Multilateral development bank investigations, sanctions proceedings and debarment: an introduction

Companies that borrow from MDBs or work on MDB-funded projects as contractors or otherwise need to understand how the integrity units work and what the consequences of investigations and so-called sanctions proceedings are to avoid potentially commercially crippling consequences such as debarment.

Background

MDBs play an important role in funding development across the globe. Their origins can be traced to the period shortly before the end of the second world war when delegates from 44 countries met at the Bretton Woods conference and resolved to establish the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development, more commonly known as the World Bank. The World Bank was established shortly after the conference and with it the first MDB was born. Since then, several MDBs have been created.

There are different kinds of MDBs. However, the prominent MDBs like the World Bank comprise of member nations and they focus on making low-cost loans or grants available for development purposes, as opposed to commercial profits. The wealthier member nations usually make funds available through donor commitments. The less wealthy developing member nations usually benefit from the low-cost loans or grants, which are often used towards infrastructure projects to uplift economies and create greater levels of economic opportunity, equality and prosperity.

When funds that are intended for development are diverted through fraud, collusion or corruption the people that are impacted are the citizens of the developing countries that are meant to benefit from economic upliftment. To combat this, prominent MDBs have developed strong integrity units. These units have a mandate to police MDB-funded projects by investigating alleged wrongdoing and pursuing enforcement action against wrongdoers through sanctions proceedings.

A focus on five MDBs

From an integrity enforcement perspective, there are five MDBs to particularly focus on. They are:

• World Bank Group
• African Development Bank Group (AfDB)
• Asian Development Bank (ADB)
• European Bank for Reconstruction and Development (EBRD)
• Inter-American Development Bank Group (IADB)

These MDBs are members of the International Financial Institutions Anti-Corruption Task Force and have subscribed to the Uniform Framework for Preventing and Combating Fraud and Corruption, dated 17 September 2006. They are also all signatories of the Agreement for Mutual Enforcement of Debarment Decisions. Based on this these MDBs have agreed to:

• Define sanctionable practices in the same way;
• Conduct investigations based on the same principles and guidelines including ensuring that investigations are fair, impartial and thorough;
• Apply a process to determine whether or not a sanctionable practice has occurred that involves: separate investigative and decision-making bodies; written and publicly available procedures; providing implicated persons an opportunity to respond to the allegations; a uniform standard of proof – that being more probable than not; and a range of sanctions that take into account proportionality, including mitigating and aggravating factors;
• Enforce the debarment decisions of the other MDBs provided certain criteria are met.

Each of the MDBs have separate bodies responsible for investigating business practices and for determining whether a sanctionable practice has been committed. The decision-making bodies themselves comprise of two-tier administrative bodies. The first-tier body decides whether a sanctionable practice has been committed based on the investigation and the second-tier body decides appeals or contested matters, depending on the applicable processes at each MDB. The relevant bodies are:

As indicated above, the relevant MDBs have agreed to common definitions of sanctionable practices. This creates consistency and uniformity in terms of what corporate misconduct they police and how they define the misconduct. There are four sanctionable practices that they have collectively recognised and defined, for which cross debarment is a risk. They are:

• Corrupt practice – the offering, giving, receiving, or soliciting, directly or indirectly, anything of value to influence improperly the actions of another party;
• 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;
• 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;
• Collusive practice – an arrangement between two or more parties designed to achieve an improper purpose, including influencing improperly the actions of another party.

The MDBs also individually consider obstructive practices to be sanctionable. The definition of obstructive practice may differ slightly from MDB to MDB, but generally this practice is defined as destroying, falsifying, altering or concealing of evidence material to a bank investigation, or making false statements to investigators, with the intent to impede a bank investigation; threatening, harassing or intimidating any party to prevent it from disclosing its knowledge of matters relevant to a bank investigation or from pursuing the investigation; or acts intended to impede the exercise of the bank’s contractual rights of audit or inspection or access to information.

What do MDB investigations entail?

The INT, PIAC, OAI, CCO and OII each have their own nuanced approach to investigations and their own tailored processes and procedures. However, as indicated above, they have agreed to base their investigations on the same principles and guidelines. These principles and guidelines are contained within the Uniform Framework for Preventing and Combating Fraud and Corruption.

Their investigations typically have common features.

Receiving complaints

Like many private companies, the MDBs have established channels through which complaints are received. These channels typically include whistle-blowing platforms that enable anonymous and confidential sources to make complaints.

Triage of complaints

The investigative bodies typical register all complaints received and conduct some form of preliminary evaluation. This is important to enable them to assess whether a complaint falls within their mandate and purview and to decide which complaints will be investigated.

Once a decision has been made to investigate a complaint, resources will be allocated to the investigation taking into account the gravity of the allegations and possible outcomes. In our experience, the employees of the investigative bodies are generally highly qualified and experienced investigators from relevant backgrounds, such as forensic accountants or former law enforcement officers. The resources allocated to the investigation will decide what investigative activities need to be done to deal with each complaint.

Investigative activities

There is no one size fits all investigation plan. Every case is different and the activities that ought to be done have to be tailored. That said, generally the persons responsible for an investigation will gather evidence in the form of records – including documents, electronic records like emails, videos, audio recordings and photographs – and will also interview witnesses.

Much of the investigative work will be done without the involvement of the implicated party. However, investigations typically evolve to a point where the investigators will engage with the implicated party and ask to meet relevant persons and request information and records from them. This is dealt with more fully below. 

Reporting and decision-making

The investigative bodies are impartial decisions-makers. As such, their role is to gather evidence that may implicate or exculpate the parties against whom a complaint has been made. At the end of the investigation, the steps taken and findings will be documented. Whilst the investigators are impartial, they are required to evaluate whether the evidence shows that it is more probable than not that the implicated party(ies) committed a sanctionable practice, and if so, the matter must be referred to the decision-making bodies detailed above.

The investigative process in more detail

With the above typical processes in mind, there are a few important things to unpack further.

The first important thing to note is that the investigations are administrative in nature. The investigators fulfil a function that is similar to the police, but they are not police, and they are not given legal powers under the laws of any particular country.

Businesses and individuals might question why they would cooperate with the investigators if they do not have legal powers to compel them to answer questions or provide information and records. However, those that don’t cooperate as an implicated party run the risk of the investigators coming to their own findings without them having a chance to provide evidence that may contradict an adverse finding. In more extreme cases, a person that does not cooperate could be found to have engaged in an obstructive practice, which is a sanctionable practice in and of itself.

The second important thing to note is that typically the investigators apply an interim step between reaching the decision that a sanctionable practice has been committed and referring that matter to the decision-making bodies. In this regard, implicated parties are typically sent a so‑called ‘Show Cause’ letter. These letters serve as a last chance for implicated parties to provide evidence or reasons why the investigators assessment is incorrect. Implicated parties are also typically given an opportunity to enter into negotiations instead of proceeding to sanctions proceedings. Negotiations enable the implicated parties and representatives of integrity units to explore whether or not an agreed outcome can be reached. Typically, the integrity units would want the implicated parties to admit certain wrongdoing and the implicated parties would seek a mitigated sanction.

What do sanctions proceedings entail?

Whilst the investigative bodies form an opinion on whether the evidence shows that it is more probable than not that a sanctionable practice has been committed, they are not empowered to make a determination on the matter. This power sits with the decision-making bodies detailed above.

Each of the MDBs have their own nuanced approaches to dealing with matters referred to sanctions proceedings. However, typically the approaches involve similar processes.

An initial decision

The first-tier decision-makers typically receive matters from the investigative bodies and are required to decide whether they agree with the assessment of the investigators or not. If not, a matter may be dispensed without further engagement with the implicated party or parties.

Involving implicated parties

If the decision-makers agree with the investigators’ assessment, the implicated party or parties will typically be invited to indicate whether they accept the position of the investigators or oppose the outcome, including recommended sanction. The implicated parties are then afforded an opportunity to make submissions that the sanctions bodies will take into account.

Evaluating submissions

Subject to the above, the first-tier decision-makers will evaluate the information and arguments put forward and decide whether it is more probable than not that the implicated party has committed the sanctionable practice and if so, what sanction should be imposed. These proceedings are typically decided on paper – in other words, there is not a formal hearing where witnesses give oral evidence and representatives cross-examine witnesses and make verbal arguments.

Appeals

If an adverse decision is made and an implicated party is subject to sanctions, they are typically afforded an opportunity to contest or appeal the decision to the second-tier decision-makers. Whilst the processes of the second-tier sanctions bodies are slightly different, generally there is more scope for a contested process and parties may apply for a formal hearing as opposed to the matter being decided on paper only.

Sanctions proceedings in more detail

With the typical process in mind, it is again important to consider some issues in more detail.

The first important thing to note is the standard of proof. As indicated above, the standard of proof is more probable than not. This standard of proof is similar to the standard of proof that many common law jurisdictions apply to civil disputes where it is often referred to as a balance of probabilities. The determination can be likened to scales upon which the evidence is weighed. If it shown that it is 51% or more likely that a sanctionable practice has been committed, then the burden of proof will have been met.

The second important thing to note is that whilst the core sanctionable practices of fraud and corruption are also typically crimes in most countries, the sanctions proceedings are not a criminal process and do not give rise to direct criminal liability.

Criminal proceedings in most countries have more robust processes before someone can be convicted of a crime. The standard of proof is also usually set at a much higher threshold and most common law jurisdictions require the state to prove a crime beyond a reasonable doubt. That being said, the MDBs generally make provision for sharing information and evidence with local law enforcement where this is deemed appropriate. As such, an implicated party may find themselves facing a criminal investigation over and above the investigation and sanctions proceedings of an MDB.

The third thing to note is what possible sanctions may be imposed on parties that have been found to have engaged in a sanctionable practice. The MDBs have agreed to general principles and guidelines for sanctions. As such, the range of sanctions that may be imposed are as follows:

• Letter of reprimand;
• Conditional non-debarments, which typically means the implicated party must comply with certain conditions failing which they will be debarred from receiving funding or being involved in a funded project;
• Debarment with conditional release or reinstatement, which typically entails a minimum period of debarment with the option to be released if certain requirements are met;
• Debarment for a fixed period;
• Permanent or indefinite debarment; and
• Restitution or other financial remedies.

In terms of the principles and guidelines, the starting position for a sanction is debarment for three years. This sanction may be increased or decreased based on mitigating or aggravating factors. Based on the common enforcement agreement, debarment that meets certain criteria will be enforced by all the MDBs and implicated parties can find themselves facing cross-debarment.

Our analysis

The investigations, sanctions proceedings and debarment of MDBs can have very serious implications for companies that rely on funding from MDBs or winning work on MDB-funded projects. Very often companies do not fully understand the nature of MDB investigations or implications if found to have committed a sanctionable practice.

It is vital that businesses engage experienced experts in white collar crime and investigations to deal with these matters and explain what the developments mean for companies in practice.