HIGHLIGHTS:

  • Companies that operate globally face substantial risks associated with activities funded by multilateral development banks (MDBs).
  • Several recent debarment actions by the World Bank highlight those risks.
  • To address such risks, companies should conduct risk assessments and try to minimize any risks identified.

Companies that receive or enter into contracts on projects financed by loans from multilateral development banks, such as the World Bank, and engage in corrupt practices face the risk of significant and potentially debilitating sanctions, including debarment. Recent high-profile debarment actions highlight that risk.

Funded by member countries, multilateral development banks (MDBs) are international financial institutions that support economic and social projects in developing countries with financial and technical assistance. They provide loans, grants and investments to governments as well as organizations with government repayment guarantees. Although the best-known MDB may be the World Bank, other examples include the European Bank for Reconstruction and Development, the Asian Development Bank, the Inter-American Development Bank and the African Development Bank. Sources of funding include grants from wealthier member nations as well as money borrowed in world capital markets.

Just as sovereign governments prohibit corrupt practices, so do MDBs. The World Bank, for example, makes five types of conduct sanctionable: fraud, corruption, collusion, coercion and obstruction. Borrowers and their agents are subject to not only national laws outlawing corruption but also MDB rules that bar such conduct. These rules derive from the contractual lending arrangements between an MDB and a borrower, and can be enforced across national boundaries without regard to the law of any nation or political subdivision of a nation. Besides the borrower country, the rules also apply to companies that enter into bank-financed contracts and individuals associated with those organizations through the contracts between the borrowers and the contractor. The provisions in these contracts that apply MDB rules to contractors are often inconspicuous and may not provide much, if any, notice that a project is supported by MDB financing.

If an MDB concludes that a violation has been committed, a company may be subject to an array of sanctions, including a public letter of reprimand, restitution, and, significantly, debarment. A range of additional consequences may follow. A company may sustain reputational damage, lose business, be the subject of a referral to any number of criminal or civil enforcement authorities, be required to have a monitor, and be subject to cross-debarment by other MDBs and other contracting authorities.

The World Bank's standard sanction is debarment with conditional release, under which companies or individuals lose their eligibility to receive bank-financed contracts for a certain period of time or until they have fulfilled certain conditions, whichever is later. Those conditions require the implementation of an integrity compliance program that includes an express prohibition of misconduct set forth in a code of conduct or similar document; the creation and maintenance of an organizational structure that encourages ethical conduct and a commitment to compliance with the law; the implementation of internal policies intended to prevent, detect and remediate misconduct both within the company and on the part of third parties; the establishment of reporting policies; and the development of effective internal controls. Aggravating factors include the severity of the misconduct, the harm caused, interference with a bank investigation and a history of misconduct. Having a minor role in the misconduct, voluntary remediation and cooperation in an investigation are examples of mitigating factors.

Recent Debarment Actions

Multilateral development banks institute many more corruption enforcement actions than the U.S. Department of Justice (DOJ) and the U.S. Securities and Exchange Commission (SEC) combined. In 2017, the World Bank publicly debarred or otherwise sanctioned 60 companies and individuals, while the DOJ and SEC combined resolved 30 Foreign Corrupt Practices Act cases. Several recent debarment actions highlight the risk.

  • On Feb. 1, 2018, the World Bank debarred three companies – Gavinor S.R.L., J.C. Segura Construcciones S.A. and a joint venture involving both – for 18 months for knowingly misrepresenting work progress under an agricultural development project in Argentina.
  • On Feb. 22, 2018, the World Bank debarred three companies – Pak Elektron Limited and two affiliates – and its former general manager for 33 months for bid rigging and price fixing on contracts that were part of a project in Pakistan financed by the bank.
  • On Feb. 23, 2018, the World Bank debarred two related healthcare companies for misrepresenting the size of commissions paid to an agent in connection with health projects in Bangladesh. ConvaTec International Services GmbH, located in Switzerland, and Malaysia-based ConvaTec Malaysia Sdn Bhd were debarred for 18 months.

In all of these cases, the respondents are not eligible to work on projects financed by the World Bank. In addition, the sanctions qualify for cross-debarment by the Asian Development Bank, the European Bank for Reconstruction and Development, the Inter-American Development Bank and the African Development Bank.

Considerations for Companies

Companies that operate globally face substantial risks associated with MDB-funded activities. To address such risk, companies should conduct risk assessment and implement measures to minimize any risks identified. More specifically, companies should consider the following steps.

  • Reviewing contracts (specifically with governments in emerging markets) to determine whether they are funded by an MDB. Depending on the number of contracts impacted, companies should consider randomly auditing these contracts for compliance with MDB requirements. There should not be a minimum monetary cutoff because MDBs, including the World Bank, review contracts and seek remedial action against a contractor regardless of the size of the contract.
  • Setting up a uniform compliance program that can flag MDB contracts in the bidding stage and monitor compliance throughout the life of an MDB-funded contract.
  • Conducting annual training for staff bidding on or performing MDB-funded contracts.

With proper due diligence and compliance measures upfront, including an awareness of the sources of project funding, companies can mitigate the risk of not only coming within the crosshairs of criminal and civil enforcement authorities but also the potentially devastating consequences of an MDB debarment.