Business has role to play in helping Ukraine rebuild ethically

More than two years on from Russia’s invasion, Ukraine is still gripped by war and an end in the conflict seems a long way off. Despite this, political leaders, governments and funding institutions around the world have already given thought to not only restoring Ukraine’s damaged and destroyed built environment to its pre-war state, but to building back better and setting Ukraine up to thrive economically for decades to come.

An international effort – pooling finance, skills, innovative processes and technology – is required, and we estimate the final cost of the rebuild in Ukraine will exceed $1 trillion. It is a giga-project of the scale not seen in Europe since the immediate aftermath of the second world war.

However, with an anticipated flow of international finance, lucrative contracts on the line, and a civil society in Ukraine that will need time to restore, there is a heightened risk of corruption that organisations involved in rebuilding Ukraine will need to navigate. Several factors play into this risk.

The infrastructure sector has historically been one of the highest risk sectors for fraud and corruption. The high value of transactions and participation of multiple parties at different parts of the contractual chain are often-cited reasons for these sector risks, as the complexity can offer bad actors the opportunity to defraud others or to disguise bribes to win tenders, for example. Infrastructure projects also typically involve procedural hurdles that need to be cleared for projects to progress. The need for planning permissions, environmental permits and building control approvals, for example, give rise to gatekeepers of those processes which in turn can give rise to opportunities to solicit bribes to progress applications or to overlook errors or other failures in the procurement, regulatory approvals and construction process.

The impact of this form of corruption can have a wide-ranging detrimental impact beyond the harm of the bribery itself – including creating consequential risks to health and safety, the environment and security.

Corruption risks that arise in relation to major infrastructure projects are exacerbated in countries recovering from conflict. We have seen this in countries such as Libya and Iraq – where in the latter case there was the high-profile scandal that arose from the UN’s Oil for Food programme in the 1990s and early 2000s.

In a post-conflict scenario, corruption risk is often significantly enhanced by the need to deliver projects quickly, to help a country restore damaged or destroyed infrastructure. This need for speed can lead to pressures on infrastructure sector participants to seek shortcuts to processes and in turn gives rise to risks of corruption and fraud.

The fact civil society and governmental structures in a post-conflict state are often under-resourced or involve new people or processes that are untested or are being introduced in a rushed fashion, also exacerbates corruption risk in those countries.

We have also seen corruption risk rise in relation to so-called offset contracts in post-war scenarios, where would-be contractors offer to deliver secondary infrastructure projects of community benefit as a quid pro quo for securing the main infrastructure project contract. This corruption risk might arise, for example, where a bidder for a contract to construct a major new road offers to build a hospital in the constituency of a government minister who will be the decision maker in relation to the main contract award.

Further corruption risk can arise from the fact that the main funders of projects in post-conflict scenarios – such as foreign governments or multilateral development banks – are physically distant from where their loans and grants are spent on the ground. Bad actors can perceive there to be reduced oversight in these circumstances and view this an opportunity to extract funds.

Figures published by the European Bank for Reconstruction and Development (EBRD), which is already pledging support to Ukraine, give an indication of the dedicated resources at the disposal of compliance teams at multilateral development banks.. The EBRD’s anti-corruption efforts are led by its Office of the Chief Compliance Officer (OCCO). Its latest annual report detailed that, as of the end of 2022, OCCO had 39 staff members. EBRD operations span across Europe, North Africa and parts of Asia.

Notwithstanding that the various compliance-related functions of a multilateral development bank might be bolstered by engagement of third-party investigators, auditors or via other resources at its disposal, in normal circumstances the core compliance teams at these institutions are typically small. In a post-conflict scenario, this will mean those funders will likely expect project participants to provide enhanced assistance to compliance efforts – including in relation to reporting concerns and proactively cooperating with enquiries a funder may have.

Despite improving its CPI score over the past decade, Ukraine still ranks below average on the index. Transparency International has said “the existence of a significant number of high-level corruption cases remains a major concern” and that there is a need for “sustained and comprehensive anti-corruption measures for Ukraine to achieve full reform and European integration”.

Many businesses hoping to be engaged in Ukraine’s rebuild programme – even large, international contractors with experience delivering projects in high-risk markets globally – will be unlikely to have encountered such a complex confluence of compliance challenges on other projects, nor the level of international scrutiny that will attach to the funding of the rebuild.

Significant funding for Ukraine will come from Western governments as well as multilateral development banks. In the US, the government has already faced significant challenges in winning sufficient political support for the newly voted $60.8bn Ukrainian Aid Package in the House of Representatives. Those domestic tensions are likely to continue as further rounds of support are pledged and will sharpen focus on how funds that the US does commit are spent – the US is a major global enforcer on cross-border bribery and its Foreign Corrupt Practices Act is regularly cited by US law enforcement agencies in clampdowns against bribery of foreign public officials by US, European and other businesses worldwide.

Other anti-corruption laws that have extraterritorial effect and which could come into play in rebuilding Ukraine include the UK Bribery Act and the Sapin II law in France. Criminal sanctions available under those laws include potentially heavy fines for businesses, the disgorgement of the proceeds of corruption, and imprisonment for individuals.

Multilateral development banks have their own sanctionable practices regimes that could be applied in Ukraine too, known as “prohibited practices” in the case of the EBRD. These apply strict compliance rules on participants in bank-funded projects in relation to fraud, corruption, collusion and obstructive practices, among other compliance issues that are unfortunately endemic in the construction sector.

It is easier for businesses to fall foul of these sanctionable practices regimes, because the burden of proof is lower than in criminal enforcement cases. The practical operation of the rules can also mean that infrastructure participants need to interpret disclosure obligations under bank-funded contracts as approaching the standards of contracts of utmost good faith. An inadvertent but reckless failure to disclose something that should be disclosed under a bank-funded contract can mean a company might face an allegation of a fraudulent practice under development bank rules.

The consequences of breaching the sanctionable practices standards of a multilateral development bank can be severe. It can lead to companies being debarred from participating on other projects that bank funds, and potentially being cross-debarred from similar projects that other multilateral development banks fund under cross debarment arrangements that some of the major multilateral development banks, including the EBRD and World Bank, are party to.

It seems likely, given the level of funding that will flow from governments and multilateral institutions, that Ukraine will come under pressure to bolster its anti-corruption regime beyond the steps it has already taken, even in war time. However, those measures will take time to deliver.

What this all means for businesses seeking to be engaged on rebuild projects in Ukraine is that they need to undertake a robust and specific compliance-based bribery and corruption risk assessment beyond any standard due diligence exercise or risk assessment they might undertake before commencing a project.

The purpose of this risk assessment would be to gain a full understanding of the unique set of circumstances and confluence of risks that they might encounter if they became engaged on a project in Ukraine. It would also involve consideration of the existing suite of controls a business has in place to mitigate corruption and compliance risk, identification of any gaps in those controls in light of the amplified risks in Ukraine, and thought given to what enhancements to the existing controls are needed and possible where gaps are found.

Practical enhancements are likely to include conducting advanced due diligence on all the third parties that the business might work with, such as prospective joint venture partners where risks could be heightened. It would also involve vetting key people that the business might look to, to deliver operations on the ground – and ensuring they have access to adequate support mechanisms to address the fact that they may be vulnerable to attempts to solicit bribes or other corrupt practices.

While there are risks, there is also opportunity for businesses.

Businesses will have an opportunity through their work on projects in Ukraine to deliver not just best-in-class infrastructure to the latest technological and environmental standards, but to help Ukraine become an emblem for an economy and civil society that can be rebuilt ethically following conflict. For example, international businesses can show openness and transparency, share best practices on tendering and contracting, lead on the implementation of anti-corruption training, and demonstrate how to price fairly and what effective monitoring and audit of compliance standards should look like.

That activity would deliver real social value and allow businesses to leave a lasting legacy beyond the physical assets they construct.