Monthly Archives

August 2014

The value of due diligence and publicising compliance efforts

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

When meeting a potential new business partner, quite often commercial urgency or excitement at having established a relationship with a high profile company can overtake more sober and practical thoughts of undertaking due diligence, which can often seem like a time-consuming and inconvenient necessity. You and your company will almost certainly not want to be surprised by news that your new joint venture partner’s subsidiary was previously debarred, or that there are clouds hanging over ‘that’ project, which you later learn was an open secret among all its employees…

Should a skeleton prove to have been lurking in the closet, of course it is not enough for the other party to say ‘but you never asked’. However, with an increasingly low threshold to establish administrative and even criminal responsibility following sanctionable practices such as fraud and corruption, the responsibility is essentially on you to show that you conducted all reasonable inquiries before forging a new business relationship. It is important to ask the right questions when conducting due diligence on contract partners, be they individuals or corporate entities, or you could risk reputational damage by association at the very least.

There are many methods of conducting due diligence inquiries into new business partners, but a good place to start is through open source intelligence. It need not be very costly and can often provide insight into a company beyond the official face that it projects to the public. Depending on how a relationship has come about, you may even ask mutual business acquaintances for a second opinion or if there is ‘anything you should know’.

It is becoming increasingly difficult to hide on the internet. Even if web pages are deleted or altered, traces can remain and be picked up by search engines, although this is becoming more complex with the advent of the ‘right to be forgotten’ now emerging in Europe. The proliferation of data via the internet can be a mixed blessing in business: while it can be more difficult for a company to make a clean start after a scandal when items are cached for years after the event, potential business partners are often glad of being provided with the full story behind the glossy corporate image so that the right questions may be asked as to how a company has improved its internal procedures to avoid repetition of such an event in the future. This can go towards establishing how a company reacts following negative experiences and applies lessons learned to adopt a more positive approach moving forward.

An increasingly globalised market means that there is a greater likelihood of trading with partners based overseas. For this reason, the website has effectively become the shop window of international commerce. It is therefore of paramount importance that there is as much information as possible about your company’s anti-corruption policy, integrity compliance program and whistle-blowing mechanisms, as a lack of such information can constitute a red flag in the mind of a prospective business partner, shareholder or other investor. A surprising number of large multinational companies do not feature the name of their compliance officer, or even make reference to having one, which raises the question in the mind of both consumers and potential trading partners as to whether or not one exists. Even where a compliance officer is featured, very often a website will not show a direct means of communicating with them, making it harder for third parties to raise matters of concern that they may have witnessed, such as a rogue employee offering or soliciting a payment. Websites that do not feature sufficient information about a company’s compliance strategy risk selling the company short and undermining confidence in its integrity efforts, thus losing valuable trade potential.

Jazz Omari is a direct-access qualified barrister at Bretton Woods Law. If your company could benefit from an integrity compliance health check, bespoke debarment avoidance training for employees or wishes to conduct an internal anti-corruption investigation, get in touch

The World Bank’s willingness to use ‘show-cause’ letters

By | Multilateral Development Banks, News | No Comments

One of the options open to the World Bank’s Integrity Vice Presidency (INT) when investigating sanctionable practices of fraud and corruption is the issuance of a ‘show-cause’ letter to the suspected company. The ‘show-cause’ letter may be the first the company knows of the interest of INT, the World Bank’s policeman, in the company’s dealings within a World Bank funded project and may come as something of a bolt from the blue.

The consequences of the ‘show cause’ letter can be profound and need handling with real care to avoid any inadvertent prejudice being caused. High on the list of responses to be avoided is to ignore the letter altogether since silence or non response is treated by INT as acceptance of the allegation and the described facts contained in the letter which may be misleading or wrong.

A ‘show cause’ letter is most likely to arise in cases where INT believes that it already has sufficient evidence in hand without the need to conduct further investigation of the company’s books and records. This may very well arise where evidence has been given up by a third party such as a joint venture partner, competitor or a national prosecution authority. The letter will ordinarily describe the evidence in INTs possession and make out the alleged sanctionable practice(s) committed but not serve the copies of the actual evidence relied upon. The letter will have a time limit for response and generally indicates a willingness of INT to enter into the option of a negotiated settlement. Any response to the letter should set out fully where it is disputed and articulate why it is in error. However, whenever it is appropriate a prompt admission to the ‘show-cause’ letter would undoubtedly be treated as mitigation and reduce the length of debarment or otherwise limit the penalty facing the company.

A recent review of the World Bank’s Sanctions Board Decisions and Notices of Uncontested Sanctions Proceedings issued by the Bank’s Evaluations Officer has revealed a consistent reliance on ‘show-cause’ letters by INT over the past three years. Neil Macaulay of Bretton Woods Law believes the use of show cause letters is likely to be even more widespread than just those referred to in these reports since the recently released Report of the World Bank Office of Suspension and Debarment reveals that 39 out of 224 debarments were the result of negotiated settlement agreements with INT which by their very nature are more likely to be cases which the evidence of wrongdoing is strongest and most amenable to the ‘show cause’ route.

In those cases where INT believes it is ‘highly likely to be successful’ it may also request Early Temporary Suspension and continue its investigation for up to one year before referring the investigation to the Office of Suspension and Debarment otherwise the suspension will subside. If you have received a show cause letter or notice of Early Temporary Suspension and would like advice on the steps you need to take please contact Neil Macaulay for urgent assistance.

View Report from The World Bank Office of Suspension and Debarment >

Curbing Illicit Financial Flows

By | News, Rule of Law | No Comments

Curbing Illicit Financial Flows from the African continent/U.S.-Africa Summit

African states and the U.S. agreed at their recent summit to establish a high-level working group to address the losses suffered by the African continent from illicit financial flows and corruption. African leaders demanded that the world’s richest nations strengthen their laws against money laundering, tax havens and tax evasion in order to tackle corruption and illicit flows from the African continent. G7 countries are creating opportunities for those who loot African countries. In many countries the volume
of financial outflows exceeds the inflows of aid due to corruption, money laundering and tax evasion.

Global Finance Integrity highlightes the role of the United States as a major facilitator of such outflows stating that the United States was the second easiest country in the world—after Kenya—for a kleptocrat to incorporate a shell company to launder ill-gotten-gains.

There was also a demand that the complex tax structures multinational corporations use to minimize their tax burdens be addressed.

At the summit it was also discussed to support African countries in negotiating fair natural resources contracts with multinationals through expert technical assistance. Many countries of the African continent although rich in natural resources are the poorest of the world. Getting such contracts right is key.

Immunity for Crimes Committed by African Heads of State

By | Corruption, Human Rights, News, Rule of Law, Uncategorized | No Comments

The BWL Rule of Law Team notes with ever increasing concern that at its Assembly in late June 2014 in Malabo, Equatorial Guinea, the African Union (“AU”) adopted the Protocol on Amendments to the Protocol on the Statute of the African Court of Justice and Human Rights (“the Second Protocol”) and called upon its member states to sign and ratify the treaty “as expeditiously as possible so as to enable [it] to enter into force.” [Click to see a copy of the relevant AU Decision] Readers will recall that the First Protocol for the establishment of the African Court of Justice and Human Rights (“the ACJHR”) was adopted by the AU in Sharm El-Sheikh, Egypt on 1st July 2008.

The ACJHR; the main purpose of which is to function as the principal judicial organ of the AU, is intended to have jurisdiction over both civil and criminal cases, including matters presently within the jurisdiction of the International Criminal Court (“ICC”) in The Hague, such as genocide, war crimes and crimes against humanity. But unlike the ICC, it is intended that the ACJHR will also have jurisdiction over transnational crimes, such as money-laundering, human and drug trafficking, terrorism and piracy. The difficulty is that the ACJHR’s constituent treaty, as adopted and advanced by the AU, contains a clause granting immunity from prosecution to sitting heads of state.

Like many others, members of the BWL Rule of Law Team are troubled by the existence of the immunity, for it undermines fundamentally the Rule of Law principle that ‘no one is above the law’ and that ‘all are accountable to the law,’ including those individuals who represent the State’s guiding mind and will. Lee Marler, the barrister who leads the BWL Rule of Law Team, is quoted as saying that “one cannot help but wonder whether the suggested immunity from ACJHR prosecution for African Heads of State – which is indefensible – is as a result of the ICC’s indictments of Sudan’s Omar al-Bashir and Kenya’s Uhuru Kenyatta.” Neil Macaulay, another senior member of the BWL Team, sees the merits of establishing the ACJHR, despite the overlapping jurisdiction of the ICC, but “is concerned that the existence of the immunity from prosecution will undermine from the very outset the Court’s credibility and may put international funding of the Court at risk.”

Steps to establish the ACJHR will not take place until 15 AU states have ratified the Court’s treaty. Until such time as the Court has the ability to prosecute all those responsible for atrocities and crimes within Africa, it is to be hoped that AU States will respect the Rule of Law and resist the AU’s call to ratify the treaty in its presently flawed state.

ONE-ON-ONE: Fraud Investigations by Multilateral Development Banks

By | Multilateral Development Banks, News, Uncategorized | No Comments

Lee Marler as featured in Risk and Compliance Magazine (JUL-SEP 2014):

Lee Marler is a barrister and Joint Head of Chambers at Bretton Woods Law and is a former Director of Operations at the World Bank Integrity Vice-Presidency. He has appeared before the Sanctions Board and has brokered Negotiated Resolution Agreements with the World Bank, immunity arrangements with the Asian Development Bank and is counsel to the African Development Bank’s Integrity and Anti-Corruption Department.

RC: Could you provide a brief overview of multilateral development bank (MDB)-financing? What trends and developments have you seen in recent years?

Marler: The MDBs, namely, the World Bank, the African Development Bank, the Asian Development Bank, the European Bank for Reconstruction and Development and the Inter-American Development Bank, provide billions of dollars each year in loans and donor funding to less-developed countries. International development companies worldwide, which provide numerous and diverse services, are able to compete for and bid on MDB-funded projects. Once the contract is awarded, the winning bidder is responsible for fulfilling the obligations under the MDB financed contract, which can range from IT systems in hospitals to agriculture projects and online tax systems for a developing country’s revenue department. But with this funding comes responsibility, and the MDB community is increasingly seeking to use its influence in the global anti-corruption fight. As such, companies that benefit from MDB funding effectively submit to their investigative jurisdiction and their ability to sanction for misconduct, such as corruption, fraud, collusion and coercion.


RC: To what extent have MDBs developed as major players in the international anti-corruption landscape? How has their role changed over the past 20 years?

Marler: Over the past 20 years, the MDBs have become major players on the international anti-corruption landscape. The power of debarment that these banks wield over contracting parties is such that they must be thought of as distinct jurisdictions in and of themselves. Indeed, the MDBs now run substantial and sophisticated anti-corruption departments that are charged with the responsibility for investigating and punishing allegations of corruption, fraud, coercion and collusion – the sanctionable practices – on bank-financed contracts. Yet these investigative departments – such as the Integrity Vice-Presidency of the World Bank – should not be viewed in isolation, for not only do they interact with each other, they also engage with the law enforcement agencies of their member states and regularly make criminal referrals in respect of matters that they have investigated. Indeed, this is a trend that can be seen with the African Development Bank, which, like the World Bank, now has an established and effective Integrity and Anti-Corruption Department (IACD) that works closely with such agencies as the United States’ SEC.


RC: What key features distinguish MDBs as a source of enforcement from more traditional enforcement mechanisms, such as the FCPA and UK Bribery Act? What mechanisms and strategies do MDBs tend to employ?

Marler: Perhaps the most significant difference between the anti-corruption departments of the multilateral development banks and the more traditional enforcement mechanisms is the sheer breadth of conduct that might constitute a sanctionable practice; linked to that is the considerably lower threshold for a finding of wrongdoing. Unlike many national bodies which look to criminal statutes and codes for definitions of offences, the MDBs themselves specify what constitutes a sanctionable practice. Almost without exception, companies that work on MDB-financed contracts completely underestimate the scope of the sanctionable practices and how strictly they are enforced. For example, most people think they understand what fraud is; yet few realise that a misrepresentation as to the qualifications on a consultant’s curriculum vitae, submitted as part of a bid, could be sufficient to render the entire company debarred from bidding on bank-financed contracts. What is more, not only is mens rea or ‘intention’ not required – since the banks take the view that this fraud can be committed recklessly – their standard of proof is substantially lower: there is no search for evidence to satisfy the decision-maker ‘beyond reasonable doubt’, but rather, the balance of probabilities will suffice. For the banks, the question is: is it more likely than not that a sanctionable practice has been committed?


RC: What are the potential risks and penalties for firms found guilty of fraudulent and corrupt practices while engaged in MDB-financed projects? What sanctions can MDBs impose?

Marler: To be blunt, the consequences for firms found guilty of sanctionable practices can be catastrophic and for a firm which relies on MDB-financed contracts, debarment by one MDB and cross-debarment by the others can spell the end of the company.The sanctions which may be imposed singly or in combination include, but are not limited to: debarment for a specified minimum period; debarment with conditional release or reinstatement; indefinite debarment; conditional non-debarment; letter of reprimand; and restitution or financial remedy. However, the stigma and reputational risk of debarment should not be underestimated, nor should the mischief that competitors can make out of such a sanction, to companies’ detriment. The periods of debarments handed down by the banks can run into years and it is likely that a company will then find its work in other areas under close scrutiny. Companies debarred and cross-debarred by the MDBs often see national aid agencies, such as DFID or USAID, walking away from them and refusing to allow them to benefit from projects they are financing.


RC: To what extent are MDB practices harmonised internationally? How does this heighten the risk of misconduct?

Marler: There has been a significant harmonisation in recent years of the practices of the anti-corruption departments of the MDBs, first by virtue of the adoption of unified guidelines for the investigation of fraud and corruption and, secondly, through the signing of the Agreement on Mutual Enforcement of Debarment Decisions, which set out the principle of cross-debarment, whereby the MDB community agrees to mutually enforce debarment actions of the other banks. Moreover, the MDBs have harmonised how they hold corporate structures culpable for sanctionable practices committed by, for example, subsidiaries. Recent years have seen the MDBs become much more litigious in protecting the funds they disburse and there has been a significant increase in the levels of cooperation between them. Intelligence sharing is prolific. The consequence is that the prospect of sanctions proceedings by the MDBs should not be underestimated by companies that undertake work on contracts funded by these lending organisations, for the consequences can be catastrophic.


RC: How has cross-debarment affected the behaviour of companies alleged to have engaged in corrupt practices?

Marler: Cross-debarment is automatically triggered when a company is debarred by one of the MDBs for a period in excess of a year: the effect is that all of the other MDBs also debar the company concerned in accordance with the decisions of the sanctioning bank. The advent of cross-debarment has upped the stakes considerably for companies that are alleged to have engaged in corrupt practices, since it can, quite literally, spell the end of the company or at very least radically change the way it operates. Companies must therefore be mindful that their conduct in respect of one MDB may impact on their ability to undertake work for another.


RC: What is the significance of the settlement mechanisms recently added to the MDB sanction process? What implications does this have for the way investigations will be resolved going forward?

Marler: The settlement mechanisms or ‘Negotiated Resolution Agreements’ (NRAs) within the MDB anti-corruption regime provide companies with the ability to minimise the commercial impact of findings of guilt in respect of santionable practices, whilst also offering them a constructive way to reform so as to prevent repetition of the misconduct in the future. NRAs equate, in effect, to prosecution agreements under which a company cooperates for a reduced sanction. Settlement can quite literally be fundamental to the survival of a company, but the terms can be onerous and it is vital in negotiating such a settlement to use specialist counsel and those with experience in the performance of companies’ obligations under such agreements, for non-compliance can render any agreement null and void. NRAs are likely to involve a review of the company’s books and records by an independent team of investigators, who will inspect the company for further evidence of wrongdoing. The company may benefit from immunity in respect of these, whilst the bank may benefit from essential intelligence.


RC: What advice can you offer to firms facing accusations of fraud and corrupt practices related to MDB financing, or of using fraudulent means to obtain MDB financing?

Marler: Just because the accusations are coming from an MDB does not mean that it is not significant or that it will just go away: the burden of proof within the MDB community is low and their reach considerable. Early action is the key to influencing the course of events and is much more likely to lead to settlement. The MDBs’ sanctions regimes are particularly esoteric and complex, so do not expect the lawyer who does your day-to-day business to be able to competently navigate the process: it is an area that requires the guidance of specialist counsel. Defending a company accused by the MDBs of engaging in sanctionable practices on MDB-financed contracts is not the same as representing a company charged by the SFO of DOJ. Different rules and considerations apply. Experience suggests that a failure to instruct experts all too often has the effect of doing more harm than good, so that when specialists are instructed further down the line, their effectiveness is hindered.



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