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COVID-19 Brings Increased Scrutiny from Development Banks

Brian Whisler, Baker McKenzie, looks to camera. A man in a suit with a purple tie.
Brian Whisler, Partner, Baker McKenzie

The Multilateral Development Banks (MDBs) and other international financing institutions (IFIs) are preparing for the increased risk of fraud and corruption that will follow the release of significant emergency funds to combat the COVID-19 global pandemic and its effects. Companies operating in low- and middle-income countries should prepare for this increased risk by reviewing their compliance systems and ensuring they conform to the international standards set by MDB members in the Integrity Compliance Guidelines (ICGs). We anticipate that companies in the healthcare, public infrastructure, and extractive sectors as well as other companies that are associated with MDB-financed projects will be most affected.

Because most World Bank financing is indirect (i.e., it loans funds to a government which then has primary responsibility for managing the project), many companies fail to detect the World Bank-funded aspect of the contract and the attendant contractual compliance obligations. Therefore, it is imperative for companies operating in emerging and higher-risk markets to carefully scrutinize government contracts to understand the extent to which there may be financing from the World Bank or other MDBs.

The MDBs and other international financing institutions (IFIs) have rapidly identified and released substantial funding to combat the global pandemic.

The MDBs have made available significant emergency financing in order to combat the immense challenge to health, social, and economic systems brought on by the global COVID-19 pandemic.

The World Bank Group (WBG), for example, plans to deploy up to USD $160 billion by the end of June 2021 to support countries’ responses to COVID-19. The International Finance Corporation (the private sector arm of WBG) has allocated $47 billion in private sector support as its part of the World Bank Group’s response, and the Multilateral Investment Guarantee Agency (which offers guarantees to investors/lenders) has launched a $6.5 billion facility to support private sector investors and lenders.

Similarly, the African Development Bank (AfDB) launched $10 billion of additional financing to assist its regional member countries in fighting the pandemic. The Asian Development Bank (ADB) has also put together a $20 billion package to help ADB’s developing member countries counter the severe macroeconomic and health impacts caused by COVID-19. The Inter-American Development Bank (IDB) has also made billions in additional funding available to countries in the region, and newly-installed IDB President Claver-Carone has outlined plans for further capital increases up to $20 billion to aid in COVID-19 recovery.

These regional actions are in addition to the United Nations’ response to COVID-19, which included providing immediate liquidity relief to the private and financial sectors in the developing world. Moreover, the Global Fund to Fight AIDS, Tuberculosis, and Malaria has mobilized more than $1 billion of its resources to assist countries in combatting the pandemic, mitigate the impact on lifesaving HIV, tuberculosis and malaria programs, and prevent fragile health systems from being overwhelmed.

Complementing the resources of the MDBs, the International Monetary Fund (“IMF”) has deployed $280 billion of its $1 trillion lending capacity since March 2020.

Patrick Dennien looks to camera in a suit and purple tie.
Patrick Dennien, Associate, Baker McKenzie

The unprecedented size of these finance facilities and the speed at which funding was distributed is commensurate with the damage and long-term risk posed by the pandemic. There are immediate global needs with respect to strengthening health systems, disease surveillance, and public health interventions. Additionally, there are numerous projected and unknown long-terms risks relating to food insecurity, supply chain disruption, education displacement, and economic ruin that will persist despite the prospect of vaccines.

The MDBs and IFIs are acutely sensitive to the risks created by fast-tracking a significant amount of funding and are taking steps to protect their financing.

The MDBs are mindful that, with the rapid mobilization of such a large amount of funds comes the increased risk of fraud and corruption. The World Bank, in particular, has already indicated that health systems are vulnerable to corruption during the pandemic as MDBs and governments push out the increased funding. As a result, the MDBs are preparing for these risks. The World Bank, for example, has committed to increased integrity and compliance measures, including support to government procurement systems, increased transparency, and providing capacity building to government integrity systems.

MDB investigators and integrity chiefs are also well aware of the increased fraud and corruption risks, as well as the need for increased due diligence, risk assessment, and integrity and compliance capacity building.

As expected with the added scrutiny, there has been an uptick in sanctions actions brought by MDBs since the outbreak of COVID-19. According to the World Bank Group Sanction System Annual Report for FY20, more fraud cases have been opened, more firms and individuals have been suspended, and more sanctions imposed pursuant to settlement agreements in FY20 than in pre-COVID 2019.

The significantly increased amounts of loans to developing countries have created unprecedented risk of sanctions and debarment for companies availing themselves, directly or indirectly, of the benefits of such funding. Debarment, unlike a financial penalty, can have a more severe adverse effect on a company’s business, depriving it of bidding opportunities, and creating significant reputational damage. In most instances, one debarment begets another, as the MDBs/IFIs presumptively cross-debar where circumstances warrant it.

Furthermore, the World Bank and other MDBs often refer cases to national authorities, which creates additional perils for companies subject to sanctions by an MDB. In recent years, multiple companies subject to World Bank investigations found themselves subject to investigation by U.S. authorities, either in parallel or successive investigations.

Maria McMahon, a blonde woman in a blouse and jacket, smiles at the camera.
Maria McMahon, Knowledge Lawyer, Litigation & Government Enforcement, Baker McKenzie.

Realizing that its mission to provide funds to support economic recovery will not succeed if corruption is not tackled, the IMF included specific anti-corruption measures in its agreements with countries receiving COVID-19 financial assistance and debt relief. Such measures may include a requirement to publish names of companies awarded contracts; publish costs of procured products and services; validate delivery of products and services; publish beneficial ownership information of companies receiving COVID-19 procurement contracts; publish COVID-19 expenditure reports; conduct COVID-19 specific audit and publish results, among other measures. On December 1, 2020, IMF Managing Director Kristalina Georgieva, in her opening remarks at the 19th International Anti-Corruption Conference, discussed a four-pronged approach for ensuring that funds disbursed amid the crisis are going to their intended use, noting that: “It is especially important to zero in on corruption in the midst of this crisis—the worst health and economic crisis of our lifetimes.”

Companies should pro-actively respond in order to avoid potential scrutiny from MDBs/IFIs

Because of the significant funding pouring into the regions and influence by the MDBs and other IFIs, companies involved in bidding and executing on MDB/IFI-financed projects should be vigilant and properly prepare for a marked rise in enforcement and sanctions. We anticipate that much of the MDBs’ increased scrutiny will remain in place even after the world recovers from the crises brought on by the pandemic. Specifically, companies should expect:

  • an increased risk of fraud and corruption as a result of significant funds being pushed out to combat the pandemic;
  • more complex and invasive front-end project assessment and due diligence from the MDBs/IFIs aimed at protecting their investments; and,
  • heightened scrutiny from MDBs/IFIs procurement and investigation teams as they monitor and audit projects to ensure the funds are put to their intended use.

Companies should also evaluate and enhance their compliance systems surrounding their operations and supply chains in order to mitigate the increased risk of fraud and corruption during the pandemic. This will both increase the likelihood of successfully obtaining contracts funded by the MDBs/IFIs, and protect the company against legal liability arising from fraudulent or corrupt conduct.

Companies should familiarize themselves with ICGs

The Integrity Compliance Guidelines (ICGs) represent the framework used by the MDBs to assess a company’s compliance program. The ICGs set out 11 principles against which compliance programs are measured and cover the following elements:

  1. Clear and visible prohibition of all forms of misconduct.
  2. All levels of the company have responsibility for ethics and compliance.
  3. Suitable risk assessments that incorporate findings into compliance enhancements.
  4. Comprehensive set of internal policies designed to prevent, detect, investigate, and remediate misconduct.
  5. Appropriate policies and procedures designed to manage business partners and third parties.
  6. Effective set of internal controls, including financial systems, contractual obligations, and approval processes.
  7. Training and communication that ensures all employees understand their compliance obligations.
  8. Incentives to encourage compliance and disincentives to address misconduct.
  9. A full set of policies that manage reporting of misconduct, advice for ethical issues, whistleblowing, and certifying compliance.
  10. Procedures that remediate misconduct through appropriate investigation and response steps.
  11. A requirement that the company is involved in collective action at a community and industry level to reduce the threat of fraud and corruption.

The World Bank and the AfDB have formally adopted the ICGs and they continue to be an important reference point for the other MDBs. The UN and the Global Fund each have their own sanctions regimes each of which are substantially similar to those of the MDBs, all of which provide for severe sanctions in the form of debarment.

Key Takeaways

  • Be aware of the increased scrutiny and compliance measures that MDBs/IFIs have tied to procurements associated with measures addressing COVID-19.
  • Review and assess your company’s compliance systems against the ICGs, the international compliance program standards set by MDB members.
  • Take steps to strengthen your compliance systems, which will increase the likelihood of securing MDB-financed contracts and protect against exposure to fraud and corruption.

About the Author:

Brian Whisler is the partner in the North America Litigation and Government Enforcement Practice Group and a member of the Compliance and Investigations, Dispute Resolution and Global Health Care and Life Sciences Practice Groups.

Prior to joining Baker McKenzie, Brian served for fifteen years as a federal prosecutor with the US Department of Justice. During that time, he was the Criminal Chief Assistant US Attorney in the Eastern District of Virginia, Richmond, overseeing and prosecuting cases ranging from white collar crime, violent crime, public corruption, and terrorism. His trial practice focused predominantly on white collar cases, including health care fraud, securities fraud, public corruption, money laundering and tax fraud. He previously served as an Assistant US Attorney for the Western District of North Carolina for ten years.

Patrick Dennien is an associate in Baker McKenzie’s Litigation & Government Enforcement Practice Group in Washington, DC. Mr. Dennien represents domestic and international corporate clients on a wide variety of antitrust and white-collar crime matters, including merger review, cartel and anti-competitive investigations, consumer protection investigations, anti-corruption and fraud investigations, sanction systems of public international organizations, anti-money laundering risk, and internal controls and corporate compliance programs.

Prior to joining Baker McKenzie, Mr. Dennien worked at The World Bank’s Integrity Vice Presidency where he monitored and assessed compliance remediation by parties sanctioned by The World Bank. Mr. Dennien also advised sanctioned parties on the development and implementation of effective compliance programs.

Maria McMahon is the Knowledge Lawyer at the North America Litigation and Government Enforcement practice group. Maria has extensive experience in corporate transactions – including mergers & acquisitions, foreign direct investment, joint ventures, corporate governance, hostile takeover defense – and complex disputes. She also focuses on emerging markets, particularly Russia and the former Soviet Union. Ms. McMahon has represented oil and gas, freight forwarding, and defense companies.

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