Trends and Guidance for Companies Operating under World Bank- and Inter-American Development Bank Financed Contracts
In this article, we discuss recent trends in the World Bank and Inter-American Development Bank’s (as well as the Inter-American Investment Corporation and the Multilateral Investment Fund, collectively referred to as the “IADB”) activity in Latin America, and provide practical guidance for companies operating under World Bank- and IADB-financed contracts.
It is difficult to overlook the sweeping proliferation of anti-corruption laws and cross-border enforcement efforts among governments worldwide. This trend continues to manifest itself not only among governments, but also intergovernmental bodies which share a parallel interest in taking action against corrupt conduct. Multilateral Development Banks (“MDBs”) such as the World Bank and the IADB continue to be at the forefront of investigating and preventing corruption and fraud in the projects they finance in Latin America. The IADB is the main source of multilateral financing in Latin America. It provides solutions to development challenges and support in a key areas of the region while striving to maintain integrity in all of its projects.
The World Bank’s anti-corruption arm, the Integrity Vice Presidency (INT), has been a prominent figure in international anti-corruption efforts for 20 years. During that time, the INT has not only grown in size and strength, but also honed its ability to identify and develop cases of improper conduct. Between 2007 and 2015, the World Bank had debarred more than 700 companies and individuals, according to its most recent Suspension and Debarment Report (2016). Recent sanctions cases arose out of multiple countries in Latin America, including El Salvador, Bolivia, Peru and Argentina. In Bolivia, for example, the World Bank debarred two companies, Empresa Constructora y Consultora LAPTUS S.R.L. and Ingenieria en Construcciónes Orleans (ICOR) for fraudulent conduct during the bid process. The case was also referred to the Bolivian prosecutor’s office for review.
The IADB’s Office of Institutional Integrity (“OII”) carries out the IADB’s anti-corruption efforts. Similar to INT, OII’s capabilities have expanded rapidly in the past 10 years, in many ways following the path paved by the World Bank and INT. OII continues to increase its workload, with the number of recommended sanctions increasing from 10 in 2014 to 35 in 2016. In the last six months, firms and individuals from Paraguay, Nicaragua, El Salvador, Bolivia and Peru have been sanctioned by the IADB for matters alleging fraud, corruption, collusion, coercion, or obstruction in violation of the IADB’s sanctions regime.
Despite the rise in prominence of the World Bank and IADB’s anti-corruption efforts, companies continue to be surprised when they find themselves thrust into their well developed, well resourced and process-heavy investigation and sanctions regimes. The sanctions regimes of MDBs are predicated on their contractual rights – that is, the right to investigate and enforce their anti-corruption and anti-fraud principles in any project they directly or indirectly finance. Because most of the World Bank and IADB’s financing is indirect (i.e., they loan funds to governments which then have primary responsibility for managing the projects), many companies fail to detect the MDB-funded aspects of the contracts and the attendant contractual obligations that follow. Therefore, it is imperative for companies operating in emerging and higher-risk markets such as Latin America – particularly those in the engineering, energy and telecommunications sectors – to carefully scrutinise government contracts to discern the extent to which there may be financing from the World Bank, IADB or other MDBs.
The World Bank and IADB sanctions regimes
Both the World Bank and IADB’s sanctions regimes contemplate multiple forms of misconduct, including: (i) corruption – offering or giving bribes to influence public officials; (ii) fraud – misrepresentations that mislead, or attempt to mislead, a party in order to obtain a benefit; (iii) collusion – arrangements that make a procurement process less competitive, including horizontal and vertical collusion; (iv) coercion – threats and similar improper actions designed to influence a procurement or contract; and (v) obstruction – destroying or falsifying evidence, impeding an investigation or hindering the MDB’s contractual audit rights.
The sanctions regime extends to the contracting companies, and third parties acting on behalf of the company. Companies are therefore held responsible for all manner of conduct occurring on MDB-financed contracts, ranging from instances of false curriculum vitae submitted by subcontractors and false certifications of completion to bribery. The ability of INT and OII to pursue a broad panoply of misconduct is aided by their low standard of proof – a preponderance of evidence – and the lack of constraints that apply to conventional governmental investigations, such as procedural rules and tribunals which limit the discretion and power of the investigator. Under these regimes, the INT and OII are afforded a vast degree of investigative authority, all under the guise of a financial audit.
Sanctions determinations are made through a two-tier system, with INT and OII presenting evidence to an independent decision-maker for a first-level determination. Such first-level determination is made by the Evaluation Officer in case of INT, and the Sanctions Officer in case of OII. The parties may then appeal the determination to a separate, quasi-judicial tribunal (called the Sanctions Board in case of the World Bank, and the Sanctions Committee in case of IADB) that evaluates the case de novo and grants the parties an opportunity to file written submissions and request a hearing. As with other major enforcement authorities, parties may at any time enter into a settlement agreement.
Sanctions are not confined to a specific MDB or MDB-financed project. Sanctions greater than one year in duration are subject to cross-debarment among the largest MDBs (which include, in addition to the World Bank and IADB, African Development Bank, Asian Development Bank, and European Bank for Reconstruction and Development), pursuant to a Cross-Debarment Agreement executed in 2010. Further, the World Bank and IADB publish sanctions against companies and individuals on their websites, thereby creating negative collateral consequences for companies bidding on other public or private contracts, establishing joint ventures or preparing for an acquisition.
Because of the World Bank and IADB’s openness with their findings, national authorities are able to obtain information and evidence that in many instances they would not otherwise be able to procure, including witness statements, email communications and banking information. Most notably, evidence may be procured by the World Bank and IADB from companies and individuals without consideration of rights against self-incrimination or the right to counsel. Furthermore, the World Bank’s sovereign immunity could protect it from being compelled to share such evidence with companies and individuals in follow-on proceedings, as was the case in a Canadian prosecution of former agents and employees of SNC-Lavalin Group Inc. (The World Bank Group v. Wallace, 2016 SCC 15.)
Recent trends and the World Bank and IADB’s activity in Latin America
Latin America remains one of the most active areas for corruption and fraud investigations worldwide. In recent years, Latin America has seen the same level of investigation and enforcement activity as Africa and South Asia, regions more often seen as posing greater challenges for transparency and corruption risks. Within Latin America, the Central America, Andean Group, and Southern Cone sub-regions have historically experienced the greatest number of investigations for misconduct.
The sectors generating the most cases are generally those which may require large-scale investment. The World Bank and IADB have focused on the energy/extractives, transportation, water, power and health sectors, as they continue to create the highest risk of improper conduct on MDB-financed projects. Education, agriculture and social development sectors also generate considerable scrutiny when MDB funds are disbursed in Latin America, with the attendant corruption risks that follow.
Fraud remains the most common form of improper conduct sanctioned by the World Bank and IADB, mainly because it presents a more readily-provable offence than bribery. Between 2007 and 2015, 83 percent of World Bank - sanctioned parties were charged, at least in part, with fraud. Fraud cases are most often based on forged third-party documents (e.g., forged guarantees or certifications) and other fraudulent documentation (e.g., forged invoices or evidence of completion). Corruption and collusion are the next most common forms of sanctionable conduct.
Practical guidance for companies operating under World Bank- and IADB-financed contracts
The Latin American economy, after six years of slowdown and recessions, appears to be expanding again. To advance the recovery and find new funds to support the growth, the governments often resort to MDB financing. In the meantime, MDBs and local law enforcement agencies have raised the stakes of noncompliance. To avoid the risk of multijurisdictional enforcement, litigation and MDB sanctions, the companies operating in Latin America should:
- Be aware of which entities are financing the project. Governments in Latin American countries often rely on international assistance to support mid and large-scale projects. Companies should look for World Bank, IADB or other MDB financing in their projects. It should also be noted that other multilateral institutions, such as the United Nations, the Global Fund, and Japanese International Cooperation Agency, have sanctions regimes that are materially similar to the MDB sanctions regime.
- Implement a comprehensive compliance program. For companies pursuing contracts financed by the MDBs, it is imperative that they implement a compliance program designed to mitigate the risk of not only corruption and fraud, but also collusion. For example, the World Bank’s Integrity Compliance Office has published guidance reflecting its standards for an effective compliance program, which are utilised when reviewing a company under scrutiny. Key areas of risk mitigation in the MDB context are third-party management and representations made in tender documentation.
- Conduct risk assessments. Companies should regularly conduct comprehensive risk assessments to adequately profile their risk at a global level with respect to sanctionable conduct and address it in their compliance programs.
- Remediate compliance gaps. Companies should develop meaningful plans to remediate any gaps uncovered in the assessment of their compliance programs and follow through with effective implementation of such plans.
- Communicate standards and impose controls on third parties. Companies should communicate their compliance standards and expectations to all those acting on their behalf, particularly when undertaking a project that is financed by the World Bank or IADB. This includes agents, consultants, subcontractors and suppliers, all of whom can trigger potential debarment consequences for a company.
If effectively implemented, these measures should serve to prevent or mitigate any potentially sanctionable conduct that may emerge from work pursued in Latin American countries.