Enforcement actions by the U.S. Department of Justice for violations of the Foreign Corrupt Practices Act often garner the most attention from companies, but multilateral development banks are also major players in the anti-corruption global arena, adding another layer of compliance risk.  

The five most prominent multilateral development banks (MDBs) are the World Bank, the African Development Bank, the Asian Development Bank, the European Bank for Reconstruction and Development, and the Inter-American Development Bank—all of which provide financial support for economic and social development activities in developing countries.

Companies that have major development contracts in emerging markets need to practice increased vigilance. “If any of these multilateral development banks finance the contract, then those banks have jurisdiction in cases where there is misconduct related to the contract,” says Pascale Helene Dubois, chief suspension and debarment officer at the World Bank’s Office of Suspension and Debarment (OSD). 

The World Bank, for example, has broad discretion to prevent, deter, and investigate a variety of “sanctionable practices,” beyond that of the FCPA and U.K. Bribery Act. Such “sanctionable practices” involve fraud, corruption, collusion, coercion, or obstructive practices.

Also unlike violations of the FCPA and the U.K. Bribery Act, which constitute criminal law, the World Bank’s sanctions process is administrative, meaning it doesn’t have the power to impose criminal or civil penalties. What it can do, however, is suspend or debar a company from receiving World Bank-funded contracts, sometimes for as long as a decade.

When the World Bank first started debarring firms around 1999, many of the debarments were permanent, but over the years it has developed a “much more sophisticated view of this issue,” says David Theis, press secretary for the World Bank. Rather than the sanctions process simply being punitive in nature, the World Bank today has a better appreciation for trying to bring firms into compliance, he says.

Enforcement trends

As the most active of all the MDBs from a suspension and debarment standpoint, World Bank sanctions have remained steady over the last few years. Since 2007 through June 30, 2015, the World Bank has “publicly debarred or otherwise sanctioned more than 700 companies and individuals,” according to the OSD’s latest enforcement report.

In fiscal year 2015, the OSD issued sanctioned cases to 39 respondents, compared to 45 sanctioned cases the previous fiscal year, and 25 in fiscal year 2013. Fiscal years 2012 and 2011 each resulted in the OSD issuing 33 sanctioned cases.

As shown in the World Bank report, fraud is by far the most common sanctionable practice. “In our context, that makes a lot of sense, because what we’re after at the World Bank is to end extreme poverty and to boost prosperity,” Dubois says. “The reason why the World Bank got into the fight against corruption is fiduciary reasons; you need to make sure that money is being used for productive purposes.”

“It’s important that a company has a compliance program. It’s more important that it gets implemented properly.”
Pascale Helene Dubois, Chief Suspension and Debarment Officer, World Bank

Since its inception, the OSD has imposed temporary suspensions on 359 companies and individuals. Last fiscal year, the OSD imposed 54 suspensions, a decline from the 66 suspensions the previous year. The 120 total suspensions over the last two fiscal years, however, is more than the 99 total suspension in fiscal years 2013 and 2012, when the OSD imposed 41 and 58 suspensions, respectively.

The OSD report also showed that the World Bank has debarred or otherwise sanctioned 368 firms and individuals since the creation of its two-tier sanctions system in fiscal year 2011. In fiscal year 2015, the World Bank sanctioned a total of 73 companies and individuals—55 following a sanctions proceeding, and 18 following settlement agreements.

In fiscal year 2014, the number of companies and individuals sanctioned following a settlement agreement fell by more than half, to seven sanctions, whereas sanctions rose to 66 following settlement agreements. The largest number of sanctions occurred in fiscal year 2012, with 83 total sanctions—65 following a sanctions proceeding, and 18 following settlement agreements.

Mitigating risk

The first step companies need to take to reduce the risk of a sanction violation is to understand whether they are engaged in any contract funded by an MDB. “That’s not as easy as it sounds,” says Billy Jacobson, a partner in the white-collar and corporate investigations practice at law firm Orrick.

In many cases, a company will engage in a contract with an agency of a country’s government and may not realize the contract is funded by an MDB. “The tender documents and the contracting documents really have to be scrutinized quite closely,” Jacobson says.

Companies have to be especially careful when submitting tender documents and making any sort of representations, because the World Bank “takes a very strict view as to what it considers fraud in the contracting process,” Jacobson adds. For example, if a company exaggerates its qualifications a bit, “you really won’t find much sympathy on behalf of the Integrity Vice Presidency (INT), which is the investigation and prosecution arm of the World Bank,” he says.

Because the World Bank is not an enforcement agency, it doesn’t have any have subpoena power. But it does have the right to exercise an “audit” on any World Bank-funded contract, which is actually an investigation, warns Jacobson. During these “audits,” the INT may seek to conduct interviews, [and] review books and records … perhaps even e-mails. “It can turn into quite an invasive investigation,” he says.

DEFINITIONS OF SANCTIONABLE PRACTICES

Below is an explanation of “sanctionable practices,” as defined in the World Bank’s suspension and debarment report.
A “corrupt practice” is the offering, giving, receiving or soliciting, directly or indirectly, of anything of value to influence improperly the actions of another party.
A “fraudulent practice” is 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.
A “collusive practice” is an arrangement between two or more parties designed to achieve an improper purpose, including to influence improperly the actions of another party.
A “coercive practice” is 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.
An “obstructive practice” is (i) deliberately destroying, falsifying, altering or concealing of evidence material to the investigation or making false statements to investigators in order to materially impede a Bank 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 (ii) acts intended to materially impede the exercise of the Bank’s contractual rights of audit or access to information.
Source: World Bank

Because INT doesn’t call them investigations, however, and they’re not conducted by a regulatory body, “many companies will subject themselves to these audits without getting counsel,” Jacobson adds. Without legal guidance during an audit, companies can get into trouble “just like they would if they were being investigated by the Department of Justice,” he says.

Investigation process

The World Bank’s sanctions process begins with investigators in the INT. These allegations can come from several sources—such as World Bank staff, contractors, citizens, government officials, and other MDBs. When the INT’s investigation has concluded, the results are presented to the suspension and debarments officer (SDO).

After the audit, INT will draft a “show cause” letter, in which the company will have the chance to show cause as to why it should not be sanctioned. If a company fails to make its case, the World Bank will move to suspend a company, pending the outcome of the sanctions proceeding.

To challenge a sanction proceeding, a respondent has 30 days from the date that INT delivers the Notice of Sanctions Proceedings to submit a written “explanation” to the SDO as to why it believes that the sanction should be withdrawn or revised. Even if it isn’t withdrawn, the SDO may still decide to revise the recommended sanction “in light of evidence or arguments as to mitigating factors presented by the respondent,” the World Bank report stated.

The company has a third and final chance to appeal its case to the World Bank’s Sanctions Board, which is a board of independent judges, who will decide at a hearing whether a company should be sanctioned. This appeal must be made within 90 days of the receipt of INT’s allegations or the OSD’s recommended sanction.

The sanction imposed most frequently is debarment, meaning that the company or individual is ineligible to receive World Bank-financed contracts. A company or individual debarred by one MDB for more than a year will be “cross-debarred” by the others. Furthermore, because debarments and other sanctions are posted on the World Bank’s public website, they are observable by national and local governments and other public and private sector organizations conducting due diligence prior to procurement or other business decisions.

A company may have any number of reasons for appealing to the Sanctions Board. One reason may be if the company feels like it simply didn’t understand something, and the World Bank’s evidence on the company committing corruption is circumstantial. As another example, the company may feel from a practical standpoint that the settlement offer isn’t an attractive option and, thus, it can’t do any worse by going to the Sanctions Board.

According to the World Bank’s report, settlement agreements nearly doubled from six settlements in fiscal year 2014 to 11 settlements last fiscal year. Most cases (67 percent) are resolved at the OSD level, while 33 percent of issued cases had at least one appeal to the Sanctions Board.

“If you turn yourself in, they will treat you fairly,” says Peter Unger, a partner in the litigation group at law firm Arent Fox. “If they have to fight with you to prove what it is that you’ve done, they’ll be much tougher on you.” That may explain the increase in settlements, he says.

Sanctions determinations

If a company fails to make its case, the baseline sanction is three years debarment, which can be extended in the event of aggravating circumstances, or reduced based on mitigating circumstances. “Mitigating and aggravating factors are examined carefully before making a final sanctions determination,” the World Bank report states.

Aggravating factors include the severity of the misconduct; harm caused by the misconduct; interference with an investigation; and past history of misconduct. Mitigating factors, on the other hand, include cooperation given during the investigation and voluntary corrective actions taken, including the implementation or improvement of a corporate compliance program.

“That is something that we will take into account as a mitigating factor,” says Dubois. That means that the baseline sanction of three years debarment may be reduced, she says.

In fact, the World Bank indicated in its latest report that it will be putting even greater emphasis on robust compliance programs. “The World Bank is now focusing more and more on incentives for cooperation and adoption of robust compliance measures,” Sri Mulyani Indrawati, managing director and chief operating officer at The World Bank, said in the report.

In March, for example, the World Bank debarred Damen Shipyards for a period of 18 months for engaging in fraudulent practices by failing to disclose the identity and commission of an agent, in connection with its bid for a Bank-financed project in Sierra Leone in 2013. Damen Shipyards could have been debarred longer, however, had it not cooperated with the World Bank’s investigation and strengthened its corporate compliance program, the World Bank said.

“This case demonstrates what it takes to meet the World Bank integrity standard in terms of acknowledging misconduct, cooperating with investigators, and raising the bar on compliance,” Leonard McCarthy, integrity vice president of the World Bank, said in a statement.

To help companies satisfy their compliance obligations, the World Bank has developed detailed guidance called the Integrity Compliance Guidelines, against which the compliance programs of sanctioned parties are evaluated. The guidelines are akin to the Justice Department’s FCPA Resource Guide, although the World Bank guidance covers fraud and collusion as well as bribery. It also touches on topics such as senior leadership responsibilities, risk assessments, internal controls, third-party due diligence, training, reporting obligations, and more.

“The standards you have to follow for a World Bank-funded projected are not so wildly different from the standards that companies ought to be following under other anti-corruption laws,” says Joe Mauro, an associate in the international trade and white-collar and investigations groups at law firm Arent Fox.

The World Bank also has two Integrity Compliance Officers (ICOs), whose responsibilities include providing guidance to sanctioned parties in establishing appropriate integrity compliance programs to fulfill the conditions for their release from debarment. The ICOs also monitor the implementation of such programs and decide whether the conditions have been satisfied.

“It’s important that a company has a compliance program. It’s more important that it gets implemented properly,” says Dubois. “That’s the best way for a company to avoid trouble both at the national level and the international level.”

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