Over the summer, the World Bank sanctioned three Chinese contractors and their affiliates for engaging in fraudulent practices in Bank-funded projects. These contractors join a list of more than 1200 contractors from 120 countries currently debarred from participating in Bank-funded projects.
The Bank, along with other multilateral development banks, is actively funding projects in Belt and Road countries and other developing nations. When extending funding, these banks require project participants, including owners, contractors, and subcontractors, to comply with integrity policies which prohibit, among other things, fraud and corruption in contracting. Contractors can run afoul integrity policies by, for example, making misrepresentations in bidding and project documents and engaging in corruption to win projects.
Debarment can be costly, both from a financial and reputational perspective. Debarred contractors are ineligible from participating in Bank-funded projects and from receiving Bank funds. Debarment can extend to parent, subsidiary, affiliate, and successor companies. More critically, it can also result in debarment and exclusion from projects funded by other multilateral development banks including the Asian Development Bank, the African Development Bank, the European Bank for Reconstruction and Development, the Inter-American Development Bank, and most recently the Asian Infrastructure Investment Bank (other MDBs).
The Bank’s sanctions proceedings, if pursued, can endure for one to two years, during which time a contractor may be temporarily debarred. There is also the expense of legal fees for attorney representation during these proceedings. Debarment and sanctions decisions are also publicly released. Not only may this create reputational concern for contractors, the sanctioned conduct may become known to other project funders and owners and may impact access to projects beyond those funded by the Bank and the other MDBs. Even worse, it may alert local regulators to potentially unlawful conduct and result in criminal and civil investigations and penalties.
Understanding the threat of sanctions and how the Bank’s sanctions system works is an important step to avoiding integrity policy violations and debarment. It also emphasizes the importance of having an effective compliance system in place to ensure, at all levels of the company, that projects are procured and performed fairly and lawfully.
I. Overview of the Bank’s integrity policies
The Bank’s integrity policies are incorporated in a number of sources including its Procurement Regulations which apply to the provision of goods, works, and non-consulting services funded by the Bank. The Bank requires all project participants to observe “the highest standard of ethics” and prohibits, among other things, fraud, corruption, collusion, coercion, and obstruction in the procurement, selection, and execution of Bank-funded projects.
If a contractor engages in any of these practices, the Bank may reject a proposal for an award (if the contract has not yet been awarded), may declare misprocurement and cancel the portion of Bank funds allocated to the contract (if the contract has already been awarded), and may sanction the contractor (including individuals involved in the misconduct) at any time.
II. Overview of the Bank’s sanctions program
If the Bank believes a violation of its integrity policies has occurred, its sanctions system is deployed. The Bank’s sanctions system involves two phases. In the first phase, investigators in the Bank’s Integrity Vice Presidency (INT) investigate allegations of sanctionable conduct. In the second phase, if the INT’s investigation substantiates the allegations, the case proceeds to two-tiered sanctions proceedings before the Office of Suspension and Debarment (OSD) and then the Sanctions Board. Sanctions may be imposed pursuant to a negotiated settlement agreement with the INT or as a consequence of formal sanctions proceedings.
The INT Investigation Phase - During the investigation stage, the INT collects evidence to determine whether sanctionable conduct has occurred. The INT may become aware of potential misconduct through a variety of sources. These include, for example, public reporting through the Bank’s website through which an employee, competitor, or other party can report potential misconduct, the sharing of information by the other MDBs, the sharing of information by law enforcement agencies, its own investigation into the concerned or other projects, and news and media reports.
If the INT believes there is sufficient evidence that sanctionable conduct “more likely than not” occurred, it will issue a letter to the respondent outlining the conduct identified and provide the respondent an opportunity to submit evidence that the alleged conduct did not occur. The INT will also offer the respondent an opportunity to cooperate and enter a settlement agreement with the Bank.
If the recommended sanction period for the alleged misconduct exceeds two years, the respondent may be temporarily debarred while the investigation is pending.
The Sanctions Proceedings Phase - If no settlement is reached and the INT pursues a sanction after its investigation is complete, the INT must submit a Statement of Accusations and Evidence (SAE) to the OSD. The OSD independently determines whether the SAE contains sufficient evidence of sanctionable conduct. Sufficient evidence will exist if the OSD determines that it is “more likely than not” that sanctionable conduct occurred. Data from the OSD reveals that 96% of all SAEs contained at least one allegation of sanctionable conduct that was substantiated.
If the OSD determines that the SAE is substantiated, the OSD will consider evidence of mitigating and aggravating factors, recommend a sanction, and send a Notice of Sanctions Proceedings to the respondent. The respondent has 30 days from receipt of the Notice to submit a written Explanation to the OSD. The OSD then has 30 days to reconsider the evidence presented and adjust the sanction if it deems necessary.
If the OSD recommends a sanction that includes debarment of at least six months, the respondent is temporarily debarred immediately upon receipt of the Notice.
Regardless of whether an Explanation is submitted, the respondent has 90 days from receipt of the Notice to submit a written Response to the Sanctions Board. If the respondent does not appeal to the Sanctions Board, then the OSD’s determination is deemed uncontested and has immediate effect. If the respondent appeals, then the INT and the respondent have an opportunity to present their cases through written submissions and, in some cases, oral hearings. The Sanctions Board is not bound by the OSD’s determination and may issue a lighter or harsher sanction than that recommend by the OSD.
Proceedings before the Sanctions Board can last one year or longer. During this period, the temporary suspension remains in place. The Sanctions Board may however consider time served when imposing a final sanction. The Sanctions Board’s decision is final, not appealable, and has immediate effect.
The Range of Possible Sanctions - There are five sanctions that may be imposed: debarment, debarment with conditional release, conditional non-debarment, public letter of reprimand, and restitution.
“Debarment” means the respondent is debarred for a certain period of time, after which it is released from debarment without any conditions. In egregious cases, a contractor may be permanently debarred.
“Debarment with conditional release” is the default sanction applied by the Bank. If this sanction is imposed, a respondent is debarred for a certain period of time and is not released at the end of that period until it fulfils certain conditions, usually the implementation of an effective compliance program, to the Bank’s satisfaction.
“Conditional non-debarment” means the respondent will not be debarred if it complies with certain defined conditions to the Bank’s satisfaction.
“Letter of reprimand” may apply in cases where debarment is not proportionate to the misconduct. In these cases, the Bank will issue a letter of reprimand to the respondent.
“Restitution” to the borrower or any other party or other actions to remedy the harm done by a respondent’s misconduct may also be ordered.
When determining the appropriate sanction, the Bank will consider mitigating or aggravating factors. Mitigating factors may include (i) the respondent’s minor role in the conduct; (ii) voluntary corrective action; (iii) conducting an internal investigation; (iv) removal of responsible employees; (v) implementation of and improvements to a compliance program; (vi) cooperation with the INT (including during the INT’s investigation and admission or acceptance of guilt or responsibility); and (vii) voluntary restraint from bidding on Bank-funded tenders pending the outcome of the investigation. Aggravating factors may include (i) the severity of the misconduct; (ii) the harm caused; (iii) interference with the INT's investigation; and (iv) a history of adjudicated misconduct.
The Implications of Sanctions – If a respondent is sanctioned, its name and a brief description of the grounds for the sanction is published on the Bank’s website. If the respondent is debarred, it will not be eligible (i) to be awarded or otherwise benefit (financially or in any other manner) from Bank-funded contracts; (ii) to be a nominated sub-contractor, consultant, manufacturer or supplier, or service provider of a firm awarded a Bank-funded contract; or (iii) to receive the proceeds of any loan made by the Bank or otherwise to participate in any Bank-funded project. If a respondent is debarred while a Bank-funded project is pending, there is a mechanism in place to permit it to complete the Project and receive Bank funds for doing so, subject to certain limitations and heightened monitoring by the Bank.
According to a 2010 agreement between the Bank and four of the other MDBs, if the respondent is debarred for more than one year, debarment extends to the other MDBs, absent exceptional circumstances. The Asian Infrastructure Investment Bank is not yet a party to the 2010 agreement but has agreed to enforce (and has already enforced) debarment decisions by the Bank and the other MDBs.
Debarment may also extend to the respondent’s parent, subsidiary, and affiliate companies, as well its successors and assigns. This is intended to avoid the circumvention of sanctions through the use of non-sanctioned companies directly or indirectly controlled by the respondent.
The Bank is transparent about its integrity policies and sanctions system. More information is available on the Bank’s website.
III. Chinese contractors have been at the forefront of the Bank’s most recent debarments.
On 19 July 2018, the Bank announced the debarment of two Chinese contractors for fraudulent practices during their participation in an energy efficiency project in Shandong Province, China. According to the Bank, the contractors and their subcontractors falsified documents to certify completion of certain parts of the project to trigger advance payments. The contractors also misrepresented that one of them performed two project subcontracts when actually the subcontracts were performed by another contractor.
Less than two weeks later, on 1 August 2018, the Bank announced the debarment of another Chinese company for fraudulent practices involving its participation in an urban transport project in Hubei Province, China. According to the Bank, the contractor falsified a certificate related to equipment it hoped to supply for the project to imply that requirements for the tender were met.
All three companies entered negotiated settlement agreements with the Bank pursuant to which they agreed to accept responsibility for the sanctioned conduct. Consequently, in the first case, the two contractors and 30 of their affiliates were debarred from participating in Bank-funded projects for minimum periods of two to four years. At the end of the minimum periods, the contractors and their affiliates will be released if they have cooperated with the INT, developed internal compliance programs to the Bank’s satisfaction, and complied with the other terms of their settlement agreements. In the second case, the contractor was debarred for a fixed period of 15 months. There are no conditions to its release from debarment.
These contractors join a total of 88 Chinese contractors (including purely domestic contractors and domestic subsidiaries of well-known multinational contractors) currently debarred from Bank-funded projects. They are not alone. Contractors from a long list of other countries have also been debarred, with Canada (127), the US (55), the UK (51), India (46), Peru (47), Indonesia (38), Bolivia (37), Germany (36), and Guatemala (36) leading the pack in terms of number of debarments. A list of the nearly 1250 Bank-debarred firms and individuals is available at: http://web.worldbank.org/external/default/main?theSitePK=84266&contentMDK=64069844&menuPK=116730&pagePK=64148989&piPK=64148984
IV. Concluding remarks
The consequences of Bank sanctions proceedings are serious. Once the Bank’s sanctions system has been deployed, there is a material risk that a sanction will be imposed. Debarment will often extend to the other MDBs as well as the contractor’s affiliated companies. These institutions have significant lending power and are financing sought-after projects in Belt and Road countries. Exclusion from these projects can have significant implications.
The Bank has an established practice of sharing information with the other MDBs and national law enforcement agencies, particularly when there are allegations of corruption. Integrity policy violations can thus not only result in Bank sanctions but may also create exposure to criminal or civil liability. Contractors should also be mindful of the implications of sanctions and debarment on their contracts with other project participants, including those with local governments, project owners, borrowers, subcontractors, and joint venture partners.
For contractors venturing out along the Belt and Road, it will be essential to have robust compliance systems in place. These systems should incorporate policies and controls that mandate integrity in bidding, procurement, and contracting, ensure the accuracy of documents and statements submitted in support of the project, and prohibit corruption and bribery, among other things. An effective compliance system is the first step in preventing misconduct. It will also be essential to any settlement arrangement with the INT or any condition for release from debarment should misconduct nonetheless occur.
