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Compliance and Enforcement at The World Bank’s Sanctions Program

Author: Matteson Ellis

The following article was originally published in the ABA’s International Law News, Volume 42, Number 1.  It is republished below with the permission of the ABA.   

Note that an important clarification has been made to the statistic cited in the first paragraph of the original version.

Understanding the World Bank’s sanctions program and complying with its anticorruption standards have never been so important. In the first 10 months of 2012, 83 entities were sanctioned for corruption or fraud in Bank-financed projects. The number represented a 247 percent increase over the year before. Numerous entities are currently under investigation by the Bank’s Integrity Vice Presidency (INT). The evaluation and suspension officer has been busy reviewing cases at the first tier of review and, on average, almost half of these cases are appealed to the Sanctions Board.

Companies such as Oxford University Press, Alstom, and KBR are learning about the consequences of noncompliance with the Bank’s Procurement Guidelines and Consultant Guidelines with corruption, fraud, or collusion. Companies can be debarred from participation in World Bank-financed projects for years. Debarred companies show up on due diligence “red flag” lists as “blacklisted” companies—even after their debarment is over – complicating efforts to conduct international business. Some debarred companies must also pay steep fines.

Moreover, sanctioned companies are now subject to cross-debarment. In April 2010, the World Bank, the African Development Bank, the Asian Development Bank, the European Bank for Reconstruction and Development, and the Inter-American Development Bank agreed to cross-debar firms and individuals found to have engaged in wrongdoing in MDB-financed development projects. According to the agreement, “Each Participating Institution will enforce debarment decisions made by another Participating Institution.” The mechanism gives additional teeth to an already formidable process.

Perhaps the most significant development over the last year is the publication of the Sanction Board’s Law Digest. For the first time, compliance practitioners can look inside the results of the sanctions process. Before now, one of the challenges of World Bank debarment was the lack of public awareness of the Bank’s investigations processes and sanctions decisions, including the quasi-judicial mechanism of the Sanctions Board. But the Digest provides a summary of the developing legal principles and practices in this heretofore opaque area developed through core holdings in the system’s first few years. As a result, practitioners can begin to draw lessons in areas like sources of law, theories of liability, and standards of evidence. This information can help them structure their compliance controls to better manage risks when participating in projects financed by the multilateral lending world. Some of these lessons are outlined below.

Sources of Law

The World Bank sanctions program implements the legal framework set out in the Sanctions Board Statute and Sanctions Procedures. Sanctionable practices are defined in the Bank’s Anticorruption Guidelines, Procurement Guidelines, or Consultant Guidelines. A “corrupt practice” is “the offering, giving, receiving or soliciting, directly or indirectly, of anything of value to influence improperly the actions of another party.” The Board also considers reasonability, stating in one decision: “Fundamental principles of fairness dictate that finality must on occasion yield in narrowly defined and exceptional circumstances.”

The Sanctions Board does not base decisions on precedent. It is not bound by any holding that came before. It thereby preserves a high degree of independence in its reviews. Moreover, in the Digest, the Board states that national laws are not necessarily relevant as it determines, in accordance with its mandate, whether the evidence supports the conclusion that a respondent has engaged in a sanctionable practice and whether to impose an appropriate sanction on the respondent. Neither the Sanctions Board Statute nor the Sanctions Procedures provide a basis on which to consider a national law framework as controlling in the Bank’s sanctions proceedings. In one decision, the Board states, “[T]he Sanctions Board did not accept that national law principles, as the respondent asserted, would define the respondent’s liability for the acts of its agent or affiliate.”

Theories of Liability

The Digest highlights some theories of liability underlying Board-imposed debarment or other sanctions. The Board has found direct liability for corruption when the respondents were found to have directly participated. It has also found liability for the misconduct of agents and other third parties. In one decision, the Sanctions Board held that “[a]s a general principle, a respondent cannot avoid liability by carrying out through an agent or affiliate any conduct that would be sanctionable if carried out directly by the respondent.” In that case, third-party liability was established when the company gave a specific power of attorney to an agent to participate and act on its behalf in a tender. The record showed that the respondent was aware of past problems and potential conflicts of interest involving its authorized representative and failed to attempt to implement controls over the representative’s activities with regard to the bid at issue. The Board stated that the respondent’s actions could be considered “willful blindness.”

The Board has also imposed liability for the misconduct of subsidiaries. In one decision, the Board stated, “A respondent cannot disclaim responsibility for a subsidiary within its scope of control merely because the respondent has declined to exercise that control.” In that case, the company was the largest of four shareholders in the subsidiary, with 50 percent of the subsidiary’s shares and a representative on the subsidiary’s board of directors. The Board will also hold a company liable for the acts of its personnel conducted on the company’s behalf. The Board might consider whether the company failed to implement controls designed to prevent or detect fraudulent activity or whether it expressly authorized a responsible employee to sign tender documents and make all necessary correspondence regarding a bid.

The Board has even found individual liability for the fraudulent misconduct of an owner’s company, even when there was no allegation or evidence that the individual had personally committed the fraud. If a company is small, the Board will likely look to whether the person maintained close operational control or was in a position to put in place appropriate control mechanisms to prevent the fraudulent practices.

Standards of Evidence

The Sanctions Procedures provide that, in the World Bank sanctions program, “[f]ormal rules of evidence shall not apply.” As such, the Board has a high degree of discretion to consider the “relevance, materiality, weight, and sufficiency” of “any kind of evidence.” It often relies on the totality of evidence, which could include hearsay and circumstantial evidence. This means that, while some evidence might suggest that an element is satisfied and other evidence might point the other way, in the end, the Board must determine whether all of the evidence reaches a 51-percent-or-more likelihood that the element is established. The standard is “more likely than not.”

In two cases, witness denials and inconsistencies in witness statements were afforded less credibility after consideration of the totality of the evidence. The Board considered other witness statements when deciding on collusion and considered documentary evidence when deciding on corruption. In one case, the Board looked at “the totality of the evidence, including all statements made in the interviews, read in context and weighted for relative credibility.” In the other, “[c]ontemporary documentary evidence from multiple sources provided support for a finding that the respondents had paid a sum of money to a designated account with the understanding the payment was for the benefit of a public official, identified in the wire transfer by name, of the implementing agency identified in the wire transfer by its acronym.”

In collusion cases, circumstantial evidence has played a central role. In two decisions, the Board drew inferences of collusion between two or more bidders based on findings such as an “inexplicable degree of congruity” across bid prices, including a “significant number of unit prices that were either identical or differed consistently by small, standardized amounts.” It considered “physical similarities” across the bids such as identical envelopes, same fonts and styles, appearances of an identical computer file path numbers at the bottom of pages, the same number of fields left blank, and identical spelling errors in bids.

Why such broad rules? The World Bank is not a sovereign authority. It is a bank, and its sanctions program is administrative in nature. Because of this, INT lacks many of the powers that a government might otherwise have. For example, it cannot compel witnesses to speak or produce evidence. As a result, it is essential that the Sanctions Board have the ability to draw inferences that connect evidence to conclusions. Without it, INT would have a hard time proving cases.

The Integrity Compliance Guidelines

Practitioners should note that the Law Digest overviews only a small number of cases. The sanctions process is still new, and legal theories and standards will continue to develop. In addition to reviewing the Digest and monitoring Sanctions Board decisions going forward, it is essential for compliance practitioners to review the Bank’s Integrity Compliance Guidelines, available on-line. They provide general guidance on compliance expectations in areas such as “Prohibition of Misconduct”; “Responsibility”; “Program Initiation, Risk Assessment and Reviews”; “Internal Policies”; “Policies Regarding Business Partners”; “Internal Controls”; “Training and Communication; Incentives”; “Reporting”; “Remediate Misconduct”; an, “Collective Action.” The document represents a comprehensive effort to harmonize the many compliance standards at play internationally. As the international community has learned this year, for companies that fail to take these compliance standards seriously, the risks are becoming greater and greater.

© 2013 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.

Matt Ellis

Post authored by Matt Ellis, FCPAméricas Founder & Editor

Categories: Enforcement, World Bank

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