Multilateral Development Banks: The compliance imperative
Multilateral Development Banks (MDBs) provide financial assistance to developing countries, funding infrastructure, energy and social projects and providing loans linked to government policy reforms. The World Bank Group (WBG) is the oldest and largest. Those with a focus on Asia include the Asia Development Bank (ADB), the New Development Bank and Asian Infrastructure Investment Bank. MDBs also play an increasingly important role in the global fight against corruption, by taking action against companies engaging in misconduct linked to MDB-financed contracts and promoting their expectations for contractors’ compliance programs.
The scale of investment by these MDBs is significant. In 2018 and 2019, the WBG, ADB and the Africa Development Bank entered into c.US$72 billion of new commitments. They have all recently announced additional funding to address COVID 19 and its anticipated impact. For example, in May 2020 the WBG pledged an additional US$160 billion over a 15-month period.
Risk of enforcement
The Government recipients of this money pay much of it to project contractors. Asian companies have been significant beneficiaries of MDB-financed projects in recent years. However, companies bidding for these projects are often unaware of the MDBs' powers to hold them to account for "misconduct", specifically fraud, corruption, collusion, coercion or obstruction (hindering MDB investigations and audits).
MDBs can assert “jurisdiction” over any company or individual, at any stage of the project or services, provided their conduct relates to an MDB-funded project. The company or individual does not have to win the bid, and they may even complete the project successfully. The form of misconduct most commonly identified is fraud, which includes (for example) inaccuracies in bid documentation such as misrepresentation of experience.
MDB sanctions
The main sanction deployed by MDBs is debarment, making the individual or company ineligible to bid for MDB-funded contracts. A matching debarment is often imposed by other MDBs under "cross-debarment" arrangements. The baseline sanction is debarment with conditional release, and a common condition is the implementation of an integrity compliance program (ICP) consistent with the MDBs' Integrity Compliance Guidelines. The MDBs may also impose a conditional non-debarment, where a company will be debarred if it fails to comply with certain conditions, including the implementation of an ICP. Other potential sanctions include public letters of reprimand, restitution and financial penalties.
The commercial impact of debarment on a company can be severe, especially where a company is cross-debarred. The reputational impact can extend beyond MDB-funded projects. The company will also bear the costs of responding to any MDB investigation, negotiating a settlement or litigating with the MDB, implementing an ICP and, potentially, appointing a monitor or independent integrity compliance consultant who will be responsible for assessing the ICP.
Increasing enforcement activity
The WBG has been the most active in terms of enforcement, sanctioning over 900 companies and individuals since 2007. However, enforcement activity is picking up across the board. In 2019, the WBG recognised 33 cross debarments from other MDBs. MDBs cooperate closely with both each other and state enforcement agencies.
There are multiple reasons for this increased enforcement dynamic. MDBs are responding to pressure from civil society and other stakeholders to enforce more rigorously: they invest public monies and society demands accountability. Also, the likelihood of misconduct coming to light may be increasing: MDBs are increasingly exercising their contractual audit rights; competitors and others are complaining (2,461 complaints were submitted to the WBG last year); and more effective whistleblowing is triggering investigations.
It is too early to draw a specific connection between COVID-19 and increased enforcement by MDBs, but COVID-19 will likely create an increased risk of misconduct, potentially leading to enforcement. Emergency situations where significant funding is being issued to address urgent needs, such as COVID-19, exacerbate integrity risks around public procurement and supply chains, stretch company compliance resources, and increase pressure to capitalise on the opportunities presented by increased funding.
Practical implications
Companies bidding for MDB-financed projects should bear the following in mind:
• Companies should understand compliance risks associated with MDB-funded projects, and ensure that they can identify these risks when they are bidding for such contracts (in particular government-funded contracts).
• To mitigate the risk of misconduct occurring, companies should implement effective ICPs that are tailored to address their specific risk profiles, conform to the MDB Integrity Compliance Guidelines and meet international expectations.
• Companies should communicate expectations about integrity compliance to agents, consultants, suppliers and sub-contractors who might be acting on their behalf in relation to MDB-financed projects, and monitor their adherence to those expectations.
• Companies should be prepared for MDBs to invoke the audit rights they have under bidding documents and contracts. Such audits must be treated seriously, so the company can, with expert support, demonstrate compliance with the contract and an understanding of the MDB Integrity Compliance Guidelines.
• Companies should also take seriously any “show cause” letter or formal investigation by MDBs, and take all steps to mitigate possible sanctions – including early compliance programme reinforcement. Companies should avoid conduct that could constitute "obstruction" of an audit or investigation.
An effective ICP can also provide a significant competitive advantage in the market. The global direction of travel is towards better compliance and China is no exception. In recent years there has been an impetus from the Chinese government for State-Owned Entities in particular to enhance compliance. In November 2018, the State-owned Assets Supervision and Administration Commission (SASAC), released pilot guidance on compliance, which touches on overseas activities. This guidance was followed in December 2018 by Corporate Management Guidelines for Compliance Overseas issued by the National and Reform Commission and other departments. Companies bidding on MDB-financed projects should therefore be proactive in their approach to integrity compliance and risk management, and not wait until actions have been taken by MDBs.
The article is co-authored by Terence Tung (Mayer Brown Hong Kong) and Paul Whitfield-Jones (Mayer Brown London).
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