Participating in World Bank-financed projects presents significant opportunities for growth and expansion in developing markets, but there are some common (but avoidable) pitfalls that can result in enforcement action. Kirkland & Ellis attorneys spell them out and recommend compliance infrastructure.
The World Bank is a major investor in developing economies around the world. According to its 2018 annual report, the bank committed approximately $67 billion in funds from July 2017 to June 2018. And its investments are made across many industries, including everything from civil infrastructure (such as roads, highways, transportation systems, etc.) to healthcare (medicine, medical devices, clinics, etc.). Thus, given the sheer breadth and size of its investments, bank-financed projects present substantial opportunities for companies of all forms and types.
But the bank’s investments are often made in high-risk markets, where the risk of corruption or other improper conduct is significant. To that end, the bank has overseen increased enforcement activity through its Integrity Vice Presidency (INT), the bank’s independent body charged with investigating allegations of misconduct in bank-financed projects.
These investigations can result in sanctions from the World Bank—between 2007 and 2017, the World Bank sanctioned 489 firms and individuals. And the World Bank has shown no signs of slowing its enforcement activity —in the 2018 fiscal year, INT identified potential integrity risks in 390 projects (equivalent to $2.2 billion in project commitments) and started 379 preliminary investigations.
World Bank sanctions can have serious consequences. First, World Bank sanctions principally include debarment—often for over one year—from participating in projects financed by the World Bank and other developmental banks, such as the Inter-American Development Bank, the African Development Bank, the Asian Development Bank, and the European Bank for Reconstruction and Development. For many companies, this can be a major hit, as it effectively precludes a large revenue stream.
Second, World Bank sanctions can have a reputational effect. The World Bank’s blacklist (known as the “Listing of Ineligible Firms & Individuals”) is publicly available and searchable, thereby generating negative hits through the most basic of background checks. Moreover, resolutions with the World Bank are often publicized by the bank itself, which is another source of adverse publicity.
And while bank sanctions do not necessarily result in exclusion from participation in other government purchasing programs (such as the Centers for Medicare & Medicaid Services in the United States), the reputational effect can at least cause potential business partners to think twice before engaging with a sanctioned party or individual.
Finally, responding to World Bank enforcement inquiries and proceedings can involve extensive document and data collection and production, often from multiple locations around the world, as well as rounds of onsite witness interviews. The financial expense of these inquiries and the associated toll on the company and its employees can be significant. When added to the financial impact of debarment, the total cost to companies can be massive.
Key Procurement, Compliance Requirements
To avoid scrutiny from the World Bank’s INT group or to be the best position to quickly respond to any inquiries, it is important to understand and fully comply with the World Bank’s key procurement and compliance requirements, some of which are less than intuitive.
1. Compliance With World Bank Guidelines. As an initial matter, it is important to note that companies bidding on, implementing, or otherwise participating in bank-financed projects—from both a procurement and execution standpoint—are required to comply with certain obligations. At its core, these obligations include strict prohibitions on fraud, corruption, collusion, coercion, and obstruction of the World Bank’s investigation. Key principles from these prohibitions are discussed in greater detail below, but parties should note that, even if they are not a successful bidder, they can still be subject to investigation and sanctions by the World Bank for misconduct during the bidding process.
Specifically, when a party bids on a bank-financed project, the bid submission typically includes an agreement conferring audit rights to the bank, which in turn permits INT to request documents, interview personnel onsite at a company, and otherwise investigate a project or party. Additionally, this agreement often require bidders to also make any agents or other third parties available for audit.
Moreover, once a party is awarded a bank-financed contract, the party is expected to comply with certain procurement guidelines or regulations, depending on the nature of the contract. While key requirements are outlined below, it can be beneficial for successful bidders to review the applicable guidelines or regulations.
2. Avoiding Debarred Entities. Companies selected for participation in a bank-financed contract are expected to ensure that all of their engaged or proposed third parties have not been sanctioned by the World Bank, other multilateral development banks, or by other international financial institutions. This requirement is particularly important where a company is responsible for overseeing a large project requiring assistance from third parties, including local vendors and agents. In such situations, companies may consider conducting sufficient background checks on third parties prior to engagement, including a review of the third parties’ beneficial owners and affiliates. This requirement has been interpreted to apply to proposed third parties listed on any documentation provided to the World Bank, regardless of whether the company ultimately engages them.
3. Conflict Check and Disclosure. Another consideration for companies bidding on—or executing—bank-financed contracts is avoiding potential conflicts of interests. Specifically, companies are expected to avoid hiring employees, third parties, agents, or their affiliates that may have been involved in preparing or implementing the original request for proposal or the underlying bid specifications. Companies are also expected to ensure that none of their employees or third parties have a close business or family relationship with procurement authorities.
4. Complete and Accurate Representations. The World Bank can pursue sanctions against a party—including unsuccessful bidders—for engaging in fraud, which is defined as “any act or omission, including a misrepresentation, that knowingly or recklessly misleads, or attempts to mislead, a party to obtain a financial or other benefit or to avoid an obligation.” Fraud is the most common sanctionable practice—between 2007 and 2017, 81% of the cases and settlements brought by the World Bank involved at least one claim of fraud.
At its core, the bank’s prohibition on fraud requires fulsome and accurate disclosures in all submissions to procurement authorities, most critically including bid submissions. In our experience, the World Bank is particularly focused on companies’ disclosures relating to third parties. This includes identifying any local agents, suppliers, sub-contractors, or other parties that have been used—or will be used—in connection with the bid submission or contract execution. Parties are encouraged to broadly construe this requirement and err on the side of disclosure. And, as noted above, parties are expected to ensure that all disclosed third parties are conflict-free and are otherwise eligible to participate in bank-financed contracts.
Finally, many bid submissions require parties to disclose the payments being made to third parties. As such, companies are encouraged to ensure that third parties receive reasonable fees through legitimate channels and that all services are justifiable.
More broadly, companies may benefit from a careful review of bid submissions to ensure that all disclosures—including discussions of product specifications, employee credentials, the company’s experience, etc.—are accurate and not misleading.
5. Competitive Procurement Standards. Another sanctionable practice available to the World Bank is collusion, which is defined as “an arrangement between two or more parties designed to achieve an improper purpose, including to influence improperly the actions of another party.” Recent data shows an uptick in the number of World Bank cases and settlements involving collusive practices, from 5% in 2016 to 25% in 2018. The prohibition on collusion underscores the bank’s expectation that all bidders will prepare their bids independent from one another and without the undue advantage of confidential, non-public information, such as product specifications. Companies are similarly encouraged to ensure that all discussions with other bidders and procurement authorities (including anyone acting on behalf of the procurement authority) are fully transparent and avoid the appearance of improper influence of the selection process.
Importantly, as with fraud, the World Bank need not show that a company colluded successfully or otherwise secured the contract at issue—under the bank’s definition of collusion, the conduct simply needs to be designed to achieve an improper purpose.
While participating in World Bank-financed projects presents significant opportunities for growth and expansion in developing markets, there are some common (but avoidable) pitfalls that can result in enforcement action. Parties are encouraged to carefully consider the bank’s requirements—and ensure that the appropriate compliance infrastructure is in place—prior to bidding on bank-financed projects.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Kim Nemirow is a partner in Kirkland & Ellis LLP’s Chicago office with extensive experience advising multinational organizations and individuals in a wide variety of DOJ and SEC investigations, internal investigations, and compliance matters.
Abdus Samad Pardesi is a partner in the government and internal investigations practice group in the Chicago office of Kirkland & Ellis LLP. His practice focuses on anti-corruption compliance, employee fraud and international risk counseling.
Irene Martínez Saltó is a visiting attorney in the Chicago office of Kirkland & Ellis LLP. Her practice focuses on white collar defense, corporate compliance and investigations.