The Litigator’s Role in the World Bank’s Fight Against Fraud and Corruption

Understanding the threat of debarment, and appreciating how debarment proceedings work as a practical matter, is therefore important for any litigator representing a business or organization’s interests, whether in the United States or abroad. Using the World Bank to illustrate these points, this article will consider how debarment works and what today’s litigators need to know about debarment, whether at the World Bank or elsewhere. Although some of the information that follows at times might get “into the weeds” of the World Bank’s operations, an appreciation for the organization’s functional nuances can be useful to other audiences.

In the most basic terms, the World Bank is an international financial institution dedicated to reducing poverty, primarily by promoting economic growth. It is currently involved in more than 1,800 individual projects in virtually every sector and developing country. These projects are exceptional in their breadth and ambition, ranging from providing microcredit loans in Bosnia and Herzegovina, raising AIDS-prevention awareness in Guinea, and supporting education for girls in Bangladesh, to helping India rebuild the state of Gujarat after a devastating earthquake.

The World Bank’s mandate and its on-the-ground activities are, in short, uniquely forward-looking and complex. U.S. and foreign lawyers assisting businesses in their efforts to “do business” with the World Bank—and counsel representing businesses who have run afoul of the World Bank’s anticorruption rules—may be well advised to take careful note of where the World Bank is, and where it is going, when it comes to its global fight against fraud and corruption.

Litigators counseling and representing businesses and organizations doing business with institutions such as the World Bank need to be familiar with the frameworks the institutions use to sanction parties who have engaged in prohibited practices, the range of serious consequences threatening those who engage in misconduct, and the way these processes fit within the organizations’ broader efforts to combat corruption. In the context of the World Bank, creating conditions for sustainable economic and social development requires an ongoing effort to promote good governance and fight corruption and fraud. Indeed, corruption is one of the greatest obstacles to development, as it jeopardizes the success of long-term initiatives by diverting scarce public resources, distorting the rule of law, and weakening the institutional foundation on which economic growth depends. In response to this challenge, the World Bank has developed a robust anticorruption prevention and deterrence framework.

In 2007, the World Bank’s board of executive directors unanimously endorsed a new governance and anticorruption strategy that increased the World Bank’s engagement in governance and anticorruption in three key areas: supporting country efforts, addressing fraud and corruption in World Bank operations, and building global partnerships.

In addition to its prevention efforts, the World Bank has also developed a comprehensive legal mechanism to deter fraud and corruption in World Bank–funded projects. In 2006, the World Bank established a two-tier administrative process for sanctioning firms and individuals found to have engaged in misconduct in projects financed by the World Bank. This sanctions system can declare private entities ineligible to be awarded future World Bank–financed contracts, a step commonly known as “debarment.” This sanctions regime is intended to uphold the World Bank’s fiduciary duty by excluding corrupt actors from accessing World Bank financing, while serving as a deterrent both for the sanctioned firm and for others, and at the same time offering an incentive for rehabilitation.

Administrative Sanctions Process

The administrative sanctions process at the World Bank is rooted in the legal framework set out in the Articles of Agreement, the treaty that established the World Bank. The Articles of Agreement require that the World Bank ensure its funds are used for their intended purpose, with due attention paid to economy and efficiency. This fundamental requirement is often referred to as the World Bank’s “fiduciary duty,” which forms the legal and policy basis for much of the World Bank’s anticorruption efforts. In furtherance of that fiduciary duty, the World Bank incorporates by reference its Procurement and Consultant Guidelines into loan agreements between the World Bank and its borrower countries. Loan agreements also incorporate by reference the World Bank’s Anti-corruption Guidelines, which outline the obligations of both borrowers and recipients “to prevent and combat fraud and corruption” in projects financed by the World Bank. Each of the Procurement, Consultant and Anti-corruption Guidelines reference the World Bank’s powers to impose sanctions on firms and individuals competing for or executing World Bank–financed contracts.

Moving from structure to enforcement, the Integrity Vice Presidency (INT) is the unit at the World Bank charged with, inter alia, investigating allegations of misconduct in connection with World Bank–financed projects. INT learns about sanctionable conduct from a variety of sources, such as World Bank staff, local governments, and competing bidders, and it investigates these allegations through myriad internal investigation techniques, including interviewing witnesses, interviewing the firms or individuals who allegedly engaged in the misconduct, gathering documents, and visiting project sites.

This discussion of procedure raises the substantive question of what qualifies as a sanctionable practice. The definitions have changed somewhat over the years. Prior to 2004, the Procurement and Consultant Guidelines referred only to “corrupt practice” and “fraudulent practice,” with collusive practice included within the definition of fraudulent practice. In 2004, the World Bank added a separate definition of “collusive practice” and also added “coercive practices” (such as threatening others) to the list of sanctionable practices. And in 2006, the World Bank added “obstructive practice,” encompassing actions that impede an INT investigation, such as destroying evidence or not allowing the World Bank to exercise its audit rights. Today, these five prohibited actions (fraud, corruption, collusion, coercion, and obstruction) are what the World Bank refers to as “sanctionable practices.”

The Two-Tier System

If INT believes it has found sufficient evidence of sanctionable misconduct by a firm or individual, INT presents the case to the Evaluation and Suspension Officer (EO), which constitutes the first tier of the World Bank’s sanctions system. There are four EOs in the World Bank Group, one for the International Bank for Reconstruction and Development and the International Development Association, who is full-time, and one EO each for the International Finance Corporation, Multilateral Investment Guarantee Agency, and World Bank guarantee operations. These latter three EOs hold their positions in addition to other duties.

INT submits to the EO a Statement of Accusations and Evidence, which summarizes the accusations of sanctionable misconduct and attaches the relevant evidence, both exculpatory and inculpatory. The EO evaluates the Statement of Accusations and Evidence and the evidence presented by INT and determines whether there is sufficient evidence to support a finding that an individual or firm has engaged in a sanctionable practice. If the EO determines that there is not enough evidence to proceed, the EO notifies INT. INT may edit and resubmit the Statement of Accusations and Evidence. If the EO determines that sufficient evidence does exist, the EO issues a Notice of Sanctions Proceedings to the individual or firm (referred to as the respondent). The notice includes all evidence presented by INT and a sanction recommended by the EO.

At the time of issuance of the notice, the EO temporarily suspends the respondent from eligibility to be awarded contracts for World Bank projects. The temporary suspension is posted on the World Bank’s internal website and on its extranet website, “Client Connection,” which is accessible to certain personnel in World Bank member countries but not to the general public. The limited distribution of temporary suspensions allows the appropriate parties to give effect to the suspension while allowing respondents to appeal the sanction before their ineligibility is made known to the general public. Some respondents choose to be represented by counsel; others do not.

After delivery of the notice, the respondent is given 30 days to send the EO an explanation as to why the notice should be withdrawn or the recommended sanction revised. Within 30 days of receiving an explanation, the EO may decide to terminate the temporary suspension imposed on the respondent, withdraw the notice, or revise the recommended sanction in light of the evidence or arguments presented by the respondent.

If the respondent does not contest the accusations or recommended sanction by filing a response with the Sanctions Board within 90 days (see below), the sanction recommended by the EO is imposed, and information about the sanction imposed, along with the EO’s determination (in cases in which a notice was issued by the EO on or after January 1, 2011), is posted on the World Bank’s public sanctions website.

If the respondent appeals INT’s accusations, the EO’s recommended sanction, or both, the case is referred to the World Bank Group Sanctions Board. This is the second tier of the sanctions process. The Sanctions Board is an independent body within the World Bank and is supported by a permanent secretariat. The Sanctions Board is made up of three World Bank staff and four non–World Bank staff, and is chaired by one of its non–World Bank staff members. The external members are well-known jurists appointed by the executive directors of the World Bank from a roster of candidates nominated by the president of the World Bank. The internal members are appointed by the president of the World Bank from among senior World Bank staff. The respondent has the opportunity to contest the accusations or the sanction recommended by the EO by filing a written response with the Sanctions Board within 90 days of receiving the notice. The respondent may present evidence to refute or mitigate the accusations. This response is forwarded to INT; INT then has 30 days to submit a reply to the arguments and evidence contained in the response. Either INT or the respondent may request a hearing before the Sanctions Board; a hearing may also be held upon decision of the chair of the Sanctions Board. Respondents are often represented by counsel at the hearing.

Before making a decision, the Sanctions Board considers the accusations and evidence contained in the notice, the arguments and evidence submitted by the respondent in its response, INT’s reply, and any other materials contained in the record. The Sanctions Board reviews the case de novo and is not bound by the EO’s determination or recommended sanction. After completing its review, the Sanctions Board determines whether it is more likely than not that the respondent engaged in sanctionable misconduct. If it finds that the respondent has engaged in sanctionable misconduct, the Sanctions Board imposes an appropriate sanction. Decisions of the Sanctions Board are final and non-appealable. The Sanctions Board’s decisions regarding cases in which a notice was issued by the EO on or after January 1, 2011, are available on the World Bank’s public sanctions website.

Possible Sanctions

There are five possible sanctions within the World Bank’s sanctions system: debarment with conditional release, indefinite or fixed-term debarment, conditional non-debarment, public letter of reprimand, and restitution. In determining the appropriate sanction, the EO and the Sanctions Board are guided by the World Bank’s Sanctioning Guidelines, which are not prescriptive but set forth the considerations relevant to the sanctioning decision. The Sanctioning Guidelines provide information regarding aggravating and mitigating factors to be considered. The general categories of aggravating factors are as follows:

• the severity of the misconduct
• the magnitude of the harm caused by the misconduct
• interference by the sanctioned party in the Bank’s investigation
• the sanctioned party’s past history of misconduct as adjudicated by the World Bank or by another multilateral development bank

The general categories of mitigating factors, in turn, are as follows:

• the sanctioned party’s minor role in the misconduct
• voluntary corrective action taken
• cooperation with the investigation or resolution of the case

Lawyers should note that a three-year debarment with conditional release is the default or baseline World Bank sanction, subject to increase or decrease or the choice of an alternative sanction in view of the facts and circumstances of a given case. The purpose of a conditional release is to encourage respondents’ rehabilitation and to mitigate further risk to World Bank–financed activities. Accordingly, a respondent who receives a sanction of debarment with conditional release will be released from debarment only after it has complied with specified conditions, typically including the establishment, and implementation for an adequate period of time, of an integrity compliance program satisfactory to the World Bank. In September 2010, the World Bank appointed its first Integrity Compliance Officer to work with respondents to monitor integrity compliance by sanctioned parties and to decide whether the conditions for release established by the World Bank have been met.

To amplify its anticorruption efforts and enhance the effects of its sanctions work, the World Bank has also agreed to honor certain debarments imposed by other multilateral development banks (MDBs). In 2010, the World Bank and four other leading MDBs—the Inter-American Development Bank, the African Development Bank, the Asian Development Bank, and the European Bank for Reconstruction and Development—signed a landmark agreement to cross-debar firms and individuals found to have engaged in wrongdoing in MDB-financed development projects. The agreement provides for some limited exceptions to this general rule, including an exception for debarments of less than one year. MDBs also have the right to opt out of recognizing particular debarments for legal or policy considerations. That said, under this agreement, the debarment decisions of one MDB are recognized and enforced by the other participating MDBs, no longer allowing parties that had been debarred by one MDB to continue obtaining contracts financed by other MDBs. Cross-debarment unites international financial institutions around one common enforcement objective: strengthening efforts to prevent fraud and corruption.

Settlements and Voluntary Disclosure

In some circumstances, sanctions may be imposed on a respondent through a settlement, which is referred to as a Negotiated Resolution Agreement. At any time during the sanctions proceedings, INT and one or more respondents (who may be assisted by counsel), acting jointly, may ask the EO for a stay of sanctions proceedings for up to 90 days for the purpose of conducting settlement negotiations.

Settlements, so familiar to U.S. attorneys, were until recently somewhat of an international rarity. At the World Bank, the use of settlements has enhanced the sanctions system by potentially resolving disputes in less time and with fewer resources while providing certainty of outcome for all parties. Under this mechanism, which was established in 2010, settlements are subject to certain procedural and substantive safeguards to ensure fairness, transparency, and credibility. The World Bank general counsel clears all settlement agreements. The EO is also charged with reviewing settlement agreements to verify that the terms of the agreement do not manifestly violate the World Bank’s Sanctions Procedures and Sanctioning Guidelines. Parties may (and generally do) submit a certification by both INT and the respondent(s) that they entered into the settlement agreement freely, fully informed of the terms thereof, and without any form of duress.

Beyond deterring corruption through debarment, the World Bank is engaging in proactive anticorruption efforts by accepting the voluntary cooperation of firms prior to the opening of any World Bank investigation. In 2007, the World Bank established the Voluntary Disclosure Program (VDP) with the goal of providing firms and individuals an incentive to disclose their sanctionable practices and comply with World Bank rules and guidelines. Managed by INT, the program allows entities who have engaged in past fraud and corruption to avoid administrative sanctions if they disclose all prior wrongdoing and satisfy standardized, nonnegotiable terms and conditions.

Under the VDP, participants commit to not engage in misconduct in the future, disclose to the World Bank the results of an internal investigation into conduct subject to sanction by the World Bank involving projects or contracts financed or supported by the World Bank, and implement a comprehensive internal compliance program. A compliance monitor approved by the World Bank typically observes the compliance program for three years and reports annually to the World Bank.

Per the VDP Guidelines, a VDP participant conducts an internal investigation of all its World Bank–related contracts that were signed or in effect in the five years before entering the VDP. The participant reports the results of its investigation to the World Bank, and the World Bank verifies the completeness and accuracy of that investigation. In exchange for full cooperation, entities and individuals enrolled in the VDP remain anonymous and avoid the reputational damage of public debarment.

Conclusion

Diversion of funds from development projects through fraud and corruption presents a significant challenge to economic and social development, but the World Bank has taken this challenge head-on by developing a robust, multipronged approach to promote good governance and deter corruption. Through its sanctions system, the World Bank has publicly sanctioned more than 500 firms and individuals, and has honored more than 80 cross-debarments, as of September 30, 2012. These numbers are the result of clear-eyed enforcement strategies and a desire to ensure that development dollars are used in the most effective way as part of the World Bank’s mission to overcome poverty and boost economic growth and opportunity. Litigators representing individuals, companies, and organizations doing business with the World Bank must take care to understand the World Bank’s anticorruption rules and must remain proactive in their efforts to ensure that their clients closely monitor potential misconduct.

The findings, interpretations, and conclusions expressed herein are those of the author and do not necessarily reflect the view of the World Bank Group, its board of directors, or the governments they represent.