Strings attached: compliance expectations in projects involving multilateral development banks

March 2017 | PROFESSIONAL INSIGHT | FRAUD & CORRUPTION

Financier Worldwide Magazine

It comes as little surprise to most sophisticated companies that bad conduct by employees, agents or partners, such as bribing a government official, could result in criminal charges against the company. Yet a surprising number of companies and individuals related to projects involving financing from a multilateral development bank (MDB), such as the World Bank Group, have given little thought to the fact that they have subjected themselves to an entirely separate regime of anti-fraud and anti-corruption regulations with serious consequences for non-compliance. Other companies, such as those bidding to sell goods or services to such a project, might not even realise that MDB money is involved in the project at all.

Under the auspices of fulfilling their fiduciary duties, MDBs contractually require borrowers to abide by the MDBs anti-fraud and anti-corruption regulations, such as the World Bank’s Guidelines on preventing and combating fraud and corruption in projects financed by IBRD loans and IDA credits and grants. Those guidelines are designed to apply to not only borrowers, but also to any company or person receiving loan proceeds for their own use (vendors, for example), as well as any person or entity that makes or influences decisions regarding the use of loan proceeds. Borrowers (and their subcontractors) are required to include provisions in all related contracts giving effect to this intent and binding their subcontractors, vendors, etc., to comply as well.

While it is easy for one to believe that their own company would never be involved in something as serious as bribery, even relatively mundane actions like misrepresenting the company’s qualifications or permitting a conflict of interest in bidding could constitute ‘fraud’ in the eyes of an MDB. Failure to comply results in much more than simply being found in breach of an agreement with the bank or its borrower – for some it could mean the end of their business altogether. The principal deterrent for non-compliance is the temporary or permanent debarment of a company (including potentially parents or affiliates) or an individual from any participation in projects financed by the MDB, as well as the imposition of monetary restitution. If the debarment ordered exceeds one year, the debarment will be given worldwide effect by a 2010 agreement generally requiring other MDBs to automatically cross-debar any entity receiving such a penalty.

So what is a company to do? Forgoing all financing or work involving MDBs is likely undesirable or untenable. And it might be difficult for a company to even identify whether an MDB’s guidelines would apply, as an MDB could have lent only a small fraction of the project’s value – in one instance several companies were sanctioned in connection with a project for which the MDB had lent only 1.6 percent of the overall value. Thus, it is vital that all companies with potential exposure to projects financed by an MDB understand the anti-fraud and anti-corruption guidelines they might encounter, and maintain compliance procedures designed to address those rules.

World Bank Group’s anti-fraud and anti-corruption guidelines

While each MDB’s sanctions regime might have subtle differences, the major MDBs – that is, the African Development Bank, the Asian Development Bank, the European Bank for Reconstruction and Development, the European Investment Bank, the International Monetary Fund, the Inter-American Development Bank and the World Bank Group – have jointly agreed on the definitions of prohibited conduct and have attempted to normalise the considerations that each will take into account in the event of a suspected violation. Using the World Bank Group’s guidelines as an illustration, the following five types of conduct are prohibited: (i) 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; (ii) 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; (iii) 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; (iv) 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; and (v) an “obstructive practice” is deliberately destroying, falsifying, altering or concealing 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; 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 any other act intended to materially impede the exercise of the bank’s contractual rights of audit or access to information.

At first glance the conduct prohibited by the MDBs might seem familiar from other compliance laws or contexts, however, some of the types of prohibited conduct, like that of a “corrupt practice”, are interpreted more broadly than what might be addressed by some corporate compliance programmes. The World Bank Group considers the bribery of any person, not just government officials, to violate a duty as being corrupt – in other words, so-called ‘commercial bribery’. Additionally, the “World Bank Group does not condone facilitation payments” despite their being permitted under some countries’ laws, like the US’ Foreign Corrupt Practices Act of 1977 (FCPA).

Others, like the MDBs’ “fraudulent practice” offence, have been applied to facts that are unlikely to be a focus of most corporate compliance programmes. For example, in February 2016, a company was debarred after an employee falsified a document demonstrating that the company was authorised to supply a manufacturer’s equipment. In another example, a company was debarred with conditional release because, in part, the company had lied about the extent of the company’s experience on similar projects. Indeed, the World Bank Group even investigated as fraudulent a contract issued to a consultant because an employee of the project was married to the consultant’s director.

Practical advice for companies potentially exposed to MDB projects

The broad reach of the MDBs’ anti-fraud and anti-corruption rules threatens to catch even sophisticated companies focusing on traditional anti-corruption laws, such as the FCPA, by surprise. Moreover, even where an MDB investigates more traditional conduct, such as bribery of a government official, the company being investigated has no right to a trial, no right to present witnesses in defence, and the MDB’s enforcement arm need only establish evidence “sufficient to support a reasonable belief” “that it is more likely than not” that a violation occurred. It is no wonder then, that the World Bank Group’s sanction arm reports finding “sufficient evidence” for a penalty to be imposed in 96 percent of all cases reviewed.

It is important for any company operating internationally to create and maintain a strong compliance programme, designed to prevent sanctionable conduct from occurring in the first instance. This is critical for any company that might become involved in projects for which financing is provided by an MDB. Such companies, in fact, could be in violation merely by failing to maintain such programmes, or for failing to ensure that their consultants and vendors do. The World Bank Group’s guidelines, for example, require companies to “take all appropriate measures” to prevent violations, including “adopting appropriate fiduciary and administrative practices” to ensure that MDB loan proceeds are used only for their intended purposes.

Additionally, corporate compliance programmes should be periodically reviewed to ensure they comply with the specific requirements imposed by the MDB guidelines, such as the World Bank Group’s requirement that all representatives involved with a project, and all recipients of loan proceeds, be provided with a copy of the World Bank Group’s guidelines by a borrower. Specific contractual provisions, such as those: (i) giving effect to the guidelines; (ii) permitting early termination if the recipient is debarred by the bank; (iii) requiring restitution of loan proceeds with respect to which fraud or corruption has occurred; and (iv) requiring the recipient cooperate fully with representatives of the bank performing any investigation into allegations of fraud or corruption in connection with loan proceeds, must also be included in all related contracts.

Finally, as with compliance programmes generally, companies should ensure they keep sufficient documentation to demonstrate the existence and proper functioning of the programme, as well as documentation specific to each project or consultant. If the company should ever find itself the subject of an MDB investigation, the existence and effectiveness of such a programme may be the only way to influence the type of sanctions imposed by an MDB, or avoid a sanction entirely.

William E. Lawler III is a partner and Brian L. Howard II is an associate at Vinson & Elkins LLP. Mr Lawler can be contacted on +1 (202) 639 6676 or by email: wlawler@velaw.com. Mr Howard can be contacted on +1 (202) 639 6620 or by email: bhoward@velaw.com.

William E. Lawler III and Brian L. Howard II

Vinson & Elkins LLP