Navigating Development Bank COVID-19 Relief Probes

By Joshua Ray and Salomé Lemasson
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Law360 (May 20, 2021, 6:01 PM EDT) --
Joshua Ray
Joshua Ray
Salomé Lemasson
Salomé Lemasson
Despite challenges imposed by COVID-19, the investigatory arms of the World Bank Group and other multilateral development banks, or MDBs, have maintained a consistently high pace of enforcement activity. The World Bank alone debarred 46 firms and individuals and recognized 72 cross-debarments from other MDBs in just the past year.[1]

These figures suggest that the number of open MDB investigations may approach or even exceed the number of investigations being pursued by government law enforcement agencies such as the United Kingdom's Serious Fraud Office and Financial Conduct Authority.[2]

As the pandemic slowly subsides, the number of individuals and businesses coming under MDB scrutiny will no doubt increase; particularly so given the World Bank's announcement that it will deploy up to $160 billion in financing, including over $50 billion of individual development account resources in grants and highly concessional terms, to help developing countries recover from COVID-19's devastating economic effects.[3]

With this unprecedented financing commitment, the World Bank and its new head of enforcement will be keen to ensure the highest degree of integrity is maintained in bank-financed COVID-19-related projects, including by engaging civil society organizations to help monitor COVID-19 response projects.

Although MDB investigations have been a growing trend in recent years, they remain relatively unknown to the public and even to the corporations that bid on MDB-financed projects. But this does not mean they should be ignored.

MDBs have extensive sanctioning powers that can have a debilitating impact on a company's business activities. The spillover effect of a debarment and subsequent cross-debarment, and potential additional prosecution before national jurisdictions, alongside the significant financial impact of a temporary suspension and any disgorgement of profit should incentivize corporations to take any such investigation seriously.

This article lays out the sanctions MDBs can impose, and some practical steps that the targets of MDB investigators should consider when navigating through an MDB inquiry.

MDBs' Jurisdiction and Investigation Prerogatives

Investigations led by MDBs derive from contractual audit rights included in the procurement guidelines that govern bank-financed projects. More specifically, the underlying legal basis for MDBs' sanctions regimes is the fiduciary duty to protect the use of bank financing.

Stemming from contractual origin, investigations led by MDBs are administrative in nature. Their scope is limited to allegations of sanctionable practices committed on bank-financed projects, which generally cover five types of wrongdoings: (1) obstruction, (2) fraud, (3) corruption, (4) collusion and (5) coercion.[4]

Major MDBs have agreed to a harmonized definition of sanctionable practices, as well as guidelines governing investigations into potential wrongdoings, under the Uniform Framework for Preventing and Combating Fraud and Corruption of September 2006.[5]
  
Investigations are led by a specific department within an MDB, such as the integrity vice presidency at the World Bank or the office of integrity and anti-corruption at the African Development Bank. These are granted specific prerogative to investigate potential wrongdoings committed on MDB-financed projects by companies and individuals, including:

  • Access to and review of extensive documentation not limited to contractual documentation of a given MDB-financed project — e.g., including email correspondence, accounting and financial documentation, etc.;

  • Interview of key personnel, including former employees or agents involved in said MDB-financed project; and

  • Access to company premises, etc.

Temporary Suspension and Voluntary Withdrawal

In the course of the investigation, when there is sufficient evidence that the investigation is likely to result in sanctions, an MDB may request a temporary suspension of the defendant. If such a request is granted, the defendant is excluded from participating in any bank-financed project during a specific period of time,[6] and often until the investigation is concluded.[7]

A temporary debarment may have a significant impact on the defendant's business activity, as the company may be required to withdraw from pending bids or ongoing projects, often incurring high contractual costs. In practice, temporary debarment is often sought when the defendant is viewed as not being cooperative enough with the investigation. Such defendants may be further sanctioned on counts of obstruction.

With effects similar to a temporary suspension but of a very different strategic nature, a defendant may also consider voluntarily withdrawing from ongoing MDB-financed projects when it is being targeted by an investigation. From a strategic point of view, a voluntary withdrawal may be used to forestall the bank's petition for temporary suspension while gaining cooperation credit.

Such a decision should be carefully assessed, in particular for its financial impact on the company. It may, however, prove to be a useful argument during settlement negotiations, to obtain a reduced debarment period in consideration of the duration of the voluntary withdrawal.

Range of Sanctions

Most MDBs apply the principle of "more likely than not" that sanctionable practices were committed in connection with bank-financed projects. Once this threshold is met, MDBs determine sanctions, which may range from a letter of reprimand to permanent debarment. Sanctions also include disgorgement of profit, paid to the victim of the wrongdoing — e.g., the foreign public entity for which the project was financed by the MDB.

Sanctions may be negotiated between the defendant and the concerned MDB's investigation office under a settlement agreement.[8] Such agreement may be entered into at any time during the investigation, including early on in the investigation process.

In practice, it may be rather unsettling for targeted companies to launch negotiations when limited evidence of wrongdoing is put forward by the bank. If no settlement is reached, the defendant may ultimately be sanctioned by the bank's two-tier administrative sanctions process.[9]

As is the case for the World Bank, most MDBs retain a baseline sanction which varies depending on mitigating and aggravating factors.[10] In practice, baseline sanctions qualify for cross-debarment by other MDBs, therefore carrying a significantly greater weight than the mere debarment period.

Impact of Cross-Debarment

Major MDBs have entered into the Agreement for Mutual Enforcement of Debarment Decisions of April 9, 2010.[11] Under the cross-debarment agreement, signatory MDBs have agreed to enforce any debarment decision issued by other MDBs as long as such debarment exceeds one year.

Additional criteria also apply for the mutual enforcement of debarment decisions. These criteria include, among other things:

  • Debarment is based on findings of sanctionable practices as defined under the 2006 uniform framework;

  • The debarment decision is public;

  • The debarment decision was issued within 10 years of the date of commission of the sanctionable practice; and

  • The debarment decision was not made in recognition of a decision made in a national or other international forum.

This means that any debarment exceeding 12 months taken by any of the major MDBs will have an effect on other major MDBs, thus excluding the sanctioned company or individual from participating in any project financed by these other MDBs.

In addition, certain MDBs that are not party to the cross-debarment agreement have decided to spontaneously enforce debarment decisions issued by the World Bank, the Asian Development Bank, the African Development Bank, the Inter-American Development Bank, and the European Bank for Reconstruction and Development.[12]

In practice, any debarment decision following the identification of sanctionable practices on a bank-financed project may significantly impact a company with business models that rely on access to MDB financing for major infrastructure projects in developing countries.

Potential Spillover Effect Before Other MDBs or National Jurisdictions

MDBs publish their debarment decisions, as this is a prerequisite for cross-debarment. The publicity of an MDB decision carries a great impact as it may tip off national authorities or other MDBs into launching their own investigation.

This may notably be the case for major projects that rely on various sources of financing from different development banks. One defendant may have, in practice, benefited from several MDBs' funds and therefore be subject to joint investigation for various parts of a given project.

In addition, the 2006 uniform framework encourages MDBs to consider whether to refer information derived from an investigation to appropriate national authorities. Despite that the evidence threshold is lower for MDB proceedings as opposed to criminal ones, evidence of sanctionable practices such as corruption, fraud or collusion are likely to qualify as criminal offenses before national jurisdictions as well.

Consequently, companies and individuals debarred by MDBs may face prosecution in their home country for similar underlying facts. Given the fundamental difference in nature between MDB proceedings or sanctions and criminal prosecution, one may question whether the principle of non bis in idem — according to which a legal action cannot be instituted twice for the same cause of action — is likely to protect debarred defendants from future proceedings before national jurisdictions.

Finally, national authorities may also be encouraged to investigate potential criminal offenses deriving from wrongdoings committed in connection with MDB projects by professionals bound by a duty to alert national authorities when they become aware of potential criminal offenses. This is notably the case for chartered accountants, who are required by law to denounce criminal offenses in many jurisdictions.

Conclusion

Despite the unprecedented health crisis, MDBs have maintained their anti-corruption missions and continued to investigate allegations of sanctionable practices on bank-financed projects. The World Bank alone has adapted its sanctions system to almost entirely electronic processes with minimal interruption. It continues to assess any allegations of potential wrongdoing, pursue investigations, and review and adjudicate cases for potential sanctions.

With staff unable to travel due to current pandemic-related travel restrictions, certain investigation units such as the World Bank's integrity vice presidency have turned to local external firms to carry out investigations, forensic work and due diligence on its behalf.[13]

New investigation units have also emerged despite the pandemic. The Asian Infrastructure Investment Bank has continued growing, and is now seeking to play a greater role in the fight against corruption and fraud, spontaneously cross-debarring entities subject to debarment by other MDBs. Similarly, the independent integrity unit of the Green Climate Fund investigated a steady number of cases last year despite the pandemic.

While MDBs primarily fund major projects located in developing countries, European companies of all sizes — from major international groups to family-owned businesses — are regularly targeted and ultimately sanctioned. For example, the World Bank recently debarred Spain-based Grupo Mecánica del Vuelo Sistemas SAU in connection with collusive, corrupt and fraudulent practices relating to a development project in Vietnam.[14]

Earlier this year, the German company Ferrostaal Oil & Gas GmbH was subject to a 13-month debarment for fraudulent practices committed on a bank-financed project in Myanmar.[15] Another German company, Berky GmbH, was previously debarred in November 2020 for collusive, fraudulent and corrupt practices committed on the same project.[16]

Along with its unprecedented financing commitment to deploy up to $160 billion in response to the ongoing pandemic, the World Bank has increased its scrutiny to ensure the highest integrity is maintained in bank-financed COVID-19-related projects. Engaging nongovernmental organizations to help monitor COVID-19 response projects is part of this.

MDB investigations and sanctioning are likely to have a heavy impact on companies' business activities. The spillover effects of a debarment and subsequent cross-debarment, and potential additional prosecution before national jurisdictions, alongside the significant financial impact of a temporary suspension and any disgorgement of profit, give corporations incentive to take any such investigation seriously.



Joshua Ray is a partner and Salomé Lemasson is of counsel at Rahman Ravelli.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.


[1] WBG Press Release, World Bank Group Sanctions System Maintains its Anticorruption Mission, Despite Unprecedented Challenges in Fiscal Year 2020, Oct. 9, 2020.

[2] SFO, "Our Cases," available at https://www.sfo.gov.uk/our-cases/; FCA 2020 Disclosure Log, available at https://www.fca.org.uk/publication/foi/foi7640-response.pdf.

[3] World Bank Annual Report, 2020.

[4] Certain MDBs, such as the Asian Infrastructure Investment Bank ("AIIB"), add two additional sanctionable practices (theft and misuse of resources).

[5] Uniform Framework for Preventing and Combating Fraud and Corruption of September 2006, https://www.afdb.org/fileadmin/uploads/afdb/Documents/Generic-Documents/Uniform_Framework_for_Combatting_Fraud_and_Corruption.pdf.

[6] Under the World Bank Procurement Guidelines, temporary suspension is granted for an initial period of six months and may be extended for another period of six months.

[7] Under the World Bank Procurement Guidelines, once a Statement of Accusation and Evidence is submitted within the 1-year timeframe, temporary suspension is automatically extended pending the final outcome of sanctions proceedings.

[8] Such a settlement agreement is then validated by the concerned MDB's sanctions board.

[9] Major MDBs have adopted uniform procedure relying on a two-tier process.

[10] The baseline sanction for the World Bank is a three-year debarment with conditional release.

[11] The World Bank Group, the African Development Bank, the Asian Development Bank, the Inter-American Development Bank Group and the European Bank for Reconstruction and Development are signatories to the Cross-Debarment Agreement.

[12] This is notably the case for the AIIB, which has cross-debarred over 1,000 entities to date.

[13] World Bank Group, Request for Expression Of Interest Investigative, Forensic Audit, Due Diligence, and Digital Forensics Services, Nov. 10, 2020.

[14] https://www.worldbank.org/en/news/press-release/2021/03/03/world-bank-group-debars-grupo-mecanica-del-vuelo-sistemas-sau.

[15] https://www.worldbank.org/en/news/press-release/2021/02/24/world-bank-group-debars-ferrostaal-oil-gas-gmbh.

[16] https://www.worldbank.org/en/news/press-release/2020/11/04/world-bank-group-debars-berky-gmbh.

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