The World Bank recently assessed a project relating to the funding of power stations in South Africa. The World Bank’s initial assessment appears to have cascaded from an SEC enforcement action with respect to Hitachi Ltd. According to Andrew Ceresney of the SEC’s enforcement division, and as reported in the FCPA Blog, “Hitachi’s lax internal control environment enabled its subsidiary to pay millions of dollars to a politically-connected front company for the ANC to win contracts with the South African government.”
While the World Bank’s assessment ultimately concluded that none of their funds were at risk since the contract was not financed with World Bank resources, international aid and finance institutions are not immune from corruption, nor do they operate in investigatory isolation. As Kara Brockmeyer, Chief of the SEC Enforcement Division’s FCPA Unit announced in the SEC press release, “We particularly appreciate the assistance we received from the African Development Bank’s Integrity and Anti-Corruption Department and hope this is the first in a series of collaborations.”
The corruption challenges which aid and development institutions face in their projects was something I addressed in a recent event hosted by The World Bank, Vice Presidency for Integrity (INT), on October 7th, 2015 titled “Why Break the Law: The Misuse of Public Assets and Development Resources.” As stated in the program, “Why are people tempted to corrupt decisions and how do they do it? Are there red flags to help identify things before they happen?”
The World Bank is tasked with the challenge of lending, developing, and policing, all to ensure that programs and funding are delivered those who need it most: the societies that are deprived of some of the most basic sustenance and infrastructure needs. . This is not just a banking and finance endeavor. Rather, as shared on the World Bank website, it is “a unique partnership to reduce poverty and support development,” and often in high-risk and low integrity regions.
And therein lies the challenge: the locales which are in desperate need of aid and financial support are often the one’s where governance is at its worst; thus, the need to carefully calibrate projects to address the hardships of the populous while staying fraud free from those who want to capture those funds for their own benefit.
Such dynamics presents The World Bank with an enormous challenge, as bribery and fraud (including collusion and coercion) distorts and dilutes the delivery of aid and development to the front lines of society. In other words, corruption in World Bank projects steals from the poor. While the World Bank has one of the most robust debarment regimes, which is respected and reciprocated by other development organizations, the conditions and environment in which corruption interferes with projects is a long way from the home offices where these programs are reviewed, funded and managed. It is the INT which is tasked with reducing fraud and corruption, in order to, as stated on their website, “ensure that Bank funds are used for their intended purposes: to alleviate poverty and increase prosperity and stability in our borrowing countries.”
But even with robust investigatory, audit, and compliance teams, the initiatives needed to keep projects corruption free confront tremendous peril, where implementation occurs among what might be a destructive mix of corrupt third parties, commercial entities, and public officials. It is at this ‘table’ where development agencies often ‘don’t have a seat’ and where well-intentioned projects can be derailed by corrupt commercial employees and public officials.
The World Bank has demonstrated an awareness of this risk at the evaluation and assessment stages, where teams review and analyze proposals that might be prone to foreign corruption and fraud through its Preventive Services Unit (PSU). The PSU, as stated on the World Bank website, works “in partnership with operational teams, turn(ing) the unique knowledge gained from INT investigations into practical measures that can deter or stop corruption in World Bank-financed projects.”
The ‘table’ is where I focused my discussion, including an exchange with Stephen Zimmermann (pictured), Director of Operations, INT, The World Bank, as well as with the audience. We talked about the commercial mindset of those on the front lines, and how corporate personnel, third parties, and government officials engage in corruption, addressing how legitimate projects can turn corrupt due to a number of well-hidden red-flags. Thus, we not only focused on potential red flags at a project’s evaluation stages, but also concentrated on corruption risks during implementation. I ‘drilled down’ into my own corrupt transactions as a discussion point for how attendees can shape their own initiatives and preventative measures to avoid such risk.
I also addressed my own experience with how investigators cooperate, where the UN Procurement Task Force, Chaired by Robert Appleton, shared the findings of his investigation with the Justice Department in 2007. We also discussed how real-world corruption risk remains strong, as the same Mr. Appleton recently focused upon when he wrote (link here) that in these high-risk regions, “the criminal laws of the vast majority of countries are not keeping pace with the expansion of global commerce.” Furthermore, he added that corruption risk is compounded in these regions where “there is also a lack of legislation addressing the problem, a lack of resources and, most importantly, a lack of will and energy to do so.” These are many of the same places where World Bank projects are needed most.
Thus, all the more reason to express my appreciation to the World Bank INT for their openness and willingness to bring the front lines of international commerce to their teams during the October 7th event, as a potential learning moment and a basis for discussion.
I recently asked Stephen Zimmermann about his impressions of the session, including our audience Q & A, and if he thought the event brought value to the work of his unit and team. He replied, “Richard, our work is to protect the integrity of the projects the World Bank finances. Corruption in a development context steals from the poor. Your personal and professional reflections from the front lines of international business raised awareness of how corruption actually arises and the consequences that result, especially to those societies who need our help the most. The Bank’s mandate is to support client countries in their efforts to end poverty but without simultaneously confronting corruption; our ability and that of client countries to achieve that goal is at risk. Thank you again for your frank and often emotional discussion and for putting us in the room where it happens.”