Pay attention to sanctions and debarment risks amid new COVID-19 financing opportunities.
In recent weeks, the World Bank, the African Development Bank (AfDB) and other multilateral development banks (MDBs) have greenlit financing and loans at unprecedented rates in response to the global pandemic and recession.
This is particularly true for countries in Africa, where World Bank and AfDB lending was already on the rise. As the opportunities for companies to bid on and participate in World Bank and MDB-financed projects in Africa and elsewhere increase, so does the potential for corruption, fraud and other forms of misconduct, which can result in possible suspension and debarment through these institutions' sanctions systems.
firms and individuals debarred or sanctioned in 2019 by the World Bank
Here are risks and consequences for contractors undertaking MDB-funded commitments—including those financed with emergency COVID-19 disbursement funds—and key compliance takeaways for a post-COVID-19 era.
THE IMPORTANCE OF UNDERSTANDING DEVELOPMENT FUNDING SANCTIONS
A major goal of the World Bank and other MDBs' sanctions regimes is to protect development funding.
Past analysis by the World Bank indicates that nearly 25 percent of all investment projects receive at least one complaint of fraud or corruption. In response, the World Bank and other MDBs have established and are now vigorously enforcing administrative suspension and debarment regimes, with a focus on deterring behavior that would compromise their respective development agendas. Nonetheless, many companies and their compliance officers remain unaware of these systems and the serious consequences that can follow from any misconduct.
This lack of awareness can prove detrimental to companies. Over the past several years, the World Bank has demonstrated a willingness to investigate aggressively and to impose debarment and non-debarment sanctions to address misconduct connected to the activities they finance. Many MDBs, which share a harmonized agenda reflecting agreed goals and tools to fight corruption and fraud, have established investigative anti-corruption frameworks and entered into agreements to cross-debar any entities debarred by other banks for at least one year. The MDBs have not harmonized all aspects of their sanctions systems or enforcement approaches, including in some cases, the scope and definitions of sanctionable conduct that they target and the standards they apply when deciding to pursue misconduct.
As a result, these frameworks and systems can be confusing for contractors, but are essential to understand before committing to an MDB-financed opportunity.
WORLD BANK AND AFDB SANCTIONS SYSTEMS
The World Bank describes its jurisdiction as contractual in nature. Its enforcement powers derive from the Bank's loan agreements, its fiduciary duty is enshrined in the Bank's Articles of Agreement, and its enforcement actions are informed by the Bank's anti-corruption guidelines.
Today's sanctions landscape carries greater risks and consequences than ever before.
The World Bank's Integrity Vice Presidency (INT), which appointed a new chief in May 2020, investigates potential violations of Bank rules. The Suspension and Debarment Officer (SDO), which heads the Office of Suspension and Debarment (OSD), reviews evidence submitted by the INT and determines whether the evidence supports a finding that alleged sanctionable practices have occurred. Parties may negotiate settlement agreements with the INT at any stage during the sanctions process. Appeals of SDO determinations are heard by the Sanctions Board, which conducts a de novo review of cases, generally with the benefit of an expanded record, and issues decisions that may not be appealed. Many contractors are subject to review by the Integrity Compliance Officer, which monitors contractors subject to its supervision.
The structure and approach of the AfDB's sanctions system largely mirrors the World Bank's system. An Integrity and Anti-Corruption Department investigates allegations of sanctionable practices and submits findings to the Sanctions Office, led by a Sanctions Commissioner. If a company chooses to litigate, the AfDB's Appeals Board conducts a de novo review of the record and issues binding decisions. Like the World Bank, the AfDB has sought to improve the transparency of its sanctions regime, including by publishing an annual report of its Sanctions Appeal Board.
Typically, a contractor learns of the World Bank's enforcement interest on a matter by receiving an audit letter or a "show cause" letter. It is important to take these letters seriously and bring them to the attention of compliance and integrity personnel, since failing to do so can risk losing a critical opportunity to present your case later. The World Bank may temporarily suspend a contractor when INT commences an investigation if sufficient evidence exists to conclude that a sanctionable practice has occurred that would result in debarment for at least two years. An early temporary suspension bars a contractor from the opportunity to be awarded new contracts for six months (and longer if extended).
The Bank's baseline sanction is a three-year conditional debarment. Settlements are typically shorter (two to three years in duration). Litigating to the Sanctions Board can result in a shorter debarment period, but does not always achieve that result. When determining an appropriate sanction, the Bank considers a non-exhaustive set of "aggravating" and "mitigating" factors, broadly defined, that may be applied in full, partially or not at all. Aggravating factors include the severity of the misconduct, the harm caused, any interference with the investigation and any past history of adjudicated misconduct. Mitigating factors include playing a minor role in the misconduct, voluntarily taking corrective action and cooperating with an investigation. Where applicable, these factors may result in adjustments of up to 50 percent from the baseline sanction.
When deciding whether to extend sanctions to a corporate group (including parent companies, subsidiaries, sister entities, joint venture partners and associated individuals), the World Bank requires some level of involvement or participation, although in the past, it has held multinational corporations accountable on the basis of the actions of a single employee's misconduct.
Finally, the impact of an imposed sanction can be severe: If a debarment of at least one year is imposed, the contractor is cross-debarred by other MDBs, and the discovery of local law violations may result in a referral to national authorities.
RECENT WORLD BANK ENFORCEMENT PATTERNS
Until recently, World Bank suspension and debarments had been rising. Other MDBs, including the AfDB, had largely followed a similar pattern. However, the World Bank's second joint Sanctions System Annual Report for Fiscal Year 2019, released in October 2019, showed significant enforcement efforts that had still slightly declined from the Bank's previous enforcement statistics.1
In 2019, the World Bank debarred or otherwise sanctioned 53 firms and individuals, including through settlements (compared with 83 firms and individuals in fiscal year 20180. The OSD temporarily suspended 24 firms and 10 individuals in 2019 (compared with 29 firms and 11 individuals in 2018), and reviewed 16 settlements (down from 26). The INT issued 42 referrals in 2019 (compared with 43 in 2018). Finally, the World Bank imposed 33 cross-debarments based on debarments imposed by the AfDB, the Inter-American Development Bank and the Asian Development Bank (compared with 73 in 2018).2
MDB INVESTMENTS IN AFRICA
Both the World Bank and the AfDB have increased their investments across industries to countries in Africa in recent years. During its fiscal year 2017, the World Bank unveiled plans to provide a record US$57 billion in financing for projects in sub-Saharan Africa through the end of its fiscal year 2020. In line with this pledge, the World Bank issued US$18.4 billion to partner countries and businesses in sub-Saharan Africa during 2019. The World Bank has committed a further US$25 billion in investments through 2030 to support digital transformation across North Africa and sub-Saharan Africa, with plans to mobilize another US$25 billion from the private sector.
Meanwhile, the AfDB disbursed US$7.4 billion during its fiscal year 2017, its highest year on record, and in September 2019 reported US$20 billion in disbursements over a three-year period.
Now, crucial emergency needs arising from the global pandemic have prompted the World Bank, AfDB and other MDBs to make additional pledges. As of the date of writing, the World Bank had committed up to US$160 billion in grants and financial support over a 15-month period to help more than 100 developing countries, with further funds committed by the MDBs, including the AfDB. These financing amounts and the rates at which they are being approved are notable and could translate into additional opportunities for companies to bid on and participate in World Bank and AfDB-financed projects in Africa and elsewhere.
However, they also carry increased risks associated with sanctions and debarment procedures.
Indeed, for the last several years, sub-Saharan Africa has ranked at or near the top of new World Bank sanctions cases opened by region, based on the location of the World Bank–funded project or program involved in the case (see Figure 1).
COMPLIANCE TAKEAWAYS IN A POST-COVID-19 LANDSCAPE
Today's sanctions landscape carries greater risks and consequences for contractors than ever before.
This is reflected most recently in indications by the World Bank, the AfDB and other MDBs that they intend to remain diligent about their anti-corruption efforts while emergency disbursement funds mobilize and the international responses accelerate in high-risk markets.
For that reason, contractors engaged or planning to bid on World Bank and other MDB contracts in high-risk markets should take a careful look at their compliance systems and ensure they understand the risks of engaging on contracts financed by MDBs.
Make sure you:
- Understand World Bank and other MDB compliance obligations, common pitfalls that can give rise to enforcement actions, and the potential (and significant) collateral effects such as cross-debarment and referrals
- Train employees on practices that can lead to debarment proceedings, particularly in light of the different standards the World Bank and other MDBs apply when deciding whether to pursue allegations of misconduc
- Introduce controls to avoid misconduct in your World Bank and other MDB projects
- Conduct risk assessments to identify gaps in your internal controls that could lead to sanctionable conduct
- Understand the significance of World Bank and other MDB communications, such as audit and show-cause letters
Finally, if you discover that any misconduct has occurred in your contracts, it is important to take swift action. This includes undertaking an independent internal investigation so your management teams can make informed decisions, identifying culpable personnel and gaps in compliance systems and demonstrating appropriate remedial actions.