the entity is debarred, usually for a particular period of time, but sometimes indefinitely. Most MDBs, with the exception of the AfDB, do not use fines as a form of sanction. Restitution is the only financial remedy currently occasionally used by the World Bank.
Lorello: The MDBs do not have criminal law enforcement powers, although they frequently share information with national law enforcement authorities. The remedies available to the MDBs arise from the contractual protections established in funding and services agreements on MDB-financed projects, and the sanctions and debarment regimes that the major MDBs have implemented in recent years. Although the MDBs’ enforcement powers are in certain ways constrained relative to those of national law enforcement authorities, there are also ways in which the MDBs can act with more flexibility. For example, the MDBs are not limited by the jurisdictional hurdles that a national prosecutor may face; their decisions are made within an administrative framework – thus, the burden of proof and evidentiary standards are lower relative to criminal proceedings, and the MDBs’ international legal status means that their decisions are unlikely to be subject to judicial oversight.
Debevoise: Although each regime is aimed at combating and deterring corruption, each operates very differently. The US FCPA and the UK Bribery Act are national criminal laws, which are enforced by national law enforcement acting within its own jurisdiction and presenting cases to the national judiciary. MDBs cannot always rely on the national legal systems of their borrowing countries, and they have no jurisdiction to enforce or adjudicate criminal violations. Therefore, instead of enforcing anti-corruption rules through national criminal law as a sovereign state would, MDBs obtain jurisdiction to sanction corrupt conduct contractually through loan agreements and use administrative processes to implement sanctions. The World Bank’s sanctions system is best analogised to the US Suspension and Debarment system for government contractors than to the FCPA or Bribery Act. Instead of the traditional criminal punishments and fines associated with the FCPA and Bribery Act, MDB sanctions typically take the form of suspension and debarment, whereby the sanctioned entity loses its eligibility to do business with the sanctioning entity. That said, the World Bank has structured settlements involving the payment of significant sums.
Wee: The main difference between the US FCPA and UK Bribery Act in comparison to the sanctions imposed by the MDBs is in their enforcement. A violation of the US FCPA or UK Bribery Act is deemed criminal in nature and involves imprisonment or monetary reparations. On the other hand, in the case of the ADB, the sanctions process is purely administrative in nature and applied only to public funds that are subject to ADB lending.
FW: What are the potential consequences for companies found guilty of fraud and corruption by an MDB? Overall, is the power to debar companies being utilised more frequently?
Wee: The ADB imposes sanctions on companies, and on individuals, that it finds to have engaged in fraudulent or corrupt practices. The length of the sanction period will depend on the circumstances of each case. In the case of companies, the sanction period could last up to seven years for first time offenders. During the sanction period, the company or individual is ineligible to participate in any ADB-financed, administered or supported activity. Also, in accordance with the Cross Debarment Agreement that it has with other MDBs, the ADB may cross debar companies, and individuals, that have been debarred or sanctioned by any of the participating MDBs, and vice-versa.
Kaushal: Companies found guilty of fraud and corruption by MDBs face the possibility of debarment by that MDB. If the period of debarment imposed exceeds one year, that company may also face cross-debarment by the other MDBs. Since its inception in 2010, the cross debarment agreement has impacted 709 entities. This is an expression of a highly effective mechanism designed primarily to deter fraud and corruption.
Lorello: The sanctions procedures of the leading MDBs are largely harmonised with one another. The available sanctions range from a letter of reprimand to debarment. Conditions may be imposed to be released from a debarment, and there is also a sanction known as ‘conditional non-debarment’, under which the respondent can avoid debarment if it complies with preconditions agreed with the MDB. The MDBs also have the ability to order restitution or, in certain circumstances, other financial penalties. Debarment is the most frequently used sanction – the World Bank is on record saying that debarment with conditional release is its “default sanction”. One of the most important collateral risks arising from an MDB debarment is cross-debarment. The World Bank and other leading MDBs have in place a formal cross-debarment regime, which provides for the debarment, by all of the participating MDBs, of contractors that are debarred by any one of the MDBs.
Debevoise: The general consequence of being sanctioned by an MDB is some form of suspension or debarment, meaning the loss of eligibility to obtain contracts financed by that MDB. The World Bank sanctions system provides for a menu of possible sanctions, but the default sanction is a three year debarment with conditional release. The company will be ineligible to receive any bank-financed contract for a minimum of three years. After the three-year debarment, the company only regains eligibility after obtaining approval of the bank’s integrity compliance officer (ICO), which will usually involve implementing a compliance system. Pursuant to a 2010 agreement among MDBs, debarment by one MDB can also result in cross-debarment by other MDBs. The current iteration of the World Bank’s sanctions system is now eight years old. The most recent data published by the World Bank Office of Suspension and Debarment (OSD) shows a significant increase in cases from a mere handful eight years ago to an average in excess of 50 debarments per annum over the last six years.
FW: In your opinion, are MDB practices applied in a consistent way across international boundaries? Is there room for improvement to reduce instances of misconduct?
Kaushal: World Bank sanctions are based on the facts of the case and the extent of misconduct, irrespective of countries involved or the nature of the parties. Sanctioning guidelines and decisions are publicly available on the internet so that entities can better understand our processes and how they are applied. After the cross-debarment agreement became effective, MDBs also created harmonised sanctioning guidelines to guide sanctioning determinations made by each of them.
Debevoise: Looking at the limited data published by the World Bank that breaks down enforcement actions by region does not reveal the type of enforcement action or MDB efforts to combat corruption through governance reforms. The data may also not be meaningful because the sanctions system largely responds to the cases referred to it rather than affirmatively seeking out cases. That said, one of the key missions of the investigators in the World Bank’s Integrity Vice Presidency is to apply common standards, and the World Bank’s OSD and the Sanctions Board have the power to correct abuses.
Wee: Under the IFI Anti-Corruption Task Force, the ADB and other participating MDBs follow a harmonised approach including standard definitions of fraud and corrupt practices, common principles and guidelines for conducting investigations and the determination of sanctions, exchange of best practices and procedures, and most importantly, mutual enforcement of debarment decisions. Of course, there will always be room for improvement for as long as incidences of possible fraud and corruption involving development projects and activities of MDBs occur. At the ADB, in addition to the remedial measures of sanctions and cross-debarments, we also carry out awareness raising and capacity development activities in an effort to mitigate and prevent incidences of fraud and corruption in activities financed, administered and supported by the ADB.
Lorello: The World Bank has been far more active than the other MDBs in bringing sanctions cases, although the major MDBs maintain essentially parallel regimes. That is probably a function of a number of factors, including relatively more constrained investigatory resources in the other MDBs, and perhaps differences in policy. The World Bank also appears to invest greater resources in proactive measures as compared to the other MDBs. It has, for example, established a Preventive Services Unit that uses information obtained through investigations to develop measures to prevent corruption in World Bank-financed contracts. All of the MDBs perform anti-corruption due diligence on their projects, but the types of efforts that they pursue – including the frequency in which anti-corruption diligence is applied and the type of information sought – vary considerably.
FW: If a company is accused of fraud and corruption by an MDB, how should it respond in trying to avoid repercussions such as cross-debarment, often cited as the most serious consequence for a multinational company?
Lorello: If a company is debarred by one MDB for a period longer than a year, then the presumption is that it will be cross-debarred by the other MDBs that are part of the cross-debarment arrangement. When faced with an accusation from an MDB of corruption or other sanctionable practices, the key is to, firstly, carefully investigate the facts, including to identify any mitigating factors that can be presented in a negotiation with the MDB, and secondly, ensure that any necessary compliance remediation is undertaken on a proactive basis. If it appears that a debarment is likely, it may be feasible to have the debarment restricted to particular affiliates and/or shortened in duration, for example through entering into a negotiated resolution with the MDB. As with the case of national enforcement, cooperation with the MDB in the sanctions process can have an important effect in reducing the scope of the sanction.
Kaushal: It always helps when a company comes clean, acknowledges its misconduct and cooperates. Real meaningful cooperation is a mitigating factor in the sanctions determination and can lead to a significant reduction in the sanction imposed. Cooperation saves the Bank from having to use its investigative resources on a particular case and also gives us confidence that the entity cooperating is keen to turn a corner and become a responsible development partner.
Debevoise: Ultimately, the best course of action depends on the nature of the accusation, the MDB involved, and the terms of the underlying loan agreement. In a typical World Bank enforcement action, if the investigation process is far enough along that the Voluntary Disclosure Program (VDP) is no longer viable, then a company is usually best served by working cooperatively with investigators to either eliminate the Bank’s concerns or enter into a settlement agreement. Only the Bank’s investigators have the discretion to enter into these settlement agreements. Once sufficient evidence of sanctionable conduct is submitted to the OSD, a company will almost certainly be temporarily suspended and receive a recommended sanction of three year debarment with conditional release. If that happens, the company should utilise due process protections provided by OSD and the Sanctions Board to either have the sanction removed entirely or, at a minimum, reduce the sanction to less than a one-year debarment, which is the threshold for triggering cross-debarment.
Wee: ADB considers mitigating – and aggravating – circumstances in determining the period of debarment and application of cross-debarment should a company be found to have been engaged in fraud and corrupt practices. These circumstances include, firstly, whether the company continued the integrity violation after becoming aware of ADB’s investigation, or whether it ceased the violation voluntarily, secondly, the degree of cooperation shown during the course of ADB’s investigation, thirdly, any restitution and steps taken by the company to address the concerns, and finally, the existence, establishment, improvement or implementation of internal governance measures by the company to strengthen its internal controls and prevent integrity violations from recurring.
FW: In April 2015, 56 countries joined China in creating a new MDB for Asia. How might this move impact established MDBs, and what influence could it have on the international anti-corruption landscape?
Debevoise: If the AIIB takes anti-corruption seriously, it will increase and harmonise the global expectation that corruption in development projects is something that must be fought and deterred. If the AIIB adopts a sanctions system similar to the World Bank’s sanctions system, that will likely increase harmony in the international anticorruption landscape, and increase the likelihood that the current MDB sanctioning regime will become a lasting model. If the AIIB does not prioritise anti-corruption, or implements a different system of anti-corruption enforcement, borrowers, donors and suppliers will need to decide which environment they prefer. An interesting marker of things to come is whether the AIIB joins the cross-debarment agreement signed in 2010 by the World Bank and four other MDBs.
Lorello: It is difficult to say at this stage what impact AIIB will have, given that it has not yet commenced operations in a meaningful sense. While proponents of AIIB have argued that it will fill an important gap in financing development and infrastructure needs in Asia, others have been more critical, arguing that AIIB will compete with and diminish the influence of the existing MDBs. Concerning anti-corruption risk, the agency’s president-elect has been quoted as saying that the agency will have a “zero tolerance” stance on corruption, but it remains to be seen what tools the AIIB will adopt to investigate corruption and take responsive actions. It is unclear, for example, whether the AIIB will adopt an enforcement approach consistent with the harmonised approach currently followed by the other MDBs, or whether it will become a signatory to the MDB cross-debarment agreement.
Wee: Recognising the large infrastructure gap in Asia, the ADB has welcomed the AIIB and has committed to working together for the development of the region, including co-financing projects. On the anticorruption front, the ADB would welcome AIIB’s inclusion in the IFI Anti-Corruption Task Force, and we would be happy to share our experience and expertise in this area, just as we have in areas such as procurement, the environment and social safeguards.
Kaushal: Corruption is a major development challenge for the World Bank and all other development institutions. The cooperation among development organisations can only advance the global fight against corruption.
Whitney Debevoise is a senior partner in the firm’s International practice with particular involvement in international financial transactions, public policy, international arbitration, multijurisdictional litigation, banking, international trade and anti-corruption investigations. Mr Debevoise rejoined Arnold & Porter LLP in 2010, having served as US Executive Director of the World Bank from 2007. He can be contacted on +1 (202) 942 5042 or by email: email@example.com.
Clare Wee is Head of the Office of Anticorruption and Integrity (OAI) at the Asian Development Bank (ADB). Ms Wee joined OAI as Director from ADB’s Office of the General Counsel (OGC), where she was Assistant General Counsel when she left OGC (2005-2007). Prior to joining ADB, Ms Wee practiced law in New York City with the law firm Whitman, Breed, Abbott & Morgan. She can be contacted on +63 2 632 5201 or by email: firstname.lastname@example.org.
David Lorello is a partner in the firm’s London office and serves as a vice chair of the firm’s International Trade and Finance practice group. Mr Lorello advises clients concerning a range of international regulatory, white-collar and commercial matters under both European and US laws. Mr Lorello is recognised in the leading peer review publications for his work on trade controls and anti-corruption compliance and investigations matters. He can be contacted on +44 (0)20 7067 2012 or by email: email@example.com.
Mamta Kaushal is a lawyer currently working as a Senior Investigator and Advisor to the Director of Operations of the World Bank’s Integrity Vice Presidency (INT). Ms Kaushal conducts investigations into fraud and corruption involving World Bank-financed projects in the Africa and South America regions as well as coordinating policy issues related to investigations. At INT, Ms Kaushal also coordinated the referral process through which the institution engages with national authorities on cases of potential or mutual interest. He can be contacted on +1 (202) 458 7918 or by email: firstname.lastname@example.org.
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