Meeting the World Bank in Enforcement Actions

One of the most interesting elements of the Justice Department’s settlement of corruption charges against French construction giant Alstom SA involves what the Justice Department did not do—quite a footnote to the largest Foreign Corrupt Practices Act criminal fine in history.

The Justice Department did not require Alstom to hire an independent compliance monitor, even as the company pays $772 million in penalties and undertakes a long program to improve its compliance program. Instead, it entrusted that crucial job to the World Bank, which has already had an independent compliance monitor watching Alstom since 2012.

The move is an astute one in several ways. The World Bank has broad discretion to prevent, deter, and investigate “sanctionable practices”—fraud, corruption, collusion, and coercion—for World Bank-funded contracts. If the World Bank finds evidence of misconduct, it can ban a company from receiving World Bank-funded contracts for as long as a decade.

For any business involved in construction or economic developments, especially in emerging markets, “it can effectively put a company out of business if it relies heavily on public contracts in developing countries,” says Michael Diamant, a partner with the law firm Gibson Dunn & Crutcher.

That’s because companies debarred by the World Bank also automatically face cross-debarment by five other multilateral development banks (MDBs): the African Development Bank, the Asian Development Bank, the European Bank for Reconstruction and Development, and the Inter-American Development Bank.

In 2013, for example, the World Bank barred Canadian construction and engineering company SNC Lavalin, along with its more than 100 subsidiaries, from World Bank-funded projects for a period of 10 years for alleged corruption in Bangladesh, Cambodia, Libya, and Algeria. That is the longest sanction ever imposed by the World Bank in a settlement.

“Even if the World Bank decides not to proceed with a sanctions action for whatever reason, it might still decide to refer its findings to a national authority.”
Matteson Ellis, Special Counsel, Miller & Chevalier

Nearly 600 companies faced World Bank debarment in 2014. What’s more, the bank’s enforcement activity has grown briskly in recent years: from an average of 16 sanctions annually from 2005 to 2009, to an average of 56 sanctions 2010 to 2014. The total in 2014 itself hit 71 sanctions.

Companies subject to World Bank procurement guidelines may not even know it, because the funds go directly to countries awarding contracts rather than the contractors building actual projects. “That can create a lot of compliance risks,” says Jonathan Ware of the law firm Freshfields Bruckhaus Deringer.

To mitigate the risk of a World Bank investigation, companies should first identify whether they are engaged in any World Bank-funded contracts. That information can be found within the contract, referencing the company’s obligation to abide by World Bank procurement guidelines.

To help companies satisfy those compliance obligations, the World Bank has developed guidance called the Integrity Compliance Guidelines—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 World Bank also has an Integrity Compliance Officer (ICO), whose responsibilities include monitoring companies’ implementation of the compliance program, including reviewing periodic reports, changes in the compliance program, and remedial actions taken in response to the sanctioned misconduct. Jonathan Shapiro, a former New York assistant district attorney, currently holds that position.

When the World Bank Knocks

When the World Bank receives information about a potential sanctionable practice, it conducts an inquiry covering all the usual basics: document reviews, interviews, site visits. “Investigations are easier to deal with when companies are cooperative,” a bank spokesperson says, and companies do receive mitigation credit for cooperating during an investigation.

WB COMPLIANCE GUIDELINES

Below is a partial list of the World Bank’s Integrity Compliance Guidelines:
Prohibition of Misconduct: A clearly articulated and visible prohibition of misconduct—fraud, corruption, collusion and coercive practices— to be articulated in a code of conduct or similar document or communication.
Responsibility: Create and maintain a trust-based, inclusive organizational culture that encourages ethical conduct, a commitment to compliance with the law and a culture in which misconduct is not tolerated.
Program Initiation, Risk Assessment and Reviews: [C]arry out an initial (or updated) comprehensive risk assessment relating to the potential for the occurrence of fraud, corruption, or other misconduct in the party’s business and operations, taking into account its size, business sector, location(s) of operations and other circumstances particular to the party; and review and update this risk assessment periodically and whenever necessary to meet changed circumstances.
Internal Policies: Develop a practical and effective program that clearly articulates values, policies and procedures to be used to prevent, detect, investigate and remediate all forms of misconduct in all activities under a party’s/person’s effective control.
Policies re: Business Partners: Use party’s best efforts to encourage all business partners with which the party has a significant business relationship or over which it has influence to adopt an equivalent commitment to prevent, detect, investigate and remediate misconduct. This includes agents, advisers, consultants, representatives, distributors, contractors, subcontractors, suppliers, joint venture partners, and other third parties.
Internal Controls (Financial): Establish and maintain an effective system of internal controls comprising financial and organizational checks and balances over the party’s financial, accounting and recordkeeping practices, and other business processes.
Training & Communication: Take reasonable, practical steps to periodically communicate its Program, and provide and document effective training in the program tailored to relevant needs, circumstances, roles and responsibilities, to all levels of the party, especially those involved in “high risk” activities) and, where appropriate, to business partners.
Incentives: Promote the program throughout the party by adopting appropriate incentives to encourage and provide positive support for the observance of the program at all levels of the party.
Duty to report: Communicate to all personnel that they have a duty to report promptly any concerns they may have concerning the program, whether relating to their own actions or the acts of others.
Remediate Misconduct: Implement procedures for investigating misconduct and other violations of its program which are encountered, reported or discovered by the party.
Collective Action:  [E]ndeavor to engage with business organizations, industry groups, professional associations and civil society organizations to encourage and assist other entities to develop programs aimed at preventing misconduct.
Source: World Bank.

A World Bank investigation in many ways shares the same characteristics as that of the Justice Department—which is to say, it often feels more harsh than the debarment process for U.S. government contractors.

“If you’re presently a responsible contractor and you can demonstrate that, you can continue to receive funding from U.S. governmental contracts,” Diamant says. “That’s not the case with the World Bank. You can be a perfect company today, but if you commit a sanctionable practice, they’re going to seek to debar you.”

The World Bank also can be more intimidating than the Justice Department. Because it has no power to impose criminal or civil penalties, the World Bank’s standard-of-proof is lower than that of a criminal proceeding. “The Bank only has to meet a preponderance of the evidence standard—more likely than not—to bring a successful case,” Diamant says.

Once a debarment happens, a sanctioned company can apply for reinstatement after a compliance program has been in operation for at least a year. If Shapiro’s office still says no, the debarred company can appeal to the Sanctions Board, which takes a fresh look at the case to determine if sanctions are appropriate. “Most companies that are hit with a debarment will want to appeal because they will want to receive the hearing and be able to advocate for a different outcome,” Diamant says.

According to a World Bank report on its 2014 enforcement activity, 31 companies are working with the ICO to meet the conditions of their release. Of that number, 13 are multinational companies, 16 are small and medium-size companies, and two are individuals. The top five sectors investigated most in 2014 include healthcare, transport, agricultural, water, energy, and mining.

FCPA Risk

So back to Alstom. Companies debarred by the World Bank also face greater risk of an enforcement action under the Foreign Corrupt Practices Act, given that the World Bank typically refers evidence of criminal misconduct to national law enforcement authorities, including the Department of Justice and Britain’s Serious Fraud Office. In 2014, for example, the World Bank made 22 referrals to national law enforcement authorities.

“Even if the World Bank decides not to proceed with a sanctions action for whatever reason, it might still decide to refer its findings to a national authority,” says Matteson Ellis, special counsel at law firm Miller & Chevalier and a former investigator with the bank’s integrity office.

Many FCPA-related settlements hint to such collaborative efforts. “Most of the deferred prosecution agreements we’ve seen include a clause that requires companies to cooperate with multilateral development banks,” Ware says.

World Bank spokesmen declined to comment on the Alstom case specifically. Still, the Justice Department’s decision to let the World Bank compliance monitor keep an eye on Alstom, rather than appoint a second one, is a first.

The broader compliance lesson is that “if the Bank shows up at your office to do an audit, you have to take that very seriously,” Diamant says. You’re not only answering to the World Bank, he says, “but you’re also potentially opening up a pipeline of information to the Justice Department.”