Regional Development Banks Come of Age as Global Enforcers

A contract award for a project funded by a multilateral development bank (MDB) can often be a lucrative opportunity for a company to expand its footprint in emerging economies. Yet, for a company that is alleged to have violated one of many MDB integrity rules, such an award can present risks with devastating collateral consequences. For example, if one MDB decides to sanction an entity with debarment for a period over one year, that entity will face automatic cross-debarment by the other MDBs pursuant to the MDB Agreement for Mutual Enforcement of Debarment Decisions. 

In addition to deeming the entity ineligible to participate in new contract awards financed by the MDBs, the Banks may also reject variations and extensions to existing contracts involving the entity. In short, an entity debarred by one MDB for allegations regarding one contract could face the loss of a wide variety of business opportunities because it is deemed ineligible to participate in any MDB-funded contracts around the world.[1] As the MDBs provide over $160bn in annual funding for development projects, the potential lost opportunities could be significant. 

Cross-debarment, however, is only one part of this sad story. Perhaps more significantly, a debarred entity is also likely to face difficult questions from private clients and financial institutions, which may similarly decline to do business with an entity debarred by one or all of the MDBs. It is common for companies seeking financing or otherwise dealing with commercial counterparties to be asked to respond to due diligence questionnaires that seek information regarding not only prior criminal proceedings but also sanctions imposed by MDBs and international organizations. If such private counterparties consider the potential integrity risk associated with an MDB debarment too great, they may simply decline to do business with the debarred entity although legally permitted to do so. Such decisions could deprive the entity of access to countless billions in current and future transactions in the private sector – in addition to the losses directly associated with the MDB debarment itself and related cross-debarments.

With MDBs becoming more active in enforcing integrity obligations under the contracts that they finance, it is increasingly critical that companies are aware of the enforcement risks when conducting business around the world and how to mitigate them.

Enforcement on the Rise

In recent years, MDBs have developed more sophisticated sanctions systems by ramping up investigative resources and expertise. The World Bank routinely penalizes fraud, corruption, and similar misconduct during projects that it finances, often by debarring companies and individuals from access to over $98bn in annual project funding. Following that example, regional MDBs have emerged as active enforcers, investigating and sanctioning corporate misconduct regarding activities they finance, potentially blocking access to a further $65bn in annual project funding. It is revealing that, in the 2021 fiscal year, the World Bank imposed a record-high 92 cross-debarments following debarment determinations by other MDBs, pursuant to the MDB Agreement for Mutual Enforcement of Debarment Decisions.

To illustrate the significance of these developments, this post highlights current and emerging enforcement trends among the leading regional MDBs – the Asian Development Bank (ADB), the Inter-American Development Bank (IDB), the African Development Bank (AfDB), and the European Bank for Reconstruction and Development (EBRD) – and provides certain risk mitigation strategies for global companies to consider when participating in MDB-financed activities.

Asian Development Bank

The ADB funds $32bn in annual projects across 26 countries in the Asia-Pacific region. The Office of Anticorruption and Integrity (OAI) investigates potential misconduct in connection with projects and can recommend the imposition of sanctions based on its findings.

In 2020, the OAI received a record 375 complaints, completed 76 external investigations, and identified misconduct in 78 percent of those investigations. The ADB subsequently debarred 120 firms and individuals – more than any other MDB for the period. The typical debarment ranged from two to five years, with most cases involving allegations of fraud, corruption, and/or collusion. OAI data for 2021 indicates a similar trend; from February until November 2021, the ADB debarred 98 firms and individuals. For example, in June 2021, it debarred the lead firm in a joint venture for five years after finding fraudulent statements in tender submissions.

Looking ahead: in the coming year, the ADB will partly focus on the COVID-19 response. John Versantvoort, the OAI Head, has noted “opportunities for misuse of funds, money laundering, and other integrity violations” in COVID-19 projects, including vaccine distribution programs. As part of this response, the OAI has also launched a series of “proactive integrity reviews” into COVID-19-related projects.

Inter-American Development Bank

The IDB funds $14bn in annual projects across 48 countries in the Latin America and Caribbean region. The Office of Institutional Integrity (OII) takes a “360-degree approach to integrity” that includes prevention, risk management, and enforcement. When integrity concerns arise, it investigates and, if warranted, seeks penalties from the Sanctions Office.

The OII reported that in 2020, it received 92 complaints, completed 33 investigations, and substantiated allegations in 79 percent of those investigations. It focused 85 percent of its active investigations on “high impact” cases involving allegations of corruption, collusion, significant financial fraud, or misconduct by agency personnel. The IDB subsequently imposed 47 debarments on firms and individuals, 22 of which were five years or longer, including one that will last for 13 years. In 2021, it imposed 46 debarments, 15 of which were five years or longer, including two debarments that will last for 14 years.

Looking ahead: the IDB has also indicated that it will focus on integrity risks during COVID-19-related projects. Laura Profeta, the OII Chief, has warned, “[d]uring crises [like COVID-19], the risk of fraud and corruption increases, as lending, procurement processes, and financial transactions are expedited to make resources more readily available in a timely manner.”

African Development Bank

The AfDB funds $7bn in annual projects across 54 African countries and 26 non-African countries. The Office of Integrity and Anti-Corruption (PIAC) investigates and, when it identifies misconduct, transmits the findings to the Sanctions Office for penalties.

While the current AfDB sanctions system has been in place for just ten years, the PIAC has developed an active investigations program and has reported that it completed a record 62 investigations in 2020. The AfDB debarred 13 firms in 2020, resulting in 49 total debarments on affiliated firms and individuals that ranged from one to three years. In 2021, available AfDB debarment statistics indicate greater enforcement activity, with reported debarments involving 80 affiliated firms and individuals with debarment periods ranging from 18 to 36 months.

Looking ahead: Paula Santos Da Costa, the Acting PIAC Director, has emphasized in public statements that the AfDB will continue to pursue a zero-tolerance policy toward corruption, bolstered by “preventative and curative” strategies. In addition to COVID-19 projects, it is likely the PIAC will continue to target projects in the energy, water, and agriculture sectors, which have been the focus of more than half of PIAC’s recent investigations.

European Bank for Reconstruction and Development

The EBRD funds over $12bn in annual projects across 39 countries in Europe, Asia, and Africa. The Office of the Chief Compliance Officer (OCCO) investigates misconduct allegations and the Enforcement Commission imposes sanctions. The EBRD also works alongside the European Investment Bank, which has adopted a similar sanctions system.

Although the EBRD investigates comparatively fewer misconduct cases, it has increased its profile in recent years. In an illustrative case from 2019, the EBRD imposed a six-year debarment on a Swedish firm in connection with allegations of corrupt payments to government officials, as part of a joint investigation with the UK Serious Fraud Office. In 2020, the OCCO received 43 new complaints, and it referred four to the Enforcement Commissioner and one to national authorities. The EBRD subsequently imposed four debarments, with each lasting for three years. In 2021, the EBRD imposed two additional debarments, reflecting some of the challenges for monitoring companies during the COVID‑19 pandemic.

Looking ahead: the EBRD has signaled increased desire to identify proactively misconduct in the coming year. The EBRD introduced a new whistleblowing policy in 2020 and has started to receive reports for review and further inquiry. The Bank has also created a “Project Integrity” prevention unit to identify potential issues at the project approval stage rather than post-contract execution. Amid COVID-19 conditions, Lisa Rosen, who recently departed as Chief Compliance Officer, similarly urged companies to proactively remediate compliance “gaps” and get ahead of potential issues.

Looking Forward: Risk Mitigation Strategies 

As regional MDBs continue to develop their investigative resources and expertise, companies operating in developing regions should carefully consider the potential enforcement risks associated with contractual obligations in connection with MDB-financed activities. More than ever before, potential misconduct involving an isolated project can have devastating and reverberating consequences, depriving companies of access to more than $160bn in annual MDB projects and countless billions in private transactions.

MDB investigations are premised on contractual obligations, but when an MDB identifies potential legal violations, it may also refer the matter to national authorities for criminal prosecution and/or additional civil or regulatory penalties against the entity, relevant employees, or third parties. Indeed, certain MDBs have already collaborated with national enforcement authorities, by conducting parallel investigations when resolving cases involving, for example, significant allegations of fraud and corruption.

This is an important juncture for global companies to consider risk mitigation strategies, which could include the following:

• Confirm whether projects in developing regions involve MDB funding:  this may not always be obvious in government-issued tenders. In such projects, companies should check whether their existing integrity compliance programs align with MDB-established best practices and expectations pursuant to the relevant MDB’s procurement and integrity rules.
• Consider additional employee training: tailored training to address MDB policies can help reinforce the importance of proper preparation of bid and contract documentation, including communications with the relevant MDB and executing agency personnel regarding MDB-financed activities.
• Review project specifications and instructions carefully: take care when preparing and submitting bids, as the MDBs have, to date, generated most sanctions through investigations into fraudulent practices, such as defective certifications and other omissions and misrepresentations in bid documentation.
• Be mindful of third party risk: scrutinize the actions of local agents, subcontractors and partners, whose misconduct could be attributed to the entity itself depending upon the factual circumstances.
• Consider adopting internal procedures to respond to MDB investigative requests: such requests can often originate as “audits” pursuant to the relevant contract. When responding, seek guidance from legal personnel to protect the company’s rights and comply with applicable laws (eg data privacy). There may also be opportunities for counsel to engage early with MDB investigative offices when responding to audit or investigative requests and cooperating in the conduct of the review itself. Negotiated resolutions are possible, but each MDB has implemented its own policies and processes regarding an entity’s ability to commence settlement negotiations.
• Understand the areas of focus for enforcement: keep in mind that regional MDBs will likely devote greater attention to COVID-19 related projects in the coming year. Given the urgency of pandemic funding, MDBs are eager to ensure that expedited procedures did not create opportunities for fraud and corruption.

Freshfields will continue to monitor MDB developments in its Risk and Compliance publications.

This is the seventh in our 2022 Global Enforcement Outlook blog series, which looks at key enforcement and investigations trends. All other blogs in the series will be made available here.

[1]      Indeed, certain international financial institutions, such as the Millennium Challenge Corporation, have established a de-facto cross debarment policy whereby an entity debarred by an MDB will also be declared ineligible to be awarded a new contract funded by such institutions, even though they are not signatories to the MDB Agreement for Mutual Enforcement of Debarment Decisions.