When the World Bank investigates and sanctions a major corporation for corruption related to one of its project, the deterrent impact is readily apparent. However, not every case the World Bank investigates is a major corruption case. In the past year, the World Bank Integrity Vice Presidency (INT) received many complaints related to fraud, and it is important to demonstrate responsiveness to complainants who report credible allegations as well as fix the weaknesses identified. Sanctioning cases of fraud also sends a strong message about abiding by high integrity standards in World Bank-financed projects.
Left unchecked, fraud erodes development effectiveness. It often coincides with poor project implementation, which can result in collapsing infrastructure or the distribution of counterfeit drugs. It causes costly delays and can lead to direct financial losses for countries which cannot afford it. Fraud also fosters a negative enabling environment, creating opportunities for more serious and systemic misconduct to occur.
Of the fraud cases submitted for sanctions by the World Bank in FY14, 18% were implementation fraud which includes instances of overbilling or auditors who falsely certified work completion. The remaining cases involved companies that were not qualified to win contracts so they resorted to falsifying key bid or proposal documents to hide their lack of experience or financial insolvency.
Four of the Bank’s substantiated cases in FY14 involved falsified or misused bank guarantees. In one investigation, a construction company that had won a $3.1 million contract as part of a larger water infrastructure project abandoned the worksite. Over three years, more than 85% of the funds had been disbursed but no component was complete, with some components only 10% finished. The government implementation entity tried to cash the performance bank guarantee provided by the construction company only to discover it was fake. In such situations, governments can open their own investigation or attempt judicial liquidation, but both forms of redress require additional time and money.
Using the patterns of misconduct identified in fraud cases, the World Bank helps to empower client country officials to conduct better due diligence and identify unqualified bidders. These training efforts are paying off. More than 70% of the fraud cases investigated in FY14 were referred to the World Bank’s Integrity Vice Presidency by project implementation units and government officials in client countries. Implementation agencies and government officials are able to identify – and stop – problematic bidders while also leveraging the World Bank’s global sanctions mechanisms to exclude unethical bidders from their procurement. In certain countries, the World Bank’s sanctions system may be the best form of recourse against unethical bidders.
Yet, how can the World Bank address fraud when sanctions are not an option? The World Bank has limited recourse when government officials engage in misconduct related to projects it finances. In extreme cases such as the Padma Bridge project, the Bank’s actions can lead to the cancellation of a loan. In other instances, the Bank refers its investigative findings to national authorities relying on them to launch their own investigations and prosecute criminal action as appropriate. The amount of time required to investigate, the political will, the capability to investigate and prosecute at the national level are all factors that cause responses to vary greatly by country.
In the meantime, the World Bank task teams are often left in the lurch. Projects that are already underway need to get back on track, and any projects in the pipeline present elevated risks. Close collaboration, flexibility and creativity between investigators, prevention specialists and project teams are essential. Getting to the accident before it happens becomes critical to development effectiveness. As investigators uncover leads, one case can lead to another, building an awareness of how fraud and corrupt schemes operate in a particular sector or country. This information is invaluable for collaboration with government and corporate counterparts. Companies operating in vulnerable sectors may look into their own business practices and make disclosures which spawn further cases.
Information culled from investigations can also lead to changes in how the World Bank operates. Drawing from investigative findings, 49 projects during FY14 had precautions built into them as well as in country strategic action plans, portfolio reviews and lending instruments like the Program for Results. In FY14, 15 contracts valued at approximately $25 million were not awarded as the wrongdoing was discovered prior to the contract award, in most cases as a result of due diligence done by the country’s project implementation agency or the World Bank staff. An additional eight contracts valued at $20.3 million were awarded but later revoked or funded with non-Bank funds after the wrongdoing was uncovered.
Prevention in tandem with investigations pays off. Our investment in technology and data-driven solutions is proving very effective. Recent technological upgrades are offering alerts to World Bank staff about high risk projects. The World Bank’s Data Dive team has been working on reverse engineering successful INT cases. Preliminary results are promising in the detection of patterns and trends of misconduct. Checklists continue to be a low-cost, methodical way to also lift out potential issues before they become problems. Another important factor in effective prevention is having sound reporting mechanisms and an environment in which people feel empowered to share potential problems, buy different sources free from reprisal. Most of INT’s investigations are opened as a result of complaints reported to the Bank.
Maintaining the integrity of development projects calls for an integrated toolkit that combines investigative and preventive skills and resources. The ultimate reward is in helping our clients in the public and private sectors achieve their development objectives armed with preventive solutions, investigative capabilities and incentives effective for change.
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Photograph of Leonard F. McCarthy, Integrity Vice President, by Simone D. McCourtie via World Bank Photo Collection
Photograph of Panama Canal expansion project by Gerardo Pesantez via World Bank Photo Collection