Category

Fraud

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Fighting Corruption is MY Responsibility: the Annual Report of the Asian Development Bank Office of Anticorruption and Integrity

By | Bribery, Corruption, Cross debarment, Debarment, Fraud, Multilateral Development Banks, Sanctions Board | No Comments

The Asian Development Bank (ADB)’s Office of Anticorruption and Integrity (‘OAI’) has released its 2016 Annual Report entitled Fighting Corruption is MY Responsibility (the ‘Report’).

OAI’s external mandate is carried out by its Investigations Division which reviews complaints and conducts investigations into allegations of integrity violations; the Due Diligence Unit undertakes its integrity due diligence functions, whilst the Review and Outreach Unit handles project procurement-related reviews and capacity development activities.

The ADB defines ‘integrity violations’ as any act which violates ADB’s Anticorruption Policy, including corrupt, fraudulent, coercive and collusive practices, the four sanctionable practices which are harmonised across other Multilateral Development Banks (‘MDBs’).

Somewhat surprisingly, the Report starts with the topic of Enhancing Tax Transparency in Asia and the Pacific. By approving an update to its Anticorruption Policy, the ADB has added its weight to the fight against tax secrecy, tax evasion and aggressive tax planning which erode domestic tax bases of the ADB’s developing member countries. That update will – according to OAI – support developing member countries to protect themselves against tax evasion, base erosion and profit shifting (‘BEPS’) and is significant because it is wider in scope than the traditional role of MDB anticorruption and integrity departments.

OAI reports that it had 211 open complaints from previous years and received 258 new complaints in the year 2016. Some 73% of the complaints received related to projects, 17 % to ADB staff and 10 % to ‘others’. The majority of complaints came to OAI via email, which is an indication both of the impact of technology on the operations of the Department and the ease with which complaints about companies and individuals may be made. From those, the focus of investigations was 53% on projects, 37% on ADB Staff with the remaining 10% falling within others. The sources of the complaints also makes for interesting reading, with 61% coming from parties external to the Bank and 35% from ADB staff, whilst only 2% came from audit reviews with the remaining 2% from anonymous sources. Despite these figures, the Report emphasises OAI’s proactive use of Project Procurement-Related Reviews (‘PPRRs’) of on-going ADB-financed projects. Once again, their scope is wide, for they seek to identify ‘noncompliance issues, irregularities, and integrity concerns, with respect to project procurement, disbursements, and delivery of project outputs’ and so firms which are working on Bank-financed contracts must remain diligent to ensure that staff and contractors continue to comply with the strict requirements that come with working with an MDB.

‘Fraud’ accounted for 73% of new investigations in 2016 and OAI explained that investigations into corruption, coercion and collusion remained low due to the difficulty in establishing these sanctionable practices. Indeed, it should be remembered that the threshold for an allegation of fraud within the MDB sanctions regime is extremely low: the mere inclusion of a CV for someone whom the company knows is unavailable or where it is reckless as to that availability may give rise to liability, sanction and extremely serious consequences for a company, including debarment.

OAI stated that it continued to fight corruption through both enforcement and prevention. In 2016, 138 entities, including 98 firms and 40 individuals were debarred as a result of integrity violations, bringing the cumulative total number of firms debarred to 1,261 by the end of the year. Indeed, under the agreement with other MDBs to mutually enforce each other’s debarment actions, the ADB cross-debarred 86 firms and 47 individuals and submitted 10 firms and eight individuals for cross-debarment to participating MDBs. Further, nine firms and one individual were conditionally non-debarred, whilst temporary suspension, a measure which was first introduced in 2013 in the ADB, was issued to one firm and one individual in the year 2016. OAI also completed 33 investigations where ADB staff were found to have engaged in integrity violations, 11 of whom received disciplinary sanction.

Surprisingly, OAI received a mere six appeals in 2016, involving just three firms and six indivduals; five of these and two pending from 2015 were denied because they did not meet the requirements for an appeal to be considered by the Sanctions Appeals Committee, a point which demonstrates the importance of engaging specialist counsel to advise on and prepare such matters.

OAI used its investigative findings to make recommendations in respect of preventive measures and by requiring subjects of investigations to improve their governance and integrity processes through conditional non-debarments, debarments with conditions and reinstatement processes.

The ADB views integrity violations as potential reputational risks and with that in mind, ADB project teams submitted 300 Integrity Due Diligence (IDD) advisory and review requests to OAI’s Due Diligence Unit, covering 644 entities. This was an 86% increase in the number of entities reviewed from 2015. OAI’s Due Diligence Unit was created in response to an increased need for ADB to evaluate and minimise integrity and reputational risks in its private sector projects, as well as taking into account its increased lending and development initiatives involving private companies; indeed, 52% percent of the total entities reviewed were actually identified by the Private Sector Operations Department.

In addition, there is a separate independent grievance process – ADB’s Accountability Mechanism – which receives complaints from entities which claim to have been adversely affected by an ADB-financed project which has resulted from the ADB’s noncompliance with its operational policies and procedures. The major areas of complaint are resettlement, compensation and land acquisition, and adverse environmental impacts.

The lawyers at Bretton Woods Law have unique and unparalleled experience of assisting companies and individuals with their interactions with the OAI. If you have any questions arising out of the issues raised in this article, do not hesitate to contact a member of the team.

Antje Kunst, Counsel and Senior Rule of Law Expert, Anti-Corruption and Integrity Trainer

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Multilateral Development Banks (MDB) – Dos and Do Nots

By | Bribery, Corruption, Cross debarment, Debarment, Development Banks, Fraud, Multilateral Development Banks, News, Sanctions, Sanctions Board | No Comments

The MDB community is comprised in the main of the African Development Bank (AfDB), the Asian Development Bank (ADB), the European Bank for Reconstruction and Development (EBRD), Inter-American Development Bank (IDB) and the World Bank Group.  Each MDB is an international organisation created by treaty and each is mandated by its Member States to ensure that the funds that the organisations lend reach their intended destination.  As such, each MDB has created an investigative office whose function it is to ‘police’ MDB funded projects in order to prevent or stop incidences of fraud, corruption, collusion and coercion (“the Sanctionable Practices”).  The MDBs have all developed an internal ‘administrative’ apparatus for prosecuting companies and individuals accused of having engaged in Sanctionable Practices on MDB financed projects.  Entities found guilty by the MDBs risk debarment (i.e., they will be prohibited from bidding on MDB funded projects for a period of time) and face referral to national prosecutorial authorities.

The following list of ‘Dos and Do Nots’ is intended to assist companies and individuals in their dealings with the MDBs:

The Dos

Do remember that companies and individuals can be debarred either indefinitely or for a set period of time by the MDBs for engaging in Sanctionable Practices on projects that they finance.

Do recall that the default sanction for a company with no prior convictions by the MDBs is a three-year debarment with conditional release, which means that the company will not be released to bid again until it can demonstrate that it has improved its corporate compliance and governance position.

Do appreciate that most MDBs publish the names of those that they have debarred for fraud and corruption, which can have dire and long-lasting consequences for the reputations of those companies and will seriously harm its chances of winning work funded by non-MDB sources as well.

Do realise that the presumption of innocence does not apply and that the World Bank can impose a six-month ‘temporary suspension’ before even formally accusing a company of having engaged in a Sanctionable Practice.

Do be cognisant of the fact that the MDBs do not have any jurisdiction over public officials; just companies and individuals who have bid upon and who have been awarded MDB funded projects.

Do be aware that the jurisdiction of the investigative offices of the MDBs stems from the ‘triangular’ contractual arrangements between lender (MDB), borrower (usually a government) and the contractor (the successful bidder).

Do ensure that bids submitted on MDB financed projects are entirely accurate and defensible.

Do ensure that you are aware of the risks of doing business in certain countries and, to this end, do consult at a minimum Transparency International’s Corruption Perception Index.

Do avoid using agents in countries in which you operate and do undertake credible due diligence checks on the consultants and contractors that you engage.

Do train your staff routinely and regularly on how to identify and avoid being drawn in to a Sanctionable Practice, as well as the potential repercussions for doing so.

Do appreciate that some MDBs, most notably the World Bank, will enter into plea arrangements known as Negotiated Resolution Agreements, whereby any likely sanction will be reduced for a guilty plea and an undertaking to assist the MDB.

Do be aware of the 9th April 2010 Agreement for Mutual Enforcement of Debarment Decisions under which a company debarred for longer than one year by one MDB will be debarred by them all, which can and most likely will deter organisations, national aid agencies and government departments from dealing with you.

Do act swiftly and instruct a lawyer who has established expertise in MDB debarment work the very moment you appreciate that you are at risk of sanction.  The earlier that a lawyer is engaged the better.

Do realise that a company’s corporate compliance structure should meet with the minimum requirements set by the World Bank’s Integrity Compliance Guidelines.

Do provide a copy of this document to your Compliance Officer.

 

The Do Nots

Do not be tempted to engage in any form of Sanctionable Practices on MDB financed projects, for it is likely that your act or omission will be discovered.

Do not pay success fees, other similar commissions or facilitation payments, for the MDBs will treat such payments as bribes.

Do not inflate or otherwise alter CVs in bids submitted on MDB financed contracts, for this can and most likely will amount to a fraudulent practice.

Do not engage with investigative offices of the MDBs, such as the World Bank’s Integrity Vice Presidency (INT) unless you have first spoken with a lawyer qualified to advise on MDB debarment matters.  The first approach from the MDB might be the issuance of an Audit Letter under which it requests sight of the company’s books and records pursuant to contractual obligations owed by the company to the borrower.

Do not allow yourself to be interviewed by MDB officers as a ‘suspect’ or ‘subject of an investigation’ in the absence of a suitably qualified lawyer instructed by you and do not disclose any documents.

Do not admit liability for a Sanctionable Practice until your lawyer has advised you on the merits and consequences of doing so.

Do not forget that the investigative offices of the MDBs regularly share information between themselves.

Do not ignore any notices received from the MDBs, such as a Notice of Temporary Suspension or a Notice of Sanctions Proceedings issued by the Evaluation and Suspensions Officer of the World Bank.

Do not forget that only the World Bank operates a quasi-judicial system for handling accusations of Sanctionable Practices, the other MDBs, such as the ADB, operate a ‘star-chamber.’

Do not consider entering into an MDB voluntary disclosure programme in the absence of first consulting a suitably qualified lawyer.

Do not forget that some MDBs, such as the World Bank, can sanction a company for a failure to co-operate with its investigators (known as an Obstructive Practice) such as where a company refuses to honour an audit clause in its contract with the borrower that permits MDB investigators to review its books and records.

All of the lawyers practising at Bretton Woods Law are experts in international organisations law, including the sanctions regimes operated by the various MDBs.  They regularly accept instructions to defend companies and individuals accused by the MDBs of having engaged in Sanctionable Practices.

If you think you could benefit from some truly international legal expertise, please click here to contact your nearest office

 

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Fraud can be ‘reckless’ and doesn’t have to be successful

By | Development Banks, Fraud, Multilateral, Multilateral Development Banks, News, Sanctions | No Comments

The current definition of fraud being applied by the World Bank Group’s Sanctions Board is capable of a very wide interpretation and could lead to yet more companies and individuals facing debarment.

The present day version of ‘fraudulent practice’ being applied under the 2011 Procurement or Consultant Guidelines and Anticorruption Guidelines has clarified, simplified and possibly extended earlier definitions of this type of sanctionable practice and now includes “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”.

For the first time recklessness is expressed as an alternative way in which a company may commit a fraudulent practice, in other words the fraud need not be deliberate but includes the taking of a risk of misleading another party. Neither does a fraud (most commonly a misrepresentation of particular facts) need to succeed; the most recent definition now specifically includes ‘attempts to mislead’. It is also worth noting that the offence has been extended explicitly to include conduct or a misrepresentation that could lead to an obligation, such as having to perform works to a particular standard, being avoided.

Previous cases suggest that the submission of false performance and experience certificates or bolstered CVs as part of a contract bid is the most common way companies put themselves at risk of sanction for fraud; although of course the definition is sufficiently wide to cover a wide range of conduct throughout the execution of a contract. In the 2011 fiscal year the World Bank Group debarred thirty five companies and individuals from doing business on any of its projects that it finances around the world.

Companies and individuals need to be aware of the wide definition of ‘fraudulent practice’ to adhere to their compliance obligations. Bretton Woods Law view is that more companies face the prospect of debarment for a ‘fraudulent practice’ than for a corrupt one.

If you are concerned that you may have committed a fraudulent practice Bretton Woods Law can investigate the matter on your behalf, advise you in confidence whether you have a defence, such as bona fide mistake or “rogue employee,” and suggest how best to proceed. To contact your nearest office please click here

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Asian Development Bank gets tough with companies who engage in sanctionable activities

By | Corruption, Development Banks, Fraud, International, Multilateral, Multilateral Development Banks, News | No Comments

The Office of Anticorruption and Integrity (OAI) of the Asian Development Bank (ADB) recently published its 2011 Annual Report (‘the Report’).  Two core messages flow from it.  The first is that efforts to tackle fraud and corruption have never been greater.  The second is the importance of ‘communication’ both between the MDBs and through OAI’s aim to ‘empower’ those involved in ADB activities “with a deeper understanding of ADB’s approach to the anticorruption fight”.  An appreciation of both messages is of paramount importance both for board members and employees of companies operating within the sphere of international development and procurement.  Indeed, many may think they have a clear view of the meaning of fraud and corruption; they are often equally clear that ‘fraud’ and ‘corruption’ are words which do not apply to them or their companies.  Yet the Report to the President may make for chilling reading: it spells out with crystal clarity conduct which may be viewed by the ADB as fraudulent or corrupt; conduct which, if found, will almost inevitably lead to the imposition of sanctions.  What might surprise many, is just how easy it is for a company to cross the threshold into sanctionable conduct.

The Bribery Act 2010 has, understandably, focused the attention of many bodies corporate on the need to be cognisant of the risks associated with such corrupt conduct.  However, it is important not to lose sight of the fact that sanctionable practices are not always as flagrant as the soliciting or payment of bribes.  Indeed, in 2011, in the case of allegations dealt with by OAI, “fraudulent practice formed the majority of investigations at 60%”.  Of that majority, misrepresentation “constitutes 52% of allegations pertaining to fraudulent practice, with submission of false documents (including bank guarantees, bid securities, or curricula vitae) at 27%.  False or inflating financial claims represent 18% of the investigations”.  It is of note that CV fraud is cited, since this is all too often a significant, but unappreciated risk area for many companies.

Companies necessarily operate in a competitive commercial environment and it seems that a practise has emerged in the field of procurement of submitting what effectively amount to ‘representative proposals’, where the personnel included are viewed not so much as integral and inseparable to a proposal, but as merely representative of the staff who might eventually be provided, should the bid be successful.  Such behaviour manifests itself as a risk in a number of ways.  One of the most common is the inclusion by a company of contractors’ CVs in proposals when that company knows or suspects that the consultant in question is not available to complete the project it is bidding for.  Furthermore, it is not uncommon for contractors to be unaware that their CVs have been included in a proposal.  It is no defence for a company to cite normal commercial practice as an explanation for such conduct; indeed, a single instance of such a misrepresentation is sufficient for a Multilateral Development Bank (MDB) to impose sanctions – including debarment.  The threat for companies of sanctions and in particular, debarment, is now greatly enhance by the cooperative approach to tackling fraud and corruption, which is now at the heart of the efforts of all of the MDBs.

The Report states that it “is important to note that the communication and exchange of information among the integrity offices of other MDBs greatly assisted in OAI’s investigations in 2012”.  It goes on publically to confirm that “ADB routinely shares information with the World Bank’s Integrity Vice Presidency and has received assistance from said office that has facilitated OAI’s investigations”.  Furthermore, the Report openly states that “more than 45 officials from government agencies and 13 development institutions have access to ADBs sanctions list”.  It is, perhaps, worthy of note that the period of debarment most frequently imposed by the ADB, both for firms and individuals, fell into the 4-7 years category.  This is made all the more significant as the relevant qualifying period for considering automatic ‘cross debarment’ is met where the “initial period of debarment exceeds one year”.

It is quite clear, then, that the regime in which international development companies operate has never been stricter and companies should factor this into their risk management strategies.  Not only is the liability often strictly interpreted, but it is now undeniable that knowledge of infringements arising out of that liability is not only being shared, but is being acted on throughout the MDB community.  The report recognises that such cross debarment has the effect of “significantly extending the reach and impact of sanctions” and as a result, it is not surprising that discussions “to further harmonize debarment practices among participating MDBs continue”.  It is with these points in mind that the value of early internal investigation and advice cannot be underestimated when companies are facing allegations, or even accusations, of fraud or corruption.  A misjudgement in respect of a CV could have potentially catastrophic consequences for the entire business.

If you are worried that your company’s internal procedures and programmes might leave you exposed to possible  accusations of fraud and corruption, Bretton Woods Law’s International Organisations Consultancy Service is the perfect solution to ensure compliance with Multilateral Development Banks’ stringent policies. To discuss your company’s needs in person, please click here to contact your nearest office.

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The settlement that dare not speak its name?

By | Corruption, Fraud, Multilateral Development Banks, News | No Comments

Recently, the OECD (Organisation for Economic Co-operation and Development) published its Phase Three Report for the UK in which it made various recommendations to the Serious Fraud Office in their continuing fight against bribery and corruption.  One of the OECD’s many recommendations was that the details of civil settlements should be made public instead of being protected by confidentiality provisions contained within settlement agreements.

Based in Paris, the OECD was founded in 1961 to formulate and promote policies that promote economic and social wellbeing worldwide.  Most recently, a key mission has been to enforce the OECD Anti-Bribery Convention, which was transposed into UK domestic legislation in the guise of the Bribery Act 2010.  The OECD is currently undertaking studies to verify each member state’s compliance in implementing the Convention.

Civil Settlements

Civil Recovery Orders have been used increasingly by the SFO to settle cases.  They are a useful tool for companies that discover that corrupt acts have been committed by employees or directors.  Wrongdoing can be reported to the SFO without it leading to criminal sanction.  A consent Civil Recovery Order is negotiated, the terms of which are binding on both parties and usually involves the company having to pay a fine as recompense for the illicit profit gleaned from the wrongdoing.  The settlement is then certified by a High Court Judge, without a hearing.  The terms of the settlement are kept confidential, as is typical of many civil cases in the UK.

There are several advantages to a Civil Recovery Order:-

  • Damage limitation regarding a company’s commercial reputation and the resulting loss of business
  • Resolution without criminal sanction
  • Insurance – some corporate insurance policies allow cover for legal fees in relation to civil litigation, which is not the case for criminal litigation, resulting in a saving for the company
  • A company will have some input as to the outcome of the settlement
  • A company will be certain of the sanction to be imposed, unlike in criminal settlements, as judicial intervention is minimal
  • Confidentiality avoids the setting of ‘precedents’ in formulating settlement packages, meaning each case will be considered solely upon its merits and the resources of each company or the value of the corrupt contract

A situation is less likely to result in criminal sanctions following a prompt self-referral, thus offering a company a valuable incentive to self-report.  This incentive would all but disappear if confidentiality were to be excluded.  There is equally an incentive for SFO to continue with such Civil Recovery Orders as they are a lucrative source of income for the State coffers and fines are sometimes reinvested into the developing world.

Criticism has been levelled at such settlements by practitioners and the judiciary alike.  Some are of the view that where a case does not meet the threshold for criminality, it makes little sense that a company should have to enter into a settlement where the SFO would have difficulty in proving a case against them at trial.  Similarly some critics insinuate that a company may effectively buy their way out of criminal sanction, thus compounding the original wrongdoing.  However, this is not strictly true: there is a certain degree of merit in a company voluntarily advancing evidence of corruption to a prosecutorial authority in an effort to change company ethics.  It would prove illogical and unjust for a company to be punished for coming forward in this way.

The consent Civil Recovery Order is a viable remedy for companies which undergo a change of regime at executive level, whereby the ‘guiding mind and will of the company’ adopts an attitude of introspective self-examination.  Although the OECD is against the confidentiality of the settlements on the basis that one cannot assess whether the penalty has been effective, proportionate and dissuasive, it is nevertheless a cost effective resolution for both parties without suffering the uncertainty and reputational risk of criminal litigation.

What the OECD fail to take into account is that the facts at the heart of any settlement may involve third parties involved in criminality and who may already be the subject of investigation or pending prosecution by the SFO, Department of Justice or multilateral development banks.  By keeping the facts confidential, there is no danger of potential targets being tipped off and, more importantly, no basis for repercussions against a company for being a whistleblower.  The facts may also inadvertently reveal the company’s commercial strategies or internal business practices which would otherwise be kept secret from its competitors.  It so follows that unless the full facts can be disclosed, there is little point in disclosing the terms of the settlement because in any event, the proportionality of the fine cannot properly be assessed.

Criminal Settlements

Civil settlements are not to be confused with criminal settlements incorporating an undertaking to make an ‘ex gratia’ payment.  Such settlements are conditional upon agreeing a basis of plea to a criminal offence.  The settlement is then presented to a Judge for approval.  The argument against confidentiality may be stronger in the case of criminal settlements, bearing in mind that criminal proceedings are conducted for the most part in open Court.

A term of the BAE Systems settlement agreement was that any ex gratia payment to the Government of Tanzania would be less the amount payable in fines imposed by the English Courts.  On one level a condition such as this ties the hands of the Judiciary insofar as a Judge may be reluctant to divert ill-gotten funds from the humanitarian projects for which they were originally destined.  Some may argue that this renders the Judiciary somewhat impotent by fettering their ability to impose the unlimited financial penalties prescribed by Parliament.  Last month, the remaining £29.5m from the BAE Systems settlement was used to fund the purchase of textbooks and other equipment to furnish schools in Tanzania.  This sum can hardly be described as not being dissuasive, especially when the case may open up an avenue for independent and concomitant commercial sanctions such as debarment or even cross-debarment by multilateral development banks, which can lead to disastrous financial consequences.  Such sanctions are not subject to the principle of double jeopardy.

That said, there is also one potential disadvantage to companies in keeping settlements confidential: a company loses a valuable resource in promoting its zero tolerance attitude to corruption.  The publicity of such suits, while initially potentially damaging, is an excellent opportunity for companies to reinforce their clients’ confidence that they will not perpetuate corrupt practices by ordering internal investigations and introducing stringent corporate compliance programmes.

Bretton Woods Law is experienced in negotiating settlements with the SFO on behalf of corporate entities.  Should your company have a matter which may be eligible for self-referral, please get in touch with one of our Counsel for a consultation.  Please click here to find your nearest office.