On October 7, the World Bank Group (the Bank) Integrity Vice Presidency (INT) released its Annual Update for the 2016 Fiscal Year (the FY2016 Report or the Report). The Report highlights INT’s efforts to safeguard Bank-funded procurement projects in the immediately preceding fiscal year, and sets out INT’s current and future policy, investigation, and enforcement goals.
INT’s FY2016 track record is probably best described as mixed. On the one hand, INT instituted a number of initiatives aimed at achieving its goals of pursuing more and more complex cases, targeting its limited resources so as to more efficiently identify sanctionable conduct in Bank-funded procurement projects, preventing sanctionable conduct in the first place, and enhancing cooperation with national authorities. On the other hand, the “trend-lines” of INT’s enforcement statistics were essentially flat, with the number of investigations opened, and companies and individuals sanctioned dropping below their historical trends, while the number of sanctions cases INT submitted to the Bank’s Office of Suspension and Debarment (OSD) for evaluationreturned to 2014 levels. The number of Negotiated Resolution Agreements (NRA) entered into, however, did increase.
Key FY2016 Developments
World Bank Group v. Wallace
The Bank’s victory in the Supreme Court of Canada in World Bank Group v. Wallace was perhaps the most important development of FY2016. At issue was a criminal defendant’s challenge in Canadian courts to the evidentiary basis of a wiretap authorization – supported by evidence provided by INT – and whether production of information that INT had provided to the Royal Canadian Mounted Police could be compelled by the lower court’s production order. Overturning the lower court, the Supreme Court of Canada affirmed the Bank’s privileges and immunities as an international organization, refusing to force it to produce certain internal documents or to require INT investigators to testify before the Court. (See our analysis here).
This decision is significant, as it preserves INT’s ability to collaborate with law enforcement authorities around the world. An adverse ruling would have forced drastic changes in INT’s practice of referring cases to national authorities and threatened future cooperation between the Bank and those authorities. With its immunities intact, the Bank and INT have clearly signaled in the FY2016 Report their intent to increase the amount of information they share with national authorities in order to ensure that they have the benefit of evidence collected by INT, and to facilitate broader cooperation and evidence-sharing in ongoing investigations.
Focus on More Complex Cases – Sanctions Board Decision No. 87
The Report also signals INT’s intent to focus its enforcement efforts on higher-impact, larger dollar-value cases involving complex cross-border misconduct. Highlighting this push in FY2016 is Sanctions Board Decision No. 87, involving Ukrainian company Information Computer Systems CJSC (Incom), which was debarred for 22 years and six months for involvement in a corrupt and collusive scheme to secure Bank-funded contracts worth $43 million. Other related entities involved were debarred for periods ranging from five and a half to seven years. Two individuals – Incom’s president and vice-president – were also debarred for periods of 11 and a half years and eight and a half years, respectively. These were the most severe sanctions issued in FY2016.
The Report highlights Incom’s obstruction as having played an important role in the lengthy sanctions handed down in the case. Many additional factors, however, were highlighted by INT as having contributed to the result, presumably as a warning to companies and individuals of its future investigative priorities: Incom was a recidivist, having already been debarred for three years for misconduct relating to the same contract, and was found to have engaged in multiple forms of misconduct. The Sanctions Board applied a number of aggravating factors in calculating the sanction, including that Incom utilized sophisticated means to perpetrate the misconduct, management and a public official were involved, Incom interfered with the investigation, and the respondents did not cooperate in sanctions proceedings. With investigations and sanctions numbers trending down or nearly flat over FY2016, the emphasis INT has put on this case signals its intent to focus on higher-value, more egregious conduct where it has the ability to do so.
Focus on Corruption in Bank-Funded Projects - Undisclosed Agents and Fraud
The Report also highlights how corruption concerns in Bank-funded projects drive its investigations, and how the discovery of fraud or other sanctionable practices often serves as an indicator to INT of underlying corruption in Bank-funded contracts. As INT’s enforcement statistics for FY2016 (discussed below) and the discussion of those figures make clear, corruption and issues related to corruption were the most common sanctionable practice investigated by INT in 2016. Of the 48 cases under active investigation at the end of FY2016, however, the report notes that 24 of those investigations also involved elements of fraud and/or collusion. INT highlights, however, that even the elevated numbers of corruption-related cases do not tell the full story until one takes into account fraud and other allegations – such as undisclosed third party agents and fraudulent books and records – which often are used to debar companies and individuals where the evidence may not support a formal finding of corruption. Consistent with other sections of the report, INT may be highlighting these facts in order to counter past criticism that its efforts to investigate fraud have been focused on low-level conduct, such as certain kinds of falsified bid submission documentation, rather than corrupt practices where INT nevertheless suspects it is present.
New Procurement Framework
On the policy front, the Report details INT’s and the Bank’s efforts to ensure that the information INT gathers regarding sanctionable practices is passed back into the Bank’s operations so that ongoing sanctionable conduct can be identified and stopped before it occurs. While INT highlights the benefits of this practice, there may be due process issues associated with this as well, as a bidding company’s other business before the Bank may be adversely affected notwithstanding the fact that INT has not established a sanctionable practice.
The report also describes the implementation of the World Bank’s new Procurement Framework as of July 1. Among other things, the new framework confirms the application of the World Bank’s Anti-Corruption Guidelines to all procurement methods, and includes Procurement Regulations for Borrowers Annex IV, relating to fraud and corruption. Where previously there were inconsistencies between the definitions of corrupt, fraudulent, collusive, and coercive practices set out in the Anti-Corruption Guidelines and the Procurement and Consultant Guidelines (in that footnotes to these definitions in the Procurement and Consultant Guidelines could have implied a more narrow interpretation of those practices in the procurement context), Annex IV of the Procurement Regulations for Borrowers now includes definitions consistent with those set out in the Anti-Corruption Guidelines.
In addition to extending the Anti-Corruption Guidelines’ definitions to all modes of Bank procurement, the Annex also sets out an expansive interpretation of the audit rights INT may exercise in applicable contracts, which appears to use the terms “investigation” and “audit” interchangeably. INT has always interpreted its audit rights broadly, and those interpretations have led to numerous disputes between firms and INT over the years. It remains to be seen what influence this expansive language in the Annex to the Procurement Regulations for Borrowers may have on the Sanctions Board’s interpretation of the scope of INT’s audit rights in operational lending, not just direct procurement, and whether INT will seek to extend its broad interpretation of audit clauses to these new areas.
Enforcement Metrics and Other Policy Initiatives
Each Annual Report publishes current and historical data on INT’s investigation and enforcement efforts. The FY2016 Report suggests that while INT’s program remains active, the number of cases it is successfully pursuing has trended down slightly in recent years. This trend may indicate the concentration of INT resources on fewer, higher-profile matters that take more time and resources to resolve; it could also reflect marginally fewer resources at INT’s disposal, in the face of some budget reductions in recent years.
- Investigations: In fiscal year 2016, INT opened 279 preliminary inquiries, 64 of which became full investigations (down from 99 in fiscal year 2015). Approximately one-third of these inquiries were initiated by World Bank staff, while two-thirds of complaints originated from non-Bank sources. As in prior years, investigations were focused on allegations of corruption (48 investigations in FY2016) and spanned 60 projects across 36 countries. Although investigations related to work performed across a number of industries, the Health and Nutrition, Transport and Communications, and Water sectors saw the most investigative activity.
- OSD Referrals: After conducting an investigation, INT must submit cases to OSD for further action. Of the 64 investigations opened in fiscal year 2016, INT referred 45 cases (approximately 70%) to OSD. A Notice of Sanctions Procedures or Notice of Temporary Suspension was issued by OSD in 40 of those cases.
- Sanctions and Settlement; Honoring Cross-Debarments: A total of58 companies and individuals were sanctioned in fiscal year 2016, 40 as a result of sanctions proceedings and 18 as a result of negotiated resolution. Of the 18 NRAs INT submitted to OSD for review, all were apparently approved. This is an increase over 2015, which had 11 NRAs, and potentially indicates an increased willingness to reach settlements with companies before INT. In addition to sanctions stemming from INT investigations, the World Bank issued 38 cross-debarments pursuant to the 2010 Cross-Debarment Agreement among the African Development Bank, the Asian Development Bank, the European Bank for Reconstruction and Development, the Inter-American Development Bank, and the World Bank.
- Investigation Timeline: INT has been tracking its case turnaround time since 2010. In fiscal year 2016, 87 investigations were closed (including 32 unsubstantiated cases and one unfounded case). Of these investigations, 53% were closed within 12 months and 85% were closed within 18 months. The average duration of all investigations completed in fiscal year 2016 was twelve months. The trend appears to be towards quicker resolutions of investigations, as the FY2015 Report listed 51% of new investigations had been closed within 12 months, and 70% within 18 months.
- Compliance: INT’s Integrity Compliance Office (ICO) is responsible for monitoring and assessing the compliance programs of companies that have reached NRAs with INT containing conditions, or that are otherwise subject to sanctions of debarment with conditional release or conditional non-debarment. To date, 259 entities have been sanctioned with conditional release, and the program continues to be utilized as a rehabilitation strategy. In fiscal year 2016, the ICO engaged with 41 entities, finding that 20 sanctioned parties had satisfied compliance-related and other conditions for release.
- Referrals to National Authorities: In fiscal year 2016, INT made 62 referrals to other countries or other MDBs.
Although it is difficult to draw conclusions based on INT’s year to year data (as investigations may span multiple years), there were some trends in fiscal year 2016 that are worth noting. Enforcement statistics generally show that although the raw number of investigations is down (as noted above) the number of cases INT referred to OSD rose slightly (to 39 from 35). Nonetheless, the number of notices issued by OSD also was reduced slightly to 58, down from 73 the previous year.
INT continues to actively investigate misconduct in Bank-funded contracts, and, while it has enjoyed some high profile successes in the past year, it also may be poised to take a harder look at larger investigations, even if it ultimately investigates a fewer number of allegations in total. Following on from the Wallace decision, we expect to see increased information sharing with national authorities and other international financial institutions, along with an increased focus on more complex, high-dollar-value matters. Fiscal year 2017 is expected to bring some changes in INT leadership, with the end of Vice President Leonard McCarthy’s second contract. Who will succeed him, and what changes new leadership may bring to INT’s enforcement program, will be watched closely by the stakeholders in the World Bank’s system.