TI: MDBs

MDBs [Multilateral development banks]

Multilateral development banks (MDBs) are supranational institutions which provide financial support and professional advice to development programmes and whose shareholders are sovereign states….MDBs have independent investigative offices and sanctions bodies to prevent, investigate and apply administrative penalties to entities engaging in fraud, corruption, collusion or coercion (the “prohibited practices”). Companies or individuals found guilty of misconduct risk debarment from MDB-financed operations and possible referral to national law enforcement authorities 

The scale of multilateral donor operations is growing, rising to a record US$59 billion or 41% of total gross overseas development aid in 2013, of which MDBs accounted for around US$18 billion 

MDBs are distinct from MFIs (multilateral financial institutions)…. have “narrower ownership/membership structure and focus on special sectors.” …mfis:  egs: Asian Infrastructure Investment Bank (AIIB), the European Investment Bank, the Islamic Development Bank, International Fund for Agricultural Development, OPEC Fund for International Development.   

will the AIIB adopt an enforcement approach consistent with the harmonised approach by the other MDBs, or will it just become a signatory to the MDB cross-debarment agreement?

growing use of “blended” financial instruments [= public funds, loans, guarantee arrangements,and  private equity], requires specialists to monitor awarding and implementation

The United Nations Joint Inspection (2016) found that there is a greater risk of underreporting or non-detection of fraud/corruption, in multilateral organisations, compared to bilateral donors, given the scale and complexity of their activities

Comparative studies [indexes of aid effectivenessof] of donor agencies show that multilateral development banks are the top performers in quality of aid delivered

In 2015, the World Bank‘s Integrity Vice Presidency (INT) received and opened 323 preliminary inquiries related to fraud, corruption and collusion in World Bank Group-financed activities (World Bank Group 2015a). Investigations found allegations wrt 61 projects and 94 contracts of a total value of US$523 million. The ADB’s Office of Anti-Corruption and Integrity (OAI) received 285 complaints in 2015

A investigation by France2, compiled a list of some of the most high-profile corruption scandals to affect World Bank operations. These included: a 2014 case in which a Dutch company paid an agent a 15% commission as a bribe in exchange for contract awards in the Iraqi health sector; another where a Dutch-Norwegian joint venture had provided kickback payments of US$172,700 related to water supply and sanitation in Tanzania; and an April 2016 investigation which found that six companies had submitted fraudulent documents to qualify for grants in Vietnam 

2 Types of corruption risk =  2 mdb duties

a. risks from an MDB’s investment activities (client related risks = “prohibited practices” ): the solicitation of bribes or non-declaration of cois by public officials in executing agencies and soes [state-owned enterprises]

b. risks from the improper behaviour of a bank’s employees (personnel related risks): (insider trading, breaches of codes of conduct, whistleblower protection) 

bribing is becoming more sophisticated, eg gifts of fake study tours 

local agents (to help corps to tender) are “more effective at negotiating ‘arrangements’ around contracts…but the main reason they are contracted by the corps, is because they are harder to investigate and, ultimately, sanction”…many tendering corps fail to disclose the agents used, and misreport [in the bidding docs], the consultancy fees charged by the agents.

the World Bank’s Integrity Vice Presidency’s annual update reports opening 32 cases per year, against bank staff relating to fraud and corruption which included the misuse of Bank Group funds, embezzlement, undeclared conflicts of interest and the solicitation of illicit payments to expedite disbursement

Likewise, the Office of the Chief Compliance Officer (OCCO) received 26 reports per year, of alleged misconduct on the part of EBRD staff, and launched ten formal investigations in response, six of which due to breaches of the code of conduct (EBRD 2016).

The France report details incidences of World Bank staff bribery and exposed kickbacks (bribes) for the awarding of contracts in Ethiopia, Kenya and Sri Lanka

Half of all substantiated allegations of malfeasance in World Bank operations related to corruption in the bidding process, while the AfDB reports that 26% of its cases related to collusive practice, a further 26% to procurement irregularities and bid manipulation in 16%

Zero tolerance?

mdbs have a Zero tolerance policy to corr = they must “punish all offenses severely, no matter how minor”

some argue that this policy is unrealistic, inefficient, and frequently counterproductive.  Most experts now recommend “triaging” integrity risks on the basis of : cost-effectiveness, jurisdiction, materiality, credibility, verifiability and context to prioritise interventions 

Common definitions of sanctionable practices

In 2014, the OCCO was unable to pursue a case in which a bank client had diverted the EBRD loan to a related entity for an unintended use because “misuse of bank resources” was not listed as a “prohibited practice”. In 2015, therefore, the heads of the MDB integrity offices agreed on the standardisation of the definitions of “abuse” and “obstructive practice” to harmonise investigations across the MDBs 

The erbd uniform (to all mdbs) framework, standardised  “prohibited practices” (client related risks):

•   corrupt practice, the offering, giving, receiving, or soliciting, directly or indirectly, anything of value to influence improperly the actions of another party
•   fraudulent practice, any act or omission, including a misrepresentation, that knowingly or recklessly misleads, or attempts to mislead, a party to obtain a financial or other benefit or to avoid an obligation
•   coercive practice, impairing or harming, or threatening to impair or harm, directly or indirectly, any party or the property of the party to influence improperly the actions of a party
•   collusive practice, an arrangement between two or more parties designed to achieve an improper purpose, including influencing improperly the actions of another party
•   an obstructive practice (a) deliberately destroying, falsifying, altering or concealing evidence material to the investigation or making false statements to investigators in order to materially impede a bank group investigation into allegations of a corrupt, fraudulent, coercive or collusive practice; and/or threatening, harassing or intimidating any party to prevent it from disclosing its knowledge of matters relevant to the investigation or from pursuing the investigation; or (b) acts intended to materially impede the exercise of the bank’s inspection and audit rights.

The ADB, for example, may also sanction for coi, retaliation against whistleblowers or witnesses and failure to adhere to the highest ethical standards 

Risk management & integrity due diligence policies (RM & IDDPs)

how mdbs may mitigate risks:

proactive risk management , programme portfolio analyses, fiduciary risk assessments, integrity due diligence procedures, country financial accountability assessments and country procurement assessment reports 

The World Bank’s 2012 update of its Governance and Anti-Corruption (GAC) Strategy reaffirmed the importance of assessing corruption risk by conducting a systematic analysis of GAC issues in the design and implementation of Country Assistance Strategies (CAS) and sector programmes, as well as regular risk reviews of projects and lending portfolios

The World Bank’s Preventive Services Unit (PSU) provides services to operations teams and client countries , to build preventive measures into projects and conducting risk assessments

however, while all MDBs perform anti-corruption due diligence, their frequency , and the type of information sought by MDBs varies considerably 

In operations involving the private sector [instead of nations] MDBs manage integrity risks through IDDPs

-the OAI handles about 200 requests per year, from mdbs, for IDD advice and support, wrt 400 firms/banks

-the OCCO provided guidance on IDD for 478 potential projects, and the OII conducted 438 integrity due diligence consultations in 2015

The MDB  e-Procurement Group:  MDB EPG

includes the ADB, IDB, AfDB and World Bank

promotes a common understanding of e-procurement and harmonise policy work…However, the epg, was tasked only with implementation of e-procurement across developing/low-income countries, rather than embedding it into MDBs’ own procurement policies 

the EBRD became the first MDB to offer its clients an e-procurement system covering the entire project cycle from planning to tendering and award of goods/works/loanfundedconsultancycontracts [LFCC]. The system permits suppliers worldwide to obtain tender documents for contracts

<>  COCOO TO APPLY FOR AN LFCC :  THE MDB LOANS TO PADI.  PADI PAYS ME FOR MY LEGALADVICE. THEN, PADI REFUNDS THE MDB, MINUS EXPENSES [EG: LEGAL REPRES/ADVICE…]

Ethical standards

MDBs websites show: codes of conduct, integrity policies, whistleblower policies, investigative processes, ethical training; awareness raising activities;  sh codes of conduct for staff members and directors

Whistleblowing

The World Bank’s mobile app  allows reporting of misconduct in bank supported projects and providing access to the World Bank list of debarred firms and individuals 

leniency/Voluntary disclosure /negotiated resolution agreements (NRAs)

Diff:

Vol.discl = leniency:

the World Bank’s Voluntary Disclosure Program in 2006, prompted some MDBs to set self- reporting mechanisms:   entities which have uncovered irregularities in its operations, may disclose this to the MDB in return for leniency in administrative penalties. Companies choosing to self-report are required to commit to renounce bribery and implement a compliance programme

NRAs:

the initial investigation is triggered by a complaint external to the alleged offender. In exchange for full cooperation with the MDB’s investigation, sanctions are negotiable and usually lower than under standard debarment processes but higher than in voluntary disclosure cases. NRAs function essentially as a prosecution agreement, and are usually conditional upon full access to a company’s financial records by investigators. In 2015, the World Bank entered into 11 NRAs

Investigations

The World Bank’s INT divides its investigations into :

Internal investigations = staff based corr risks

look into alleged misconduct by bank staff affecting either bank- financed activities or administrative budgets, for which the investigatory team is provided unrestricted access to information and records relating to all bank activities, personnel and physical property

External investigations =  client based corr risks = prohibited practices

examine allegations of the prohibited practices for which the bank is eligible to impose sanctions on entities doing business with the bank .Evidence of wrongdoing by public officials is usually communicated to national authorities…..MDBs have established common standards + the Uniform Framework in 2006 + 2010 Agreement on Mutual Enforcement of Debarment Decisions, which was based on the following six principles 

 the adoption of harmonised definitions of prohibited practices

 the establishment of standardised investigatory procedurestems

•   the creation of internal, independent investigative bodies and distinct sanctioning authorities
•   the publication of written notice to entities and individuals against whom allegations have been made, and the opportunity for them to respond
•   the use of the “more probable than not” standard when assessing alleged violations of integrity standards
•   the recourse to a range of proportional sanctions to fit the nature of the violation

The primary investigative tool is the audit clause that the World Bank inserts into invitations to tender, which authorise the INT to audit the financial records of any company bidding, even unsuccessfully, for a contract. Given the administrative nature of investigations, the standard of proof is lower than in criminal proceedings.

However, sanction decisions are not taken by the investigatory team, but referred to the saction authorities, or to the MDB’s internal sanctions officer…. MDBs are entitled to impose administrative (non criminal) sanctions… and the only avenue to challenge their decisions is through the use of their own appeal mechanisms

PUBLIC ACCESS

 Due to mdb’s extraterritoriality, there are little domestic legal constraints (such as national data protection laws) on the external disclosure

 The World Bank publicly names all debarred companies on its website, while the IDB disseminates the List of Sanctioned Firms and Individuals with automatic email notifications of those on the register. In addition, both the EBRD and the World Bank publish the full sanction decisions 

<> COCOO WILL BE IN THE REGISTER

MDB COOPERATION

MDBs cooperate closely on integrity management, under the International Financial Institutions Anti-Corruption Task Force, IFIACTF

Cross-debarment

to prevent a corrupt company (found to be so by one mdb), from obtaining contracts from another bank. The list of cross- debarred firms is available at www.crossdebarment.org

Is the most important area of mdb cooperation

all MDBs have the possibility (not o.), to debar entities found by another MDB to have engaged in a prohibited practice

cross-debarment requirements:

1) debarment has to be public;

2) it has to exceed one year;

3) it should be based on independent findings; and

4) sanctionable practice should have been committed within the previous 10 years 

mdb coop with law enforcement

For instance, the AfDB and the World Bank work closely with agencies like the US SEC

The AfDB’s IACD has further signed memorandum of understanding with the East African Association of Anti-Corruption Authorities to facilitate information exchange, while the OCCO frequently liaises with the Financial Action Task Force, MONEYVAL (the AML compliance body of the Council of Europe), the Eurasian Group on Combating Money Laundering and Financing of Terrorism (EAG) and the OECD Anti- Corruption Network for Eastern Europe and Central Asia

the World Bank has launched the ICHA [International Corruption Hunters Alliance]:

a network of prevention specialists in enforcement agencies, senior representatives of several integrity units of bilateral development agencies and INT’s preventive staff. Through targeted training and capacity building, technical support is provided to officials in anti-corruption agencies, attorneys general and other partners

<> COCOO TO JOIN THE ICHA