The World Bank and other development banks look to settle more cross-border investigations focusing on allegations of bribery and fraud.
The World Bank finances more than $64bn in development projects each year, the vast majority of which are carried out in high-risk jurisdictions. Corruption and fraud allegations touch almost one-fourth of these projects. To combat these risks and fulfill its mandate, the Bank has moved to the forefront of efforts to fight corruption and promote transparency. Yet the Bank’s integrity program remains off-radar to many companies and their legal and compliance teams. Often to their detriment: if wrongdoing is exposed, companies can be debarred from contracting with the World Bank and other multilateral development banks (MDBs), suffer reputational and commercial harm, and also contend with referrals to national authorities for potential prosecution or other enforcement action. As the World Bank has raised its anticorruption profile, it has also sought to make the most of its resources. Leonard McCarthy, who in April announced he would be ending his nine-year tenure as the Integrity Vice President of the World Bank Group, repeatedly called for using settlements as a way to foster “partnerships” with the private sector in the anti-corruption fight. Along the way, the Bank strengthened incentives and deterrents to encourage companies to consider a cooperative rather than a combative approach to investigations. It has also entered into a record number of settlements. Mr. McCarthy’s successor, Ms. Pascale Helene Dubois, hails from the Bank as well, and it will be interesting to see if these trends continue under new leadership. Based on our analysis of reported outcomes in World Bank cases, four trends are notable: First, the incidence of potential corruption and fraud in World Bank projects is high – again, such allegations arise in nearly one-infour of its $64bn in projects. Second, this has led to an uptick in debarments of contractors – a 34 percent increase in 2016. Third, our empirical analysis shows the potential benefits of engaging constructively with the World Bank when facing potential debarment. Fourth, following a significant victory last year in the Canadian Supreme Court, the World Bank has resumed and emphasized its practice of referring cases to national authorities; such reporting has led to more than 64 prosecutions in domestic courts. 3 Allegations of bribery and fraud arise in nearly one-infour World Bank projects, and debarments by the Bank rose 34 percent in 2016. An analysis by the World Bank's Integrity Vice Presidency recently found that allegations of corruption and fraud occur in one-in-four Bank projects. Not all these allegations will warrant full-scale investigations or the imposition of sanctions, and the Bank has other tools available to detect and prevent corruption. For example, as part of an effort to identify and mitigate project risks earlier, the Bank conducted a series of proactive sweeps last year, targeting for closer scrutiny 59 projects in sectors where investigations had identified prior misconduct. The Bank’s main enforcement tool, however, remains the imposition of sanctions, often in the form of debarment. During a period of debarment, sanctioned companies are prohibited from participating in Bank-funded contracts. They also find their names added to global due diligence “blacklists.” Moreover, under a cross-debarment agreement between the World Bank and four other MDBs, a debarment of more than one year automatically results in a debarment by the others. Debarments of individuals and companies in 2016 were up 34 percent over 2015 and were the second highest in the Bank’s history.1 Through the first quarter of 2017, this year is on pace to be even higher. In its past five fiscal years, the World Bank has launched 373 investigations and debarred a total of 705 respondents – 617 companies and 88 individuals – excluding cross-debarments. The 617 debarred companies represent 223 distinct corporate groups when affiliates are excluded. While the overall median debarment is for three years, terms can be substantially more severe in particular cases. Several weeks ago, for example, the Bank debarred a Danish consulting company for 14 years, imposing a more severe sanction based, in part, on evidence that the company instructed employees not to cooperate with the Bank’s investigation. What forms of misconduct can lead to such results? The World Bank, like other major MDBs, prohibits corruption (including bribery), fraud, collusion, and coercion in the projects that it funds. Any entity accepting Bank funds – either directly or, more often, indirectly – subjects itself to the Bank’s enforcement regime and should therefore ensure that it has carefully considered *Through March 31, 2017 Based on analysis of data available at http://Worldbank.org World Bank debarments of any kind 6 0 1 38 50 103 88 297 133 135 181 48 192 0 100 200 300 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017* 4 appropriate training and compliance programs, including mechanisms for identifying and escalating relevant risks. The World Bank also has a much lower threshold by which misconduct can be established than what companies would expect in criminal or civil proceedings. The Bank may rely on “any kind of evidence” and must prove only that it is “more likely than not” that misconduct occurred. In our experience, many companies are surprised to learn they are subject to the World Bank’s oversight. In many instances, for example, an employee of a subsidiary has bound the company to abide by the Bank’s strict integrity and disclosure rules by signing a contract with a government agency that receives Bank funds. The company faces, and is thus well aware of, the agency that sponsors or directs the project; frequently, however, it does not see the Bank or the jurisdiction of its integrity program behind the government agency. In bank-funded projects, however, the terms of tender procedures and contracts will include a simple but broad audit clause, contained deep in dozens of pages of bidding documents, which the Bank relies upon for authority to inspect the company’s books and records, to obtain its emails, and to interview employees. These agreements also prohibit the commission of sanctionable practices, thus enabling the Bank to bring a debarment action if it finds evidence of misconduct. And such evidence is not always glaring or compelling. As the Bank’s recent annual report makes clear, companies can be sanctioned simply for failing to disclose the third parties that they engage for a project, even without proof that such parties were involved in misconduct. An awareness of these risks has become increasingly important, because the Bank has steadily been targeting and sanctioning higher numbers of corporate groups. The number of distinct companies or corporate groups on which sanctions were imposed increased by 44 percent in 2016.2 Viewing the data in this manner – by, for example grouping the more than 300 SNC-Lavalin affiliates that were sanctioned in 2013 – may well provide a more accurate reflection of the trajectory of the Bank’s enforcement activity in recent years. Moreover, the World Bank has been targeting prominent multinationals. At a forum that Freshfields hosted late last month, Mr. McCarthy observed that the eight largest corporate groups sanctioned by the Bank had $47 billion in combined annual revenue. Recent outcomes have also highlighted the Bank’s broadly-worded guidance on debarring an entity’s parent company and affiliates. In implementing that internal policy, the Bank has often taken the position that large multinational groups can be debarred based on the misconduct of a single employee acting within the scope of his duties at an affiliate, even without evidence that others within the organization participated in, or even knew of, 6 0 1 22 24 54 55 34 68 61 88 0 30 60 90 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 World Bank sanctions (all types) imposed on distinct corporate groups Source: http://Worldbank.org 5 the misconduct at issue. In support of that view, the Bank will typically assert that a parent organization failed to supervise its subsidiaries or that it could and should have obtained more information but avoided doing so. Cases that the Bank has brought in its FY 2016 can be grouped in several ways in order to identify enforcement priorities or trends: By type of misconduct: The Bank opened 279 preliminary inquiries involving 36 countries that led to 64 full investigations. Of those 64 cases, most involved fraud or corruption. This pattern has been consistent for several years. By region: The Bank opened the most cases involving Europe/Central Asia (23 percent), followed by Africa (22 percent). By industry: Sectors that have received the most frequent attention have included transport and technology (25 percent), water (16 percent), and health, nutrition, and population (16 percent). Notably, the Bank has also cross-debarred 206 entities (105 individuals and 101 firms) under a 2010 agreement among five of the largest MDBs. Under this agreement, if one MDB debars an entity for more than one year, the other MDBs will debar for the same term. These cross-debarments are not included in the chart above, as they do not reflect direct results of the Bank’s integrity program. Empirical evidence shows the potential benefits of engaging constructively with the World Bank, which has settled a record number of cases. Our analysis suggests that a company facing a potential World Bank sanction can benefit either by litigating in the Bank’s internal process or by exploring the possibility of settlement. In particular, settlement tends to result in a faster process and a shorter debarment, as compared to the periods of debarment imposed in contested cases. While each case is unique, a typical (i.e. the median) Bank debarment imposed by its Evaluation Officer (EO) prohibits a contractor from bidding for 36 months. For those that litigate an appeal to the Bank’s Sanctions Board, the typical period of debarment is 24 months. But for entities that settle, the typical debarment is only 12 months. Moreover, settlements are occurring more often. A record number of settlements (18) occurred last year, a 64 percent increase from the prior year.3 This year might produce even higher numbers. Mr. McCarthy recently noted that, overall, the Bank has completed 87 settlement agreements. 6 For many businesses, time is also an important factor to consider in evaluating the potential impact of the sanctions process. When we take into account the aggregate time period required for both a World Bank investigation and a subsequent period of debarment – during which a company would be required to contend with the diversion of attention and resources such matters often require, along with other collateral costs beyond the direct loss of business opportunities resulting from a sanction – our analysis reflects the following: Debarment without appeal: six years On average, Bank investigations leading to a debarment imposed by the EO take three years. During that period, companies may face “temporary suspension,” which prohibits them from bidding on projects while the investigation is pending. When added t0 the median debarment of three years, this totals six years. Litigated and appealed cases: over six years As noted above, for companies that pursue an appeal before the Sanctions Board, we see periods of debarment reduced by onethird, to a median of 24 months. (Though, again, they may also be subject to temporary debarment during the investigation.) The appeals process, however, typically takes 15 months. Thus, overall – and again, on average – the time period that elapses from the start of an investigation to the issuance of a Board decision is about three months longer, as compared to cases in which the EO’s decision is not challenged. This will not be a materially significant margin in many circumstances. Settled cases: three years or less For companies that settle, however, the typical debarment is only 12 months. What data exists on investigations that result in settlement further suggest they take at least 12 months less than other investigations. Settlements can thus substantially reduce the time required to complete the sanctions process. For obvious reasons, settlement also provides greater certainty at an earlier stage of the sanctions process, enabling a company to manage the implications of debarment and plan its return to the MDB market. Of course, in spite of these significant advantages, it may not make sense for a company to pursue settlement in a particular case. That judgment must be made based on all of the unique facts and circumstances presented. The considerations discussed above, however, can certainly help to frame and inform a company’s evaluation of contending options within the World Bank’s sanctions process. Moreover, regardless of the duration of most debarments, a company must develop and Based on analysis of data available at http://Worldbank.org World Bank settlements 6 11 18 13 17 0 5 10 15 20 FY14 FY15 FY16 FY17 7 implement a compliance program that satisfies the Bank’s internal standards before it can bid again. The Bank has released 42 companies from debarment after determining that they had satisfied a compliance review. This is carried out by the Bank’s “Integrity Compliance Officer,” a role somewhat comparable to the compliance advisor that the US Department of Justice (DOJ) retained in late 2015. It is also worth noting that other MDBs are expanding their use of settlements, albeit in different ways. While starting its debarment regime late in 2013, the African Development Bank (AfDB) has since aggressively used settlements to obtain payments from prominent multinationals. In late 2015, it settled with Hitachi (for an undisclosed but “substantial” sum) and SNC-Lavalin (for $1.5m). Stating that “there is no such thing as ‘too big to sanction,’” the AfDB also settled with China First Highway Engineering Co. Ltd. for $19m. And it extracted $22.7m in payments from four oil and gas contractors involving projects in Nigeria. Separately, the Inter-American Development Bank (IDB) initiated a settlement program in 2016. The IDB has taken a more limited approach, however, by adopting eligibility criteria for the settlement process that include reporting on sanctionable practices beyond the scope of the respondent’s own conduct. World Bank has resumed and may increase its referrals to national authorities. The World Bank refers cases to national authorities when it determines that domestic laws may have been broken. This has led to the criminal prosecution of more than 64 individuals and the conviction of at least 35. In its last fiscal year, the Bank sent 30 referrals to local regulators. The pace of referrals had slowed, if not stopped, until an April 2016 ruling by the Supreme Court of Canada. The case arose after the Bank referred evidence of an ongoing bribery scheme to Canadian authorities, who then conducted their own investigation and brought a criminal case. The trial court accepted the defendants’ argument that they should have access to certain of the Bank’s investigative files and that the Bank had waived its immunity by voluntarily providing evidence to prosecutors. The Bank viewed this ruling as a violation of its privileges and immunities that threatened to undermine its integrity operations. It therefore appealed to the Canadian Supreme Court and ultimately won a decisive victory. The Court’s decision recognizes the important role that the Bank plays alongside national authorities in the global fight against corruption, and it placed the Bank safely beyond the reach of domestic legal process. With the Court’s favorable decision, the World Bank seems determined to continue an aggressive enforcement and referral effort, and we expect referrals to rise. 8 Conclusion Looking ahead, the World Bank aims to “focus on complex cases involving multiple perpetrators and jurisdictions.” More cases seem likely to come. We anticipate Africa and South Asia may be areas of more debarments this year. Energy-related industries as well as those in health, nutrition and population, may also see increased activity. Companies should identify potential risks arising from World Bank-funded projects, and ensure they maintain an effective compliance program to mitigate their exposure. If potential misconduct occurs, or the World Bank calls, seeking legal counsel promptly from those with experience before the Bank can prove critical to protecting a company’s interests. This material is provided by the international law firm Freshfields Bruckhaus Deringer LLP (a limited liability partnership organised under the law of England and Wales authorised and regulated by the Solicitors Regulation Authority) (the UK LLP) and the offices and associated entities of the UK LLP practising under the Freshfields Bruckhaus Deringer name in a number of jurisdictions, and Freshfields Bruckhaus Deringer US LLP, together referred to in the material as ‘Freshfields’. For regulatory information please refer to www.freshfields.com/support/legalnotice. The UK LLP has offices or associated entities in Austria, Bahrain, Belgium, China, England, France, Germany, Hong Kong, Italy, Japan, the Netherlands, Russia, Singapore, Spain, the United Arab Emirates and Vietnam. Freshfields Bruckhaus Deringer US LLP has offices in New York City and Washington DC. This material is for general information only and is not intended to provide legal advice. © Freshfields Bruckhaus Deringer LLP 2017 9 Contacts Daniel Braun Partner, Washington T: +1 202 777 4528 E: firstname.lastname@example.org Jane Jenkins Partner, London T: +44 20 7832 7280 E: email@example.com Dimitri Lecat Partner, Paris T: +33 1 44 56 55 14 E: firstname.lastname@example.org Gabriel Mpubani Partner, London T: +44 20 7716 4101 E:email@example.com Geoff Nicholas Partner, London T: +44 20 7832 7773 E: firstname.lastname@example.org William Robinson Partner, Hong Kong T: +85 22 8463 336 E: email@example.com Kim Rosenberg Counsel, Dubai T: +1 202 777 4537 E: firstname.lastname@example.org Jeroen van Hezewijk Partner, Amsterdam T: +31 20 485 7656 E: jeroen.vanhezewijk@ freshfields.com Norbert Nolte Partner, Dusseldorf T: +49 211 4979 528 E: email@example.com Emily Holland Associate, Washington T: +1 202 777 4537 E: firstname.lastname@example.org Jonathan Ware Senior Associate, Washington T: +1 202 777 4511 E: email@example.com i 1 This data is based on our analysis of the World Bank’s “Listing of Ineligible Firms & Individuals.” See http://www.worldbank.org/debarr/. The chart represents the total number of debarments and cross-debarments made against any company or individual and excludes non-debarment sanctions, such as letters of reprimand or conditional non-debarments. 2 This data is based on our analysis of the World Bank’s “Listing of Ineligible Firms & Individuals.” See http://www.worldbank.org/debarr/. The chart represents a count of all sanctions issued annually against any corporate entity or group of entities, including debarments, cross-debarments, voluntary disclosures, letters of reprimand, and conditional non-debarments. Where more than one entity within a corporate group is involved, those are grouped together as one and listed in the first year that a member of the group was sanctioned. 3 Data on settlements is based on INT’s Annual Reports and news of the World Bank’s Negotiated Resolution Agreements (NRAs) made with any corporate entity or individual. We have counted NRAs involving multiple entities within the same umbrella corporate group as one settlement.