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International Financial Institutions: Project Finance & Corruption, Contributed by Norbert Seiler and Jelena Madir, European Bank for Reconstruction and Development

Thursday, January 19, 2012

On 9 April 2010, the heads of five leading multilateral development banks (MDBs) – the African Development Bank (AfDB), the Asian Development Bank (ADB), the European Bank for Reconstruction and Development (EBRD), the Inter-American Development Bank (IADB), and the World Bank (WB) – signed an agreement providing for mutual and reciprocal enforcement of debarment decisions taken by any one of them against entities that engage in corrupt practices in connection with MDB-financed projects. The Agreement for Mutual Enforcement of Debarment Decisions (Mutual Enforcement Agreement) dramatically amplifies the impact of debarment decisions taken by any one of the participating MDBs, while affirming the MDBs’ commitment to combating fraudulent, corrupt and collusive practices. Consequently, companies will need to invigorate their procedures with a view to managing their risks not only in relation to national legislation, but also in relation to the MDBs’ sanctioning authorities, which have much broader geographic scope than that of national legislation such as the UK Bribery Act 2010 or the U.S. Foreign Corrupt Practices Act. Furthermore, when penalties are imposed by government agencies under national legislation, they are open to appeal in national courts. The international legal personality of an MDB, on the other hand, makes it impractical, if not impossible, to challenge an MDB’s decision except through the institution’s own mechanisms.1

The Mutual Enforcement Agreement: Core Principles

The Mutual Enforcement Agreement establishes the six core principles among the MDBs for prohibiting fraudulent and corrupt practices by contracting entities. These are:2
  • Adoption of harmonised definitions of sanctionable (also known as prohibited) practices, which include: (1) fraudulent practice; (2) corrupt practice; (3) coercive practice; and, (4) collusive practice;
  • Adherence to standardised investigatory procedures that ensure fair, impartial and thorough investigations;
  • Establishment of internal authorities with independent investigative and distinct decision-making authority;
  • Publishing written procedures that require: (1) notice to entities and/or individuals against whom the allegations are made; and, (2) an opportunity for those entities and/or individuals to respond to the allegations;
  • Use of the "more probable than not" standard in assessing sanctions violations; and
  • Providing for a range of sanctions that are proportionate and incorporate mitigating and aggravating factors.
The Mutual Enforcement Agreement affects only debarment decisions exceeding one year3 and the sanctioning institution must have made the decision within 10 years of the date of commission of the sanctionable practice.4 Further, debarment decisions made in recognition of a decision in a national or other international forum are not impacted by the Mutual Enforcement Agreement.5 Notably, an MDB may decline to enforce a debarment decision of another MDB in accordance with its own legal or other institutional considerations. If an MDB decides not to enforce another’s debarment decision, it must "promptly notify" all other MDBs of this decision.6 Finally, the Mutual Enforcement Agreement does not preclude an MDB from instituting independent debarment proceedings, which could result in "concurrent, consecutive or subsequent periods of debarment" for entities and individuals engaging in sanctionable practices.7

The International Financial Institutions Anti-Corruption Task Force

The groundwork for the Mutual Enforcement Agreement was laid out in September 2006, when the ADB, AfDB, EBRD, IADB, WB, the European Investment Bank and the International Monetary Fund signed the Uniform Framework for Preventing and Combating Fraud and Corruption (Framework). The Framework standardised the definitions of the four core sanctionable practices by defining them as follows:
  • Corrupt practice: the offering, giving, receiving, or soliciting, directly or indirectly, anything of value to influence improperly the actions of another party.8 An example would involve a situation where a company is awarded an MDB-financed contract from government in exchange for a bribe or kickbacks. Kickbacks generally occur when a company that is awarded a contract "kicks back" money to the ministry official(s) who steered the award of the contract to the company.9
  • Fraudulent practice: 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.10 An example might involve a scenario where, during the implementation of a project, the poor performance of a key consulting company raises suspicion that the capacities and qualifications of the company might have been misrepresented. An investigation reveals that the experience and credentials of the principal, as well as the qualifications and certifications of the consulting firm were misrepresented in order to meet the selection criteria of the tender.11
  • Coercive practice: 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.12 An example would be a project where procurement for two MDB-financed roads is found to be tainted by the use of intimidation of competing bidders. An investigation reveals that a company that was pre-determined to win contracts in a collusive scheme used a combination of threats to the future business interests of competitor companies or threats to the physical well-being of competitors’ staff, in addition to payments to "losing" bidders, to ensure that other bidders submitted inflated bids.13
  • Collusive practice: an arrangement between two or more parties designed to achieve an improper purpose, including influencing improperly the actions of another party.14 An example would involve a situation where a borrowing government arrests an official of an agency that is responsible for implementing an MDB-financed project on charges of financial impropriety. On the basis of that arrest and subsequent information from a contractor, an investigation of the relevant contracts is carried out, and reveals that the agency official had arranged a collusion "ring" to steer a large number of contract awards to his own company and to the companies of people known to him/her. To implement the collusion, the agency official influenced local officials who had a role in awarding the contracts.15
Notably, prohibited practices are broadly defined and provide the MDBs with fairly wide scope to sanction. In addition to harmonising the definitions of prohibited practices, the Framework also established agreed minimum standards by which each of the signatory MDBs conducts investigations into these or other prohibited practices, while continuing to maintain its own sanctions system. Namely, MDBs’ sanctions systems differ from each other with respect to such matters as the number and type of internal bodies involved in investigating sanctionable practices, approach towards settlement of cases, ability of the parties in the proceeding to request a hearing and to appeal the relevant MDB’s decision, deadlines for the submission of filings, composition of the sanctions (or analogous) bodies in terms of whether the majority of their members are external members or staff members of the relevant MDB, etc. Despite these differences, however, all MDBs’ sanctions systems provide significant procedural protections for the accused parties, including notice, the opportunity to be heard and a decision by a neutral body, independent of the investigators.

Standard of Proof & Evidentiary Materials

The standard of proof in all MDBs’ sanctions proceedings is "more probable/likely than not," which means that the relevant decision maker has to determine, based on the record, whether it is more likely than not that the respondent engaged in one or more sanctionable practices.16 It is important to note that the standard is clearly not meant to be in any way equivalent to "beyond a reasonable doubt," that prevails in criminal law. Therefore, the decision-maker may still be left with "reasonable doubts" about the culpability of the respondent and nevertheless impose a sanction. MDBs’ sanctions procedures provide for a highly permissive approach to evidentiary issues, without imposing the "best evidence" rule. Namely, formal rules of evidence do not apply to MDBs’ sanctions proceedings and the relevant sanctions board (or an analogous decision-making body) has full discretion to determine the relevance, materiality, weight, and sufficiency of all evidence offered.17

Sanctions

The sanctions imposed by MDBs range from reprimands and conditions of future contracting to temporary or even permanent bans and can include the following:
  • Reprimand: a formal letter of censure of the respondent’s behaviour.18 This sanction is appropriate for an isolated incident of lack of oversight or where the violation or the party’s role is in it is minor.
  • Conditional non-debarment: a declaration that a respondent is required to comply with certain remedial, preventative or other measures as a condition to avoid debarment from additional contracts for projects. Failure by such respondent to comply with such measures in the prescribed time period may result in automatic debarment under the terms provided in the decision.19
  • Debarment: in cases where no appreciable purpose would be served by imposing conditions for release, sanctioned parties may be debarred for a specified period of time, after which they are automatically released from debarment.20
  • Debarment with conditional release: a respondent is subject to debarment subject to a conditional release under which such debarment will be terminated upon compliance with any conditions contained in the decision.21 Conditions normally include the debarred party implementing an integrity compliance programme satisfactory to the MDB.
  • Restitution or remedy: in appropriate cases, the sanctioned party may be required to make restitution to the borrower or to any other party or to take actions to remedy the harm done by its misconduct. This sanction is appropriate in cases where the damage caused by the misconduct is clear and quantifiable,22 and would typically be used as part of a conditional non-debarment, where it would be imposed as a condition for the respondent to avoid debarment and where the respondent would be motivated to comply with such measure.
The length of debarment is entirely within the relevant decision maker’s discretion. In that context, WB has published Sanctioning Guidelines (WB Sanctioning Guidelines), which seek to enhance predictability while maintaining sufficient room for the exercise of discretion by the WB’s Sanctions Board. Under these guidelines, the base sanction for all misconduct is a three-year debarment with conditional release.23 Unlike simple debarment, debarment with conditional release places greater emphasis on rehabilitation, encouraging sanctioned firms to adopt effective policies and measures that make it less likely that they will engage in misconduct in the future. The WB’s Sanctioning Guidelines, just as sanctions procedures of other MDBs, prescribe a number of aggravating and mitigating factors that the relevant decision-makers should consider and which could further increase (in the case of aggravating factors) or reduce (in the case of mitigating factors) the length of the sanction. Such aggravating factors include: (1) the severity of the misconduct (e.g., repeated pattern of conduct, sophisticated means used to commit the prohibited practice, involvement of public officials, etc.); (2) harm to public safety and welfare; (3) the degree of harm inflicted on the affected MDB-financed project; (4) the respondent’s interference with the investigative process; and, (5) intimidation and/or bribing of a witness, etc.24 Mitigating factors, on the other hand, include such circumstances as management taking all appropriate measures to address the misconduct; establishment or improvement of an effective compliance programme; the respondent’s return of funds obtained through misconduct; assistance and co-operation with investigative process; the respondent conducting its own effective internal investigation; admission of responsibility; and, the respondent’s voluntary restraint from bidding on MDB-financed tenders pending the outcome of an ongoing investigation, etc.25

Conclusion

As MDBs continue to develop their enforcement structures, greater harmonisation among sanctions processes is to be expected, although each MDB will keep the mechanics that suit its size, organisational structure and that are effective in the jurisdictions in which it operates. Therefore, companies should familiarise themselves with sanctions rules and processes of each MDB from which they receive funds. From a practical perspective, companies and individuals contracting with MDBs should recognise the fact that, as a result of the Mutual Enforcement Agreement, the profile of fraud and corruption investigations has been raised significantly and could result in global sanctions for prohibited practices in a single country. Consequently, a company or an individual receiving funds from one MDB, might find itself unable to acquire financing from any other MDB if it is involved in any of the prohibited practices, even if such conduct was isolated. At the minimum, companies doing business with MDBs should ensure that their compliance and ethics programmes are up to date, both as a preventative measure or, if wrongful actions have already taken place, as a means of mitigating the severity of possible sanctions. © 2012 Norbert Seiler and Jelena Madir Norbert Seiler is deputy general counsel at the European Bank for Reconstruction and Development and chair of the Bank's Enforcement Committee. E-mail: seilern@ebrd.com; Telephone: +44 (0) 20 7338 6143.Jelena Madir is principal counsel at the European Bank for Reconstruction and Development and adviser to the Bank's Enforcement Committee. E-mail: madirj@ebrd.com; Telephone: +44 (0) 20 7338 7289.Disclaimer: The content of this article reflects the personal opinion of the authors and is not the official position of the European Bank for Reconstruction and Development.
DisclaimerThis document and any discussions set forth herein are for informational purposes only, and should not be construed as legal advice, which has to be addressed to particular facts and circumstances involved in any given situation. Review or use of the document and any discussions does not create an attorney-client relationship with the author or publisher. To the extent that this document may contain suggested provisions, they will require modification to suit a particular transaction, jurisdiction or situation. Please consult with an attorney with the appropriate level of experience if you have any questions. Any tax information contained in the document or discussions is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code. Any opinions expressed are those of the author. The Bureau of National Affairs, Inc. and its affiliated entities do not take responsibility for the content in this document or discussions and do not make any representation or warranty as to their completeness or accuracy.

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