Ignoring integrity risks in emerging markets when receiving financing from the World Bank Group (WBG) is about to become much riskier, as the WBG Sanctions System Annual Report for Fiscal Year 2022 (FY22) indicates. The recent WBG sanctions enforcement results show signs of recovery from the impact of the pandemic on transnational investigations. They also underscore the importance of proactive integrity risk management in private-sector development financing, and they indicate enhanced scrutiny of WBG’s US$320 billion financing in connection with the pandemic response, the food crisis, and the war in Ukraine.
An overview of activities in FY22
Metrics on investigative activities in FY22 suggest that the Integrity Vice Presidency (INT) may be increasing the pace of investigations as pandemic restrictions are easing. However, statistics from the Office of Suspension and Debarment (OSD) and the Sanctions Board have yet to recover to pre-pandemic levels. One might expect this result considering that the adjudicative units receive INT’s investigative work product, which often requires more than 18 months to complete. The uptick in multilateral investigations can also be interpreted as a bellwether for domestic enforcement that continues to remain low.
In FY22, the WBG sanctioned 35 firms and individuals, of which 32 were debarred with conditional release. Most of the debarments were imposed as part of a settlement (18), while the remainder were ordered pursuant to OSD determinations (11), or to a Sanctions Board decision (6). Since FY18, mixed or shorter sanctions are typically a result of settlements and highlight the benefits of legal certainty that settlements provide to respondents and the WBG. Most settlements in FY22 resulted in a one to two year period of debarment. Almost 20 percent of the settlements in the last five years include a combination of either debarment with conditional release followed by a period of conditional non-debarment, or a fixed-term debarment period followed by conditional non-debarment.1
In three rare FY22 settlements, INT settled allegations of fraud and collusion in two projects financed by the International Finance Corporation (IFC), one of the WBG’s private sector arms. The sanctioned companies were two multinational companies and a local company involved in airport projects in an African and an Eastern European country. IFC settlements are rare, with the previous being in four years earlier in FY18, largely because IFC manages integrity risks proactively through its Compliance and Business Risk Department. IFC works directly with project owners and sponsors from the inception to the conclusion of a project and can resolve integrity issues before a formal INT investigation becomes necessary. These settlements highlight the importance of proactive integrity risk management in development finance and investment in emerging markets.
INT: More complex and impactful investigations take longer to complete
In FY22, INT started 48 new external investigations, the most since FY19 and a 20 percent increase over FY21. Further, 94 investigations were still active at the end of FY22, 16 more than at the end of FY21. The majority of these 94 investigations were open for less than 12 months. Most of new and active investigations were in the Europe and Central Asia Region. Recipients of WBG financing should assess the status of their integrity program implementation in this region.
INT completed 31 investigations in FY22 (three more than in FY21). Over 80 percent of the investigations completed in FY22 took 12 months or more to complete. Approximately two-thirds (64.5 percent) of completed investigations were substantiated, which is generally consistent with the rate in FY21 (68 percent). INT submitted 18 cases and 12 settlements to OSD for review and three settlements to the IFC Evaluation Officer, for a total of 33 enforcement actions. Pre-pandemic in FY19, INT had submitted a total of 53 cases and settlements for review.
Although INT’s statistics are lower this year when compared to pre-pandemic time periods, the upward trend in new and active investigations suggests that INT is recovering from the impact of the pandemic. Nevertheless, INT has signaled that it plans to continue to conduct remote interviews and audits, as appropriate.
Further, two recent developments set the stage for INT’s investigations to return to their pre-pandemic levels. First, the WBG has allocated US$150 billion in the last few years in response to the pandemic and US$170 billion in response to the food crisis, the war in Ukraine, and its spillover effects. INT will be called upon to safeguard the bank’s funds in a time of crisis, when the risk of malfeasance is high.
Second, through the so-called FY22-FY26 Strategy Update, INT seeks to enhance its risk-based approach to investigations and strengthen its prevention capabilities. For example, INT has been leveraging machine learning, artificial intelligence, text mining and pattern detection systems, and algorithm-driven tools to detect proactively collusive bid rigging schemes and fraudulent documents. Ultimately, INT is seeking to deliver the “greatest impact” and/or help mitigate the “most significant risks” to the WBG, although it has not signaled what these terms mean.2
OSD: Insufficient evidence for at least one claim in half of the cases
OSD, led by the Chief Suspension and Debarment Officer (SDO), reviewed 15 cases and 12 settlements in FY22. The SDO referred eight out of the 15 reviewed cases back to INT for revisions after determining that there was insufficient evidence to support one or more claims. Following INT’s revisions, the SDO found sufficient evidence in all but one case. Consistent with historical trends, 70 percent of cases and settlements contained at least one fraudulent practice allegation; 30 percent involved corrupt practices; 19 percent involved collusive practices; and 11 percent obstructive practices.
The SDO sanctioned 11 out of 20 respondents via uncontested determinations. This is consistent with the trend since 2007 that approximately 67 percent of cases are resolved at the OSD level because no appeal to the Sanctions Board is filed. If there is sufficient evidence, the SDO recommends an appropriate sanction based on the WBG Sanctioning Guidelines. The sanction takes into account aggravating and mitigating factors. Benefiting from mitigating factors highlights the importance of engaging experienced counsel when strategizing a response to a WBG sanctions case.
Finally, OSD published a breakdown of the regional origin and location of misconduct in cases and settlements in FY18-FY22. Generally, most respondents originated in East Asia and Pacific Region, followed by Middle East and North Africa Region. Recipients of WBG financing should factor this information in their risk assessments and continue to monitor the evolution of the regional trends.
Sanctions Board: AppelLAnts risk stricter sanctions
In FY22, the Sanctions Board issued four final decisions. The FY22 decisions resulted in the sanction of six firms and individuals. Oral hearings were held in one case and outside counsel was involved in two.
From FY18 to FY22, the Sanctions Board reviewed and decided 39 contested cases against 56 respondents. In 98 percent of these cases, the Sanctions Board found liability. The sanctions imposed by the Sanctions Board “matched” those recommended by the SDO in nine percent of instances. For 54 percent of respondents, the Sanctions Board applied a lesser period of debarment, and it increased the minimum debarment period for 36 percent of respondents. These statistics highlight that appealing to the Sanctions Board is not without risk; in two-thirds of the cases, the Sanctions Board imposed a reduced or the same sanction, but in one-third of the cases the Sanctions Board increased the sanction.
Integrity Compliance Office: Interim notices boost engagement
The Integrity Compliance Office (ICO) is responsible for assessing compliance of sanctioned entities with their conditions for release from sanction. In FY22, the ICO worked with 81 sanctioned entities and released 22. The released entities included large multinational companies, state-owned enterprises, and small companies operating around the world, including in fragile and conflict-affected situations, which highlight the Sanctions System’s far-reaching jurisdiction.
The ICO also notified 36 entities that their sanctions would be continued beyond the initial period of sanction until they meet their conditions for release from sanction. By the end of FY22, 406 entities remained sanctioned with conditional release, but only 59 were actively engaging with the ICO.
For the first time in FY22, the ICO began sending interim notices to sanctioned entities who were not engaging with it, inviting them to engage. Interim notices were sent to 62 sanctioned entities, leading to several new engagements.
As WBG continues to provide “historic levels of support around the world,” as WBG President David Malpass put it in his foreword to the Annual Report, INT will leverage closer collaboration among its prevention, complaints intake, forensic and digital audits, and data analysis teams to enable a risk-based approach investigations. We expect that INT, OSD, and the Sanctions Board to see increased case activity as a result.