Fraud and corruption inside donor funded projects
Issue 18, August 2014
This article discusses the potential impact an investigation by the Multilateral Development Banks (MDBs) can have on companies participating in MDB contracts.
- Vicarious Liability
- Factors influencing sanction decisions
- MDB mutual enforcement of banning decisions
- Risk enquiry form
In 2013, the largest Multilateral Development Banks (MDBs), including the World Bank Group (World Bank) and the Asian Development Bank (ADB), approved over US$70 billion in funding for projects in developing countries. With many of the recipient countries susceptible to corruption, the MDBs take a zero tolerance towards corruption.
They have set rules governing the conduct of firms and individuals who participate in their financed and administered activities which aim to prevent fraudulent and corrupt conduct by entities when trying to win or in executing contracts. Dedicated investigation units investigate allegations of misconduct and, MDBs can impose sanctions against companies and/or individuals found to have breached their rules. Sanction repercussions can be severe, and include banning entities, even indefinitely, from participating in MDB-financed contracts.
Companies participating in activities financed by MDBs need to be prepared in the event that they are subject to an investigation. They need to know that they can be held vicariously liable for the conduct of their representatives, and that the likelihood of being investigated has increased as detection capacities have improved. As a result, there has been an increase in the number of entities that have been sanctioned – the ADB alone has 787 firms and 532 individuals ineligible to participate in any of its financed activities as a result of its sanctions.
Companies participating in MDB contracts should ensure that their compliance regimes are regularly revised to guard against any possible misconduct. A sound, monitored and well documented compliance framework may also help to defend vicarious liability claims, as companies need to be able to evidence situations where individuals have acted outside controls (and relevant information needs to be readily accessible in the event of the need to respond to an MDB investigation).
Organisations may be held vicariously liable for the conduct of their representatives. This is most likely to occur when the representative is acting inside the scope of their authority or in the absence of a sound compliance program that includes both supervision and training. Likewise, a parent company cannot disclaim responsibility for a subsidiary within its scope of control merely because it has declined to exercise that control.
If a company submits a bid as part of a joint venture, it must also be aware that it may be culpable for the actions of its partner. Appropriate diligence before entering an agreement and/or relationship with a partner organisation is therefore critical.
A ban by an MDB is a genuine risk for those who have inadequate compliance arrangements in place. For example, approximately 90% of the organisations currently sanctioned by ADB for misconduct have been banned from participating in its contracts, while only 10% have been reprimanded as a sanction measure. When determining what sanctions should be imposed, MDB sanction committees consider any aggravating and mitigating factors.
A strong compliance program can act as a mitigating factor to any MDB sanctions likely to be imposed where misconduct has been found. Consequently, organisations should regularly review their compliance programs, ensuring well documented processes and ongoing monitoring. As the onus is on them to provide persuasive evidence to demonstrate why they should not be held responsible for the actions of their representatives, they should be in a position to evidence these controls at short notice.
Identifying and self-disclosing misconduct, and cooperation with an investigation, can be considered by sanction committees in their application of sanctions. For example, if a firm self discloses misconduct to an ADB investigation unit and/or offers its full cooperation with any resulting investigation, the investigators may, in certain circumstances, recommend the waiving or mitigating of sanctions. In addition, an organisation’s capacity to show that it has investigated the incident, identified and remedied any control gaps, including those that led to the incident, can also be considered as a further factor in mitigating sanction decisions.
Factors influencing sanction decisions
In 2006, MDBs agreed to standardise investigation principles and the definitions of practices prohibited inside their projects. Following this, in 2010, they signed a cross-debarment agreement via which, in summary, it was agreed that the signatories could mutually enforce each other’s banning decisions.
While a unilateral debarment may negatively impact a company, cross-debarment can have devastating effects. This may include killing off a company where its revenue sources are dependent on the international development sector. In addition, some donor agencies who were not signatories to the agreement, such as Japanese International Cooperation Agency (JICA), can also recognise these cross debarments. At present, 505 entities have been cross debarred.
MDB mutual enforcement of banning decisions