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

By 6th August 2014 January 9th, 2017 Multilateral Development Banks, News, Uncategorized

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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