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COUNTERING FRAUD AND CORRUPTION IN THE PROJECTS FINANCED BY MULTILATERAL DEVELOPMENT BANKS

By Duncan Smith, Deputy Head of Fraud Investigations at the European Investment Bank (EIB) and author of the volume "Promoting Integrity in the Work of International Organisations: Minimising Fraud and Corruption in Projects" (Springer, 2021). He writes this article in a personal capacity.


MDBs and other international organizations can minimize fraud, corruption, and other forms of misconduct that lead to the misuse of funds impacting the projects the MDBs have financed. This criminal misconduct may have serious impacts on the affected project and country, depriving them of desperately needed funding for development.


Introduction

Multilateral Development Banks (MDBs) are supranational institutions set up by sovereign states, which are their shareholders. Traditionally, the term MDB has referred to the World Bank[1], which operates at the global level, and other institutions acting at the regional level: the African Development Bank (AfDB)[2], the Asian Development Bank (ADB)[3], the European Investment Bank (EIB)[4], the European Bank for Reconstruction and Development (EBRD)[5], and the Inter-American Development Bank (IDB)[6].


Multilateral Development Banks and other international organizations (such as the European Commission, the Global Fund, United Nations International Children's Emergency Fund (UNICEF), United Nations Development Programme (UNDP), World Health Organisation (WHO), and World Food Programme (WFP)) provide essential funds to be used in development projects for countries in need of financial support. In such a context, the interaction of national, regional, and international systems can make it extremely challenging to minimize the misuse of funds.

Such a situation is even more complicated because some of the countries in which the projects have to be implemented have inadequate levels of law enforcement and deterrence against fraud, corruption, and other misconduct (such as bid-rigging or engaging in threatening behavior in order to obtain a large contract). These forms of misconduct are particularly harmful and cannot be considered “victimless” crimes. They could threaten the well-being of society and even cause death, for example, when the safety standards in the construction sector are not respected because of fraud or corruption so that a dam, a bridge, a school, or even a hospital may collapse.

Multi-level strategies to counter economic crime

Differently from ordinary financial institutions, the World Bank and the other MDBs lend money to states (borrowers) to allow them to carry out key development projects. In turn, the borrowing states implement those projects, which involve the purchase of goods, works, and services through their domestic public procurement systems.

The use of the funds by the borrower is normally specified in a legal agreement or contract signed by both parties (i.e., the MDB and the state) formally covering the types of support that are provided by the MDBs. There are also requirements and procedures to comply with in an MDB-financed project, such as standard procurement rules[7]; monitoring of the projects can also be important.

Nevertheless, the prevention and deterrent effect of these (and other) requirements that are routinely used do not exclude the possibility that the senior public officials who manage the project and potential corporate contractors/consultants may engage in fraud, corruption, collusion, money laundering and/or other illegal conduct. Such misconduct, if it goes unchecked can significantly impact the proper implementation and success of a project.

In addition to controls that international organizations can use in the implementation of the projects and the sanction systems that they may have developed (Manacorda), there are corporate and other safeguards, such as due diligence, compliance programs, whistleblowing, audits by external accountancy firms, participation in the UN Global Compact[8], and certification for ISO 37001 anti-bribery management systems[9]. All of these can reduce the likelihood of misconduct being undertaken by corporate entities.

Despite all these initiatives, it is always compelling to look for warning signs (“red flags”) of fraud and corruption in procurement processes, which can be an indicator that misconduct has occurred and should be addressed. MDBs and other international organizations can also conduct proactive reviews in high-risk projects based on available data, in some cases leading to a full review, analysis, and inspection of the places, processes, documentation, and financial data from the project. If gaps or weaknesses are identified (whether they have already led to fraud and corruption or could be exploited to enable such misconduct in the future), such reviews can lead not just to the uncovering of misconduct that was otherwise hidden but also to recommendations to be implemented to improve the borrower’s processes and reduce or eliminate weaknesses in its control systems.

Such reviews are known by different names at different MDBs. At EIB they are called Proactive Integrity Reviews[10]. These reviews may also identify instances of fraud and corruption that have already occurred leading to an investigation conducted by the involved MDBs, as well as possibly by local or other law enforcement authorities. Indeed, the criminal investigations undertaken by law enforcement agencies at the national level such as the UK’s Serious Fraud Office (SFO) or the US’s Department of Justice (DOJ) and the Federal Bureau of Investigation (FBI) may result in high-profile criminal investigations being carried out using tools such as search and seizure powers, arrest warrants, interviews under caution. The evidence and testimony from witnesses gathered in such an investigation if successful may lead to criminal trials and convictions of the responsible entities and individuals. It is also important to mention the work undertaken by the International Criminal Police Organization (INTERPOL)[11], European Public Prosecutor’s Office (EPPO)[12], European Union Agency for Law Enforcement Cooperation (EUROPOL)[13], and European Anti-Fraud Office (OLAF)[14] in fostering information sharing, promoting international cooperation in criminal matters, and enhancing the response of relevant national authorities so to maximize the chances of successful prosecution and asset recovery.

When evidence of fraud, corruption, or other misconduct is obtained during the MDB investigation, it is also likely that debarment, which in relation to EIB is known as “exclusion”, of the entity/entities and individual/individuals responsible will result. Indeed, some of the MDBs have signed the Cross Debarment Agreement and will mutually recognize the debarment decisions of other MDBs.

Conclusion

There are several ways to minimize fraud, corruption, and other forms of misconduct that can impact an MDB’s project and lead to the misuse of funds. Such criminal phenomena may have a serious impact on the affected country in that they deprive it of the funding it may desperately need for development or to prevent crises such as drought, starvation, or other adverse effects of climate change. The measures discussed above include: (i) the prevention and deterrence undertaken by the MDBs and international organizations that are financing the project; (ii) activities by the corporate entities involved in implementing the project including good compliance and due diligence processes; (iii) investigation and sanctioning by the financing MDB, as well as national law enforcement investigating; and (iv) pursuing other measures against criminal activity such as prosecution resulting in convictions and related freezing asset orders in terms of the money misused.

It is relevant to stress that the “sanctions” imposed by MDBs (e.g., fines or debarment) can be applied in parallel or in addition to criminal or administrative forms of punishment imposed by national authorities.

In such a scenario, where a corporation discovers such forms of misconduct, “self-reporting” becomes extremely important in order to mitigate its responsibility. In that regard, it is possible to look at the guidelines published by public enforcement agencies (e.g., the UK Serious Fraud Office[15] and the US Department of Justice[16]) as well as by international organizations and NGOs such as Transparency International[17], the Basel Institute on Governance[18], the B20 Collective Action[19], the Infrastructure Transparency Initiative (CoST)[20], The Stolen Asset Recovery Initiative (StAR)[21], and Government Transparency Initiative (GTI).[22]

References

Suggested citation Bluebook: Duncan Smith, Countering Fraud and Corruption in the Projects Financed by Multilateral Development Banks, CORPORATE CRIME OBSERVATORY, (Dec. 23, 2022), www.corporatecrime.co.uk/post/countering-fraud-corruption-mdbs


Harvard: Smith, D. (2022) Countering Fraud and Corruption in the Projects Financed by Multilateral Development Banks. Available at: www.corporatecrime.co.uk/post/countering-fraud-corruption-mdbs


OSCOLA: Duncan Smith ‘Countering Fraud and Corruption in the Projects Financed by Multilateral Development Banks’, (Corporate Crime Observatory, December 2022),<www.corporatecrime.co.uk/post/countering-fraud-corruption-mdbs>


Endnotes [1] www.worldbank.org/en/home [2] www.afdb.org/en [3] www.adb.org [4] www.eib.org [5] www.ebrd.com/home- [6] www.iadb.org/en [7] World Bank projects use standard bidding documents - https://www.worldbank.org/en/projects-operations/products-and-services/brief/procurement-new-framework ; EIB projects can use Covenants of Integrity as part of the bidding process, Annex 3 of the EIB Guide to Procurement - https://www.eib.org/attachments/strategies/guide_to_procurement_en.pdf [8] https://www.unglobalcompact.org/ [9] www.iso.org/iso-37001-anti-bribery-management.html [10] https://antifraud-knowledge-centre.ec.europa.eu/library-good-practices-and-case-studies/good-practices/proactive-integrity-reviews-pir_en [11] www.interpol.int/en [12] www.eppo.europa.eu/en [13] www.europol.europa.eu/ [14] www.anti-fraud.ec.europa.eu/index_en [15] www.sfo.gov.uk/publications/guidance-policy-and-protocols/ [16] www.justice.gov/criminal-fraud/file/838416/download [17] www.transparency.org.uk/sites/default/files/pdf/publications/Make%20it%20Count%20-%20Transparency%20International%20UK%20%28web%29.pdf [18] https://baselgovernance.org/ [19] https://collective-action.com/ [20] https://infrastructuretransparency.org/ [21] https://star.worldbank.org/ [22] https://www.transparency-initiative.org/



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