Multilateral Development Bank Sanctions and Reputation Defence

In March, the World Bank imposed a 21-month ban on three PWC firms in Mauritius, Kenya and Rwanda over misconduct on a cross-border Ethiopia–Kenya electricity project. The African Development Bank followed suit.

There are 1,381 sanctioned individuals and businesses in the World Bank sanctioned list alone, banned for fraud, corruption, collusion, coercion, or obstruction, or a mix of offences. Five multilateral development banks have similar lists: the World Bank Group, the African Development Bank, the Asian Development Bank, the European Bank for Reconstruction and Development, and the Inter-American Development Bank.

Under the 2010 Agreement for Mutual Enforcement of Debarment Decisions, a debarment by one for more than a year is recognised and enforced by the other four.

In other words, fall foul of one, and you fall foul of them all.

For a multi-national firm like PWC, local entities in the relevant states are usually punished rather than the entire worldwide group, although they can also be implicated where there is involvement, wilful blindness, or failure to supervise.

In any circumstance, however, the reputational damage is harder to contain. Readers are only likely to see ‘PWC sanctioned over corruption’, whatever the merits of the case.

Causes

Most findings are not for bribing an official. The problems often begin in ordinary tender documentation that few companies treat as a compliance risk until an integrity office opens a file. Findings are often for bid-stage paperwork problems: overstated experience, misrepresented qualifications of named personnel, undisclosed subconsultants, inflated past-performance claims.

Process

At the World Bank, the Integrity Vice Presidency investigates cases, the Office of Suspension and Debarment reviews the evidence and imposes sanctions where cases are uncontested, and the Sanctions Board hears appeals. The other four banks run comparable structures.

The danger lies in the broad net cast by MDBs, which has caught out the likes of Deutsche Bank, Ericsson, Alstom, Siemens, and Hitachi in the past.

For example, MDBs define fraud more widely than most companies realise. A misrepresentation that misleads a party to gain a benefit or avoid an obligation might be caught. In this instance, contractors are the obvious target. Less obvious are sponsors, co-investors, joint venture partners, subsidiaries and affiliates in the same corporate group.

Consequences

An association with bribery or fraud is hard to shift. It might trigger concerns among existing clients or partners, and for investors and sponsors doing M&A or joint venture work on MDB-financed pipelines, a review of these lists is standard due diligence.

The sanctions themselves can range from a letter of reprimand to permanent debarment. In between sit conditional release and conditional non-debarment, both built around compliance remediation.

Where the facts suggest breaches of domestic criminal law, MDBs refer to national authorities. Parallel exposure under the US Foreign Corrupt Practices Act, the UK Bribery Act or equivalents becomes live from the point of referral. For listed companies there is the further question of continuing disclosure obligations to market regulators.

Mitigation & Reputation Defence

Early engagement with the MDB, cooperation, and demonstrable compliance results in materially better outcomes. Reduced debarment periods, conditional release, and the preservation of commercial relationships elsewhere in the network are all in play.

In practice, settlement terms commonly include an internal investigation, discipline of responsible individuals, a structured review of other MDB-financed work in the company’s portfolio, and the appointment of an independent integrity monitor for the remediation period.

Updated sanctions procedures now also extend to successor entities, closing a previously popular route around debarment through corporate restructuring.

The nature of the public response depends on the business.

For the likes of PWC, containment is the objective. Acknowledge the findings and, if possible, stress the local nature of the incident. To move the story on, communicate clearly what internal action will be taken – new processes, for instance, or staff dismissals if appropriate.

The stakes are higher for the vast majority of entities currently listed. These are the joint ventures, contractors, and consultants – not global firms – that often deliver these projects and a debarment could be a major risk to the business. Communicating that the incident is isolated and that concrete steps have been taken internally is the way to reassure staff, clients, partners, and investors.

The banks have spent fifteen years building this regime. It is worth understanding it before a problem arrives and preparing accordingly.

Rhys Davies and Ben Keith are barristers at IHR Advisors, a joint practice specialising in acting for companies, sponsors, governments and individuals on MDB sanctions and related international enforcement work

Joe Riley is an Account Director at Sans Frontieres Associates.