Multilateral development banks, such as the World Bank, enforce strict compliance procedures for their borrowers, along with regulations on investigations and sanctions for non-compliance. Being blacklisted by these banks has significant negative consequences (please refer to the related articles Participating in the Belt and Road Initiative, Protected from Overseas Compliance Risks, Joining the AIIB Projects—What You Must Know about Affiliated Debarment and Cross-Debarment). Taking an active role in proceedings may prevent an enterprise from being sanctioned.

The World Bank’s sanctions proceedings and possible sanctions

The World Bank’s sanction proceedings have four stages.

  • INT Investigation: If an enterprise involved in a World Bank project is alleged to be engaged in a corrupt, fraudulent, coercive, collusive or obstructive practice (“sanctionable practice”), the World Bank’s Integrity Vice Presidency (INT) will conduct an initial investigation.
  • Decision by the SDO: If the INT believes that there is sufficient evidence to support a finding of a sanctionable practice, it will submit a ‘Statement of Accusations and Evidence’ to the Suspension and Debarment Officer (SDO). If the SDO determines that the evidence submitted by the INT supports such a finding it will issue a ‘Notice of Sanctions Proceedings’ to the accused entity. The notice will provide a detailed explanation of the enterprise’s wrongdoing and recommend appropriate sanctions.
  • Written Explanation or Appeal: Upon receiving the notice, the entity may submit a written explanation to the SDO as to why the notice should be withdrawn or the recommended sanction revised. If the SDO denies the request, the entity can appeal to the Sanctions Board. The entity can also appeal directly to the Sanctions board without first making a submission to the SDO.
  • Decision by the Sanctions Board: At the entity’s request, the Sanctions Board will hold a hearing. They may require further submissions or evidence. The Sanctions Board will make a final decision on whether to impose sanctions and what sanctions will be imposed.

The World Bank’s sanctions are: reprimand, conditional non-debarment, debarment, permanent debarment, debarment with conditional release, restitution and remedy.

Since 2010, the World Bank has frequently chosen conditional non-debarment or debarment with conditional release. These sanctions encourage enterprises to take remedial measures to improve business governance.

  • Conditional non-debarment requires the sanctioned party to comply with certain conditions within a stipulated time period. Conditions include: taking actions to improve business governance, implementing an integrity compliance program, and other disciplinary actions against employees. Compliance avoids debarment by the World Bank.
  • Debarment with conditional release: the sanctioned party can be released from debarment if it demonstrates compliance with certain remedial, preventative or other conditions after a minimum period of debarment (usually three years).

Application to be released from debarment

After a sanction of conditional non-debarment or debarment with conditional release is imposed on a sanctioned party, the World Bank will assign an Integrity Compliance Officer (“ICO”). The ICO will advise a sanctioned party on how to meet the requirements of the World Bank’s Integrity Compliance Guidelines.

Sanctioned entities are required to comply with remedial measures under supervision from the World Bank. They should submit an application to the World Bank providing evidence of compliance. This will then be reviewed by the ICO.

The application must include a detailed report on the sanctioned party’s adoption of the integrity compliance program and other remedial measures. The ICO may also request a third party audit report evaluating whether the actions taken by the sanctioned party meet the Integrity Compliance Guidelines.

If a sanctioned party passes evaluation, the ICO may lift the sanction or remove the party from their debarment list. If the ICO determines that the party has not complied with conditions for release, the ICO may extend the period of debarment for up to 12 months. The party may then apply again for release.

Application for release from debarment by a sanctioned Chinese enterprise

In October 2013, a large municipal SOE (“Company A”) received a Notice of Sanctions Proceedings from the SDO. It was alleged to have falsified documents regarding the prior work experience of its employees. The documents in question were used for the tender for an infrastructure project in Africa. The SDO debarred Company A and its affiliates with conditional release, with a minimum debarment period of three years.

Company A submitted a written explanation to the SDO after receiving the notice. However, the SDO decided not to withdraw or modify its decision. Company A did not appeal so the SDO’s decision went into effect.

When the sanction came into force, Company A made a rectification plan in accordance with the ICO’s requirements. The company engaged KWM’s compliance team as an independent third party to evaluate its internal compliance program. The KWM team conducted comprehensive checks including: reviewing the company’s internal compliance policies, interviewing more than ten executives and employees, formulating internal compliance documents, investigating the company’s business partners, strengthening its finance management and contract management, improving employee training, establishing a compliance reporting system and a behavioural reinforcement schedule. This evaluation report will influence the ICO’s decision on whether or not to release the company from debarment.

The World Bank’s Integrity Compliance Guidelines

The World Bank provides guidelines on establishing a compliance management system in its Integrity Compliance Guidelines (“the Guidelines”).

The Guidelines encourage Board members and senior management staff to explicitly support compliance programs. The departments in charge of compliance should be allowed sufficient authority and resources to ensure compliance programs can be executed effectively.

The Guidelines state that risk assessment serves as an effective baseline for building an integrity compliance program. Enterprises should take into account their size, business sector, location(s) and other factors. They should assess risks around corruption, fraud and other misconduct and develop targeted policies. Risk assessments should be done regularly so that defects in compliance policies can be dealt with as they occur.

The Guidelines provide the following requirements in regards to the content of integrity compliance programs:

First, employee background checks are necessary. Particularly, management, board members and other employees with any decision-making authority or influence over business results should be vetted to determine if they have engaged in corruption, fraud or any other misconduct prohibited by the World Bank.

Second, enterprises should restrict the appointment of former public officials (or individuals or entities associated with these officials) especially when such officials have material influence over business or operations.

Third, enterprises should control and audit expenses including gifts, hospitality, entertainment and travel to ensure that they are reasonable and will not improperly affect the outcome of a business transaction. Corporate donations and sponsorships should be publicly disclosed and transparent.

Fourth, enterprises should conduct due diligence before entering into relationships with business partners. Enterprises should seek reciprocal commitment to compliance programs. Contracts should include terms to reserve the right to investigate the other party for any inappropriate behaviour, as well as the right to terminate a contract if any inappropriate conduct is found.

Fifth, enterprises should develop effective accounting management systems. All related record books should be kept intact and available for regular internal and external audits.

Finally, reasonable measures should be taken to communicate the compliance program and associated values to employees. Relevant training records should be kept. Enterprises should offer appropriate incentives to encourage compliance and take appropriate disciplinary measures for violations. There should be sufficient communication channels for reporting of violations.

In summary, Chinese enterprises participating in the Belt and Road Initiative or other overseas projects should utilise compliance programs as a means of protection against compliance risks. This will allow enterprises to make the most of all the possible opportunities along the Belt and Road.