World Bank sanctions: Is India Inc prepared?

By Kunal Gupta, Cyril Amarchand Mangaldas
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The World Bank has long been known as the premier multilateral development bank, extending large credit facilities to countries to foster development in infrastructure, health, education, etc. However, recent evidence suggests that the World Bank now may also be one of the most aggressive international regulators of corruption and fraud.

Kunal Gupta Partner Cyril Amarchand Mangaldas
Kunal Gupta
Partner
Cyril Amarchand Mangaldas

Under the anti-corruption programme of the World Bank Group, companies or individuals found by the bank’s Sanction Board to be engaged in fraud and corruption in World Bank Group-financed projects may be sanctioned by the bank. The legal basis for such sanction arises out of the “fiduciary duty” to protect the use of World Bank financing, set out in its articles of agreement. Once an entity is sanctioned by the bank, the sanctioned entity will be prohibited from bidding for any contract financed by the bank.

By way of example, 26 companies in India have been sanctioned by bank since 1999, including nine in 2016.

Sanctionable practices under the bank’s guidelines include corrupt practice, fraudulent practice, collusive practice or/and coercive practice undertaken by an individual or a company. This may also include engaging in an “obstructive practice” in connection with an investigation by the World Bank Group’s integrity vice presidency or the exercise of the bank’s inspection and audit rights.

Sanction proceedings undertaken by the bank are two-tiered. First, an evaluation and suspension officer (EO) reviews the statement of accusations and evidence against the respondent and gives a final determination on the statement. If the respondent contests the EO’s final determination, a second tier de novo review of the statement is undertaken by the Sanction Board consisting of three World Bank and four non-World Bank staff, and a decision is given on the statement.

The decisions are based on the exercise of the discretion of the EO or Sanction Board, as the case may be, guided by the non-prescriptive sanctioning guidelines, which provide for five possible sanctions: (i) reprimand; (ii) conditional non-debarment; (iii) debarment; (iv) debarment with conditional release; and (v) restitution or remedy.

It is important to note that the sanctions procedures provide that affiliates/successors/assigns of the respondents may also be sanctioned under such sanction orders, subject to certain conditions. Another significant feature of the sanctions regime is early temporary sanction, which may be imposed prior to commencement of a formal sanctions proceeding.

As reflected in Sanctions Board precedents, the board considers the totality of the circumstances and all potential aggravating and mitigating factors to determine an appropriate sanction. Aggravating factors may include (i) the severity of the misconduct, (ii) the complexity of the misconduct, (iii) the number of sanctionable practices committed by the respondent besides past history of misconduct, (iv) any interference with the investigation, etc.

The World Bank’s sanction regime also provides for a negotiated resolution agreement (NRA), by which sanctions may be imposed on the respondent through negotiated resolution of the case. Typically, an NRA involves the appointment of a monitor, and an independent investigation to identify any other World Bank-financed projects that the bank may wish to investigate further.

A significant step in ensuring that a company is protected from a likely bank sanction is to ensure that the entity has a robust compliance programme that (1) ensures a comprehensive risk assessment, (2) includes internal policies to prevent, detect, investigate and remediate all forms of misconduct, (3) maintains effective internal controls (4) ensures training to relevant staff, and (5) encourages all its business partners to adopt an equivalent commitment towards misconduct.

Another option for a company or an individual is to join World Bank’s voluntary disclosure programme. Under this programme, which is unique to the bank, a party that accepts a request to join the programme is under an obligation to disclose all sanctionable activity undertaken by it during any ongoing or previous World Bank-financed projects and to carry out an internal investigation and submit the results to the bank.

However, it is important to note here that there are no standard internal controls and compliance programmes. Even the choice of sanction is not a mechanistic determination, but rather a case-by-case analysis tailored to the specific facts and circumstances presented in each case. These may vary on a case-to-case basis depending on various factors including, among others, the size and nature of the entity, jurisdiction of its operations and the laws of the land.

Cyril Amarchand Mangaldas is India’s largest full-service law firm. Kunal Gupta is a partner at the firm.

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