The World Bank Group is conducting a major self-assessment of its Sanctions System and has invited public participation and comment. The review is intended to foster a broad discussion of the Bank’s policies and practices that address concerns about the integrity of firms and individuals participating under Bank-financed projects. Comments about the current system and possible reforms may be made through September 30, 2013. This Advisory provides a brief overview of the self-assessment process, the current Sanctions System, and some of the issues the Bank is highlighting in the self-assessment. 

Background

The background and goals of the current self-assessment, as described by the World Bank Group, are as follows:

The [Sanctions System] is an administrative process for sanctioning firms and individuals found to have engaged in corrupt, fraudulent, collusive, coercive or obstructive practices in connection with Bank-financed projects. It provides parties alleged to have engaged in a sanctionable practice with a level of due process before a decision on sanctions, if any, is imposed… To capture issues of implementation, efficiency, and effectiveness of the Sanctions System, the Legal Vice Presidency of the World Bank Group is conducting consultations with external stakeholders to solicit feedback on the system.1

Further, as yet another step in the Bank’s periodic efforts to increase the transparency of its sanctions program and to ensure that those who participate in bank-financed projects are fully aware of its standards of conduct, the consultation aims to:

  • „ Solicit the views of external stakeholders on the ‘track record’ of the Sanctions System and the implementation of the various reforms of the system to date.
  • „ Solicit the views of external stakeholders on the main findings and recommendations of the Bank’s review team in the Phase I report, which are summarized in an Initiating Discussion Brief, available at www.worldbank.org/legal/sanctionsreview.2

The fundamental mission of the World Bank Group— composed of the International Bank for Reconstruction and Development (IBRD), International Development Association (IDA), International Finance Corporation (IFC), Multilateral Investment Guarantee Agency (MIGA), and the International Centre for Settlement of Investment Disputes (ICSID)—is to reduce poverty and support development. To achieve its goals, the Bank works both with the governments of developing countries and with many hundreds of private sector companies to provide funds or guarantees by institutions in the World Bank Group.3 Bank lending in FY 2012 alone totaled more than US$35 billion.4

World Bank funds and guarantees are used, among other things, to finance infrastructure development in some of the poorest and least developed countries in the world. Individual projects awarded can be extremely large and high-value. As just one example, in Sri Lanka, the Bank is financing a project worth US$213 million to rehabilitate and improve flood and drainage management and infrastructure of the Colombo Water Basin, development of an integrated flood management system, and improvements to recover environment and public facilities along the water bodies within the region.5

These funds do not come without strings attached, however. The World Bank Group has a well-developed integrity program covering corruption, fraud and similar concerns, which can have major consequences for companies around the world. Violations of Bank anti-corruption and anti-fraud policy can lead to significant financial consequences for companies that wish to participate in the Bank’s network of programs, including debarment. And because the Bank’s financings are typically geared to environments with high corruption risks, companies that seek to participate in Bank projects need to be especially vigilant in living up to the Bank’s integrity requirements.

Categories of Offenses

Companies participating or seeking to participate in Bank projects should be aware of five sanctionable types of corruption:

  1. A “corrupt practice,” defined as “the offering, giving, receiving, or soliciting, directly or indirectly, of anything of value to influence improperly the actions of another party.”
  2. A “fraudulent practice,” defined as “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.”
  3. A “collusive practice,” defined as “an arrangement between two or more parties designed to achieve an improper purpose, including to influence improperly the actions of another party.”
  4. A “coercive practice,” defined as “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.”
  5. An “obstructive practice,” defined as “(aa) deliberately destroying, falsifying, altering, or concealing of 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; and/or 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 (bb) acts intended to materially impede the exercise of the Bank’s inspection and audit rights… .”6

Additionally, before obtaining bank financing, a “Borrower” — a term which can include both the Member Country that benefits from the financing and a company or companies using Bank money7— is required, among other things, to develop an institutional structure to prevent the possibility of corruption. 8 This would typically include an effective compliance program and reporting to the Bank any allegations of fraud or corruption that come to its attention.9

Available Sanctions

Penalties for violations of these categories of conduct include the following:

  • „ Letter of Reprimand: While firms receiving such letters are still able to participate in Bank projects, the Letter of Reprimand is public and a firm that receives a reprimand will be listed as such on the Bank’s website. 10 This is the least severe penalty available.
  • „ Restitution: A firm or individual may also be required to pay restitution to the country that received the Bank funds or another designated entity, or take actions to remedy the harm they have done.11 These payments can be extremely large depending on the circumstances.
  • „ Conditional Non-Debarment: In this case, the firm or individual is required to comply with certain conditions to avoid debarment from Bank projects. These conditions may include the introduction, improvement, or implementation of compliance programs; payment of restitution; or disciplinary action against or reassignment of employees; among other conditions. 12
  • „ Debarment: When a firm or individual is debarred, they are ineligible to be awarded a Bank contract or receive the proceeds of any Bank loan.13 Debarment can be for either a stated period of time or indefinite.
  • „ Debarment with Conditional Release: A firm or individual is debarred and must comply with certain conditions such as those mentioned in connection with a Conditional Non-Debarment after a minimum period of debarment.14 Conditions imposed may include requiring a firm to improve governance by introducing, improving, and implementing corporate compliance and ethics programs; paying restitution; or taking disciplinary action against employees.

The World Bank considers several factors in determining which of these sanctions to impose, including:

  • „the severity of the misconduct;
  • the magnitude of the harm;
  • interference by the sanctioned party in the Bank’s investigation;
  • the sanctioned party’s past history of misconduct as adjudicated by the Bank Group or by another multilateral development bank; and
  • mitigating circumstances, including where the sanctioned party played a minor role in the misconduct, took voluntary corrective action, or cooperated in the investigation or resolution of the case.15

The Sanctions Process

The Bank has a two step approach to investigating and penalizing corruption and other issues of integrity.

The process begins when an allegation is reported to the Integrity Vice President (INT) within the World Bank system, 16 which then conducts an initial investigation into allegations relating to integrity. 17 Importantly, the Bank implemented a policy in May 2009 whereby INT may make a Request for Temporary Suspension to the Suspension and Debarment Officer (SDO),18 a senior in-house ethics official, if the INT believes that (i) there is sufficient evidence to support the imposition of sanctions and (ii) it is highly likely that the investigation will be successfully concluded and a formal Statement of Accusations and Evidence will be presented within one year. 19

If the SDO approves INT’s request for Temporary Suspension, the suspended entity may not participate in Bank financed activities while the INT is investigating the allegations, which can take anywhere from several months to over a year.20 For instance, before debarring seven firms in connection with a Philippines’ roads project, the firms were temporarily prevented from participating in World Bank Group-financed activities pending the outcome of the proceeding.21 The entity that receives notice of a Temporary Suspension may challenge that decision with the SDO within thirty days of the notice and argue that it should remain eligible pending the final outcome of the sanctions proceedings. 22 Although Temporary Suspensions were used sparingly during the first two years of their existence, 2012 saw an uptick in their use, with four instances of temporary suspension.23

   After completing its initial investigation, if the INT believes that there is sufficient evidence to find that one or more Sanctionable Practices were committed, it will submit to the SDO a Statement of Accusations and Evidence including all exculpatory and inculpatory evidence. 24 The SDO then evaluates the evidence presented by the INT to determine whether the accusations are supported by sufficient evidence. If the SDO determines that the accusations are supported, he or she will issue a notification to the accused, providing the Statement of Accusations and Evidence, setting out the sanctions sought, and informing the accused of the process to contest the accusations. If applicable, the notification will also inform the accused of a Temporary Suspension. 25

The accused has ninety days to contest the sanctions and associated sanctions by submitting a written Response; 26 if the accused fails to do so the SDO’s recommendations enter into full effect. 27 The INT may submit a Reply to the accused firm or individual’s written Response within thirty days after being notified of the Response. 28

When an accused party contests sanctions, the Sanctions Board conducts a second tier review, in which it reviews the case de novo. Although it is not bound by the SDO’s decision, it uses only a “more likely than not” standard of proof in its decision-making, meaning that, if after review of the evidence, a preponderance of the evidence supports a finding of a violation of the relevant Guidelines and weighs in favor of certain sanctions, it will impose those sanctions. 29 The accused entity or the INT (or both) can request a hearing on the accusations, which will be granted as a matter of right. 30 If no hearing is held, the Board will review the existing record and render a decision. 31

  The decisions of the Board are final and take effect immediately. They do not preclude investigations or enforcement actions of any country with jurisdiction over the matter. 32 In fact, World Bank investigators frequently communicate and cooperate with national authorities and investigations. The decisions are made public throughout the World Bank Group and to the accused entity. 33

If an entity is debarred from participating in World Bank financing for one year or more, it would also be subject to a cross-debarment regime pursuant to an agreement reached among five multilateral development banks in July 2010. 34 This recent arrangement is designed to minimize the possibility of forum shopping for international procurement opportunities after debarment. 35

Issues in Current Self-Assessment

The Self-Assessment has a broad mandate and has given the public the opportunity to raise any issues of interest or concern in connection with the Sanctions System. The Bank has established a review team headed by the Bank’s General Counsel, which includes officials from various parts of the World Bank Group. The review team has stated that it will be submitting a report on possible reforms by the end of 2013 to the World Bank Group’s Audit Committee. 

The review team has issued a Discussion Paper that highlights certain issues that it intends to consider and therefore may be of particular interest. 36 The following are among the key issues highlighted:

  1. Structural Issues. The review team is evaluating the overall efficiency of the Sanctions Process, with a view toward reducing investigation times, where appropriate, without sacrificing quality or pursuing potentially complex cases. It is reviewing the processes currently in place at INT and in the two levels of sanctions review. It is also looking at formalizing the opportunities of the respondents to be heard in the first tier of the sanctions proceedings, such as the use of interviews and show cause letters before a case is submitted to the first tier of review.
  2. Review of the implementation of earlier reforms. The review team is reviewing areas where prior reforms and initiatives might be more effectively implemented. These include an examination of whether the Bank has focused too exclusively on fraud and corruption at the procurement phase as opposed to later phases of implementation, and consideration of whether the Bank has paid adequate attention to collusive, coercive and obstructive practices, in addition to corruption and fraud. Other issues under review that build on prior reforms include (a) development of clearer criteria for the use of restitution, (b) further efforts by INT to seek alliances with national authorities, (c) increased use of early temporary suspensions during the pendency of an investigation, (d) an increased focus on how best to address small- and medium-sized enterprises, (e) increased attention to procedural safeguards and transparency in connection with settlement talks, and (f) revisiting the designation of debarment with conditional release as the Bank’s “baseline” sanction.
  3. Operational Issues. The review team is focusing on the relationship between its own debarment decisions and those of third parties, such as national authorities, the United Nations, and other international organizations, with the possibility of adding ineligibility for procurement under co-financing arrangements as a basis for procurement of expenditure under World Bank projects. It is also exploring ways to strengthen internal controls to prevent disbursements to or on account of suspended or debarred parties.
  4. Legal Adequacy. The review team is conducting an overall evaluation of the legal review and processes that take place in connection with investigations, beginning with the INT investigation and going through the two stages of internal review described above. Key considerations will be when and how Respondents in investigations will have the opportunity to make their case. Notable reforms under consideration would be to permit Respondents to submit their pleadings at an earlier stage, before the matter is referred by INT to the Sanctions and Debarment Officer and to make decisions on Early Temporary Suspension subject to Sanctions Board review, at the request of either respondents or INT.
  5. Other Issues. The review team is considering additional issues, such as whether it can find ways to engage small and medium enterprises more in the sanctions process, as it notes that the majority of the smaller companies do not engage with the Bank and frequently default, without necessarily understanding the process or their rights. It is also reviewing all currently available mechanisms for handling allegations to see what might be strengthened.

Conclusion

The efficiency and effectiveness of the World Bank’s Sanctions System has major consequences for companies around the world that seek to do business using Bank funds. The Bank’s current review of that system presents a welcome opportunity for engagement and comment by stakeholders around the world, including such companies and others (including governments) that see areas for improvement. Any persons wishing to provide input should plan to do so in advance of the September 30 deadline for the review.