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January 9, 2019 By: Alex Haines, Outer Temple Chambers*

Most compliance officers are familiar with sanctions imposed by the UN, EU, US, Canada, and other countries. These international organizations and states impose targeted financial sanctions– such as asset freezes, arms embargoes and travel bans – in order to achieve a desired outcome. A lesser known form of sanctions is one that belongs to Multilateral Development Banks (MDB) like the World Bank Group.

The World Bank, a source of financial and technical assistance to developing countries around the world, can place a company or individual on its “debarment list” due to fraud or corruption. When this happens, debarred companies or individuals are ineligible to be awarded World Bank-financed-financed contracts.

Financial institutions and corporations who bid on World Bank-financed projects need to be alert to the scope of its sanctions proceedings and the surprisingly wide-ranging and significant adverse business consequences that may result from being debarred.

The Five Main MDBs

The five main MDBs are the African Development Bank, the Asian Development Bank, the European Bank for Reconstruction and Development, the Inter-American Development Bank and the World Bank Group. Each MDB uses its own decision-making framework to determine whether sanctions should be imposed.

Anti-Corruption OfficeFirst TierSecond Tier
African Development BankOffice of Integrity and Anti-Corruption, founded in 2006.

 

Independent Sanctions CommissionerSanctions Appeals Board
Asian Development Bank Office of Anti-Corruption and Integrity, founded in 1998Integrity Oversight CommitteeSanctions Appeals Committee
European Bank for Reconstruction and Development

 

Office of the Chief Compliance OfficerEnforcement CommissionerEnforcement Committee
Inter-American Development BankOffice of Institutional Integrity, founded in 2001Sanctions OfficerSanctions Committee
World Bank GroupIntegrity Vice PresidencySanctions and Debarment OfficerSanctions Board and its Secretariat

The Asian Infrastructure Investment Bank, headquartered in Beijing, began operations in January 2016 and is likely, in due course, to join the ranks of the more established MDBs.

The Use of Investigative Offices for Sanctions Purposes

Each MDB wants to ensure that the funds reach their intended destinations. As such, each MDB has created an investigative office whose function is to ‘police’ MDB-funded projects in order to prevent or stop incidences of fraud, corruption, collusion, coercion and obstruction (‘sanctionable practices’).

All MDBs have developed an internal administrative apparatus for bringing allegations against companies and individuals accused of having engaged in sanctionable practices on MDB-funded projects.  Entities found culpable by the MDBs risk debarment from bidding on MDB-funded projects and face referral to national prosecutorial authorities.  Although the term ‘sanction’ is used in the description of these regimes, in reality the consequences involve blacklisting rather than traditional sanctioning.

In this article, we will focus on the World Bank.

The Sanctions Regime of the World Bank

The bank’s sanctions regime is made up of three parts:

  • The Integrity Vice Presidency (INT) which is the investigative office;
  • The Office of Suspension and Debarment – headed by the Sanctions and Debarment Officer (SDO) – the first tier of the two-tier adjudicative system with functions akin to an administrative judicial office of first instance; and
  • The Sanctions Board and its Secretariat – the second-tier of the adjudicative system.

Like most other MDBs, the international body sanctions five distinct forms of misconduct: fraud, corruption, collusion, coercion and obstruction of investigations.  The evolution of the sanctions regime has predominantly been shaped by the international fight against corruption as well as in response to operational and due process considerations. Its ability to exclude corrupt actors from World Bank-financed projects is an essential provision to ensure the proper use of its funds.  The underlying legal basis for the sanctions regime is its fiduciary duty, so that funds provided by it are used only for their intended purposes.

The bank uses a two-tier system with a first level of review by the SDO and a second level of review by a new independent body called the Sanctions Board. The Sanctions Board was fully constituted in 2007 when it began reviewing cases that came before it following appeals from the body sitting beneath it, namely the SDO.  If a respondent contests the SDO’s final determination, they may trigger a second review by filing a response with the Sanctions Board, which considers the case de novo.  The decisions of the Sanctions Board are final are binding on the parties. There is an automatic right to an oral hearing before what are essentially independent judges.

Since 2012, all Sanctions Board decisions have been published. At the heart of the legal framework of the sanctions regime lies the Sanctions Procedures, which establish a formal adversarial sanctions process.

The World Bank Debarment List

The bank will place a company or individuals on its list when there is a finding that the firm or individual engaged in one five sanctionable practices – fraud, corruption, collusion, coercion or obstruction – while participating in a project that it funds. Reasons for being placed on the list include when a company pays bribes to government officials, engages in double billing or artificially inflates prices in a bid.

The World Bank debarred 78 firms and individuals during fiscal year 2018. Currently, there are hundreds of entities and persons on the list, which is available in English and Spanish on its website.

Companies and individuals on the list are from a variety of countries, including the United States, the United Kingdom, Mexico, Denmark and Malaysia. The results of debarment are far-reaching and there are many variables.  For example, at the end of 2017, a French power transmission company reached a settlement with INT following an investigation which uncovered evidence that the manufacturer of power transmission components, working in the DRC, had made improper payments to an employee of a consulting company in order to influence a tender process.  Under the agreement, the company was debarred for two years and its parent company received a conditional non-debarment for a period of 18 months, meaning that it remained eligible to participate in World Bank-financed projects as long as it complied with its obligations under the settlement agreement.  A holding company for the two sanctioned firms also agreed to pay a financial remedy of 6.8 million euros to the DRC.

Perhaps the most surprising aspect of the sanctions regimes of the MDBs is the wider definition of offences: the sheer breadth of conduct that might constitute a sanctionable practice within their jurisdiction often exceeds that of national systems (e.g., ‘fraud’ under the 2011 WBG Procurement Guidelines can be committed recklessly as well as intentionally).

The ban does not only extend to the listed companies themselves but also those companies directly or indirectly controlling debarred firms as well as on firms directly or indirectly controlled by a person on the list.

 Risks for Companies and Individuals

The MDBs can debar entities from bidding on MDB-funded projects. The ‘baseline sanction’ is usually three years’ debarment with conditional release.  Since the 2006 IFI Uniform Framework for Preventing and Combating Fraud and Corruption, each investigative office has harmonized its guidelines meaning greater consistency and intelligence sharing among the MDBs.Moreover, since the 2010 Agreement for Mutual Enforcement of Debarment Decisions, cross-debarment by all MDBs was introduced. Not only does this mean that companies found to have engaged in sanctionable practices are debarred consistently, but they are also debarred from bidding on all MDB-funded projects (provide the period of debarment is greater than one year). Following cross-debarment, companies often find that development aid agencies (e.g., the UK’s Department for International Development and USAID) will not fund their projects.

If the risk of plummeting revenue was not enough, the MDBs’ investigative offices can make criminal referrals to national prosecutorial agencies (e.g., the UK’s Serious Fraud Office and the US Department of Justice).  Even in the absence of any criminal referral, MDBs claim wide jurisdiction, meaning that they can initiate proceedings against companies who are not a party to the contract.

Lastly, most MDBs publish the names of those they debar, which can have dire and long-lasting consequences for the reputation of those companies.

Controlling the risks for companies and individuals

  1. Self-reporting: in 2013, INT set a benchmark of reduced punishment for those companies which uncover corruption within the business and then voluntarily report the matter to the Bank.
  2. Voluntary Disclosure Programs: the incentive for self-reporting is that the MDB that operates the program will not normally sanction the participant for disclosed past misconduct and will keep its identity confidential.
  3. The value of due diligence: with an increasingly low threshold to establish administrative responsibility following sanctionable practices such as corruption, the responsibility is on the innocent business partner to show that it conducted all reasonable inquiries before forging the new relationship.
  4. Integrity Compliance Program: it is not enough for an integrity compliance program to tick the boxes of the relevant national jurisdiction; the starting point should be that the program complies with the World Bank’s Integrity Compliance Guidelines including focus on prevention, detection investigation and response.
  5. Negotiated Resolution Agreement: in certain circumstances, companies can negotiate an agreement by providing MDBs with essential intelligence in exchange for a lower period of debarment – such an agreement includes the granting of an immunity, which covers the company for any wrongdoing which emerges for an investigation.

Increasing Trend in Settlements

The World Bank’s Sanctions System Annual Report FY18 marks the first time that INT, the Office of Suspension and Debarment and the Sanctions Board – the three parts of the sanctions regime – publish a joint report.  The Report highlights key data for debarments, cross-debarments and referrals made in 2018.

While fraud remains the most sanctioned practice (followed by corruption), there is an increasing trend in settlements and a decreasing trend in sanctions cases reviewed by the SDO.  All firms and individuals under investigation are given the option of resolving a matter through a settlement in lieu of a sanctions process.  Of all the respondents sanctioned to 18 months’ debarment or less in FY18, more than 80% were sanctioned pursuant to a settlement (as opposed to a Sanctions Board decision or an SDO uncontested decision).

Five of the respondents who settled their cases did not even receive a debarment: a conditional non debarment was imposed for a period of time meaning that they remain eligible to participate in the bank’s-financed projects as long as they comply with certain obligations.

For many years the bank’s sanctions regime was criticised for its opacity, but its 2018 Report and the data it discloses is a gladly received step towards ironing out one of the last issues which its critics have focused on.  In particular, it is beyond doubt that the most beneficial results for companies and individuals who find themselves in difficulties is through settlement (or, at the very least, an exploration of whether settlement is advantageous).

INT’s co-operation requirements post-settlement remain strict and onerous, but the alternative may well result in a draconian debarment for several years.  Each case depends on its facts, but an informed approach at an early stage increases the chances of an acceptable (and affordable) outcome.

Compliance Considerations and Collateral Effects

In September 2010, INT appointed an Integrity Compliance Officer (ICO).  In addition to monitoring integrity compliance by sanctioned companies, the ICO also decides whether the compliance conditions have been satisfied. Because the default sanction is debarment with conditional release, a respondent is ineligible to receive World Bank -financed contracts for a period of time, and is not released from debarment at the end of that period until it fulfils certain conditions. The conditional release process generally requires the respondent to implement a robust integrity compliance program.

The elements that should be included in a respondent’s integrity compliance program are listed in the World Bank Integrity Compliance Guidelines and include a clear prohibition of misconduct, the creation and maintenance of a trust-based, inclusive organisational culture that encourages ethical conduct, and a commitment to compliance with the law.  The Integrity Compliance Guidelines encourage the respondent to carry out a comprehensive risk assessment and address shortcomings. Other considerations listed in the Integrity Compliance Guidelines include developing and maintaining clear internal policies designed to ‘prevent, detect, investigate and remediate’ misconduct, implementing internal controls, providing training, establishing lines of communication, providing incentives, and establishing reporting policies.

Unlike sanctions imposed by OFAC, the UN or the EU, the consequences of MDB sanctions are only for companies (and/or individuals) themselves who engage in sanctionable practice.  The World Bank sanctions regime does not prevent banks or other businesses from doing business with debarred companies. In other words, a bank will not be penalized by the World Bank or a regulator merely for doing business or processing funds from a debarred company.

Some banks and other businesses may screen their customers and transactions against the World Bank “debarment list” as part of ongoing “Know Your Customer” efforts. A “hit” will likely result in enhanced due diligence on the company before accepting the client or processing the transaction. In addition, when there is a hit against the World Bank list, OFAC’s “Compliance page” on its website advises to contact the Directorate of Defense Trade Controls at the U.S. Department of State, 202-663-1282.

*Alex Haines is a UK barrister at Outer Temple Chambers in London.

Contact: +447752020198, and alex.haines@outertemple.com

Alex specialises in international law, particularly in the extensive field of international organisations law.  His practice areas include sanctions, corruption and the institutional law of international organisations more generally.  He has advised on the sanctions regimes of the UN, EU, US and UK, as well as those of the International Financial Institutions (IFIs) and Multilateral Development Banks (MDBs) such as the World Bank Group. He regularly represents clients and litigates before international tribunals and bodies around the world, including Washington DC, New York City, London, Geneva, Luxembourg and Manila. The cases he has been instructed in have involved more than 25 international organisations, including the World Bank Group. Alex has lectured on the sanctions proceedings of MDBs to the Brazilian Bar Association (Rio, 2014), the British Chamber of Commerce (Hong Kong, 2015), the Korean Bar Association (Seoul, 2016), the Shanghai Bar Association (Shanghai, 2016), the universities of Paris I, Pantheon-Sorbonne and Paris II, Pantheon-Assas (Paris, 2016), English Law Week (Mexico City, 2018) and he was a panellist at the 35th International Symposium on Economic Crime at Jesus College (University of Cambridge, 2017). His work on sanctions has continued through his efforts with Transparency International’s Suspension and Debarment Taskforce and Oxford International Organisations, a new Oxford University Press database.