Integrity due diligence: How much do we need to know?

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Corruption greatly undermines government effectiveness.

The World Bank’s “zero tolerance” policy on corruption makes clear how thieves and embezzlers will be dealt with, if they are discovered. But what about before corruption actually occurs—how should the Bank go about preventing fraud and corruption in the first place?

The divide between prevention and enforcement shapes the World Bank’s fight against corruption in ways both subtle and profound. Enforcement is easier to conceptualize; it is tangible. Someone commits fraud or corruption, by siphoning Bank funds away from their intended purpose.  When the Office of Suspension and Debarment slams a company with a sanction, we can quantify the effect.

Prevention, on the other hand, is a slippery idea. It evades definition. Quantifying how much fraud a policy prevents relies on counterfactuals, making it far more difficult to pin down. This means, for better or for worse, innovations and efforts towards the prevention perspective may lag behind enforcement.

That said, multilateral development banks do not lack options, should they decide to push a prevention agenda. One tool, already commonplace in private sector lending, is known as Integrity Due Diligence—or IDD, for short.

IDD refers to investigating the integrity risk posed by stakeholders in projects, deals and other joint enterprises. Essentially, the goal is to determine the likelihood that an enterprise will suffer fraud or corruption.  It is a particularly interesting tool because, by varying the breadth or the depth of the practice, IDD can take a great variety of forms.

Breadth refers to the stakeholders subject to IDD scrutiny. Should we look at all of the contractors? Or just the major ones? Should we investigate the borrowing country’s line ministry? What about the NGOs helping with project implementation?

Depth, unsurprisingly, refers to the rigor of investigation for a given stakeholder. On one end of the spectrum lies a quick Google search along with cross-referencing names against the major sanctions lists; on the other, uncovering the ultimate beneficial ownership of corporations, interviewing people who have interacted with the stakeholder in the past, analyzing corporate structure for irregularities, and more.

But is all the time and energy that could be spent on IDD really worth it? How much do we really need to know?

Cynics might argue that the very purpose of the World Bank is to make loans in the riskiest parts of the world. Of course there is risk, goes the argument, yet we accept it and move ahead anyway.

For the most part, the cynic’s argument is generally true. However, there are three critical reasons that justify taking the time and effort with IDD to understand a project’s particular integrity risks.

First, even if the Bank expects to lose a certain amount of funding on a particular project due to corruption, task teams can plan the project more effectively  by taking the potential loss into account from the outset rather than being surprised  later when funds inevitably disappear.

Second, TTLs can only attempt to mitigate integrity risk when they understand it. That is, some contractual provisions or project structures may serve to prevent corruption in certain instances. The implementing team may also decide that avoiding one contractor in particular will mitigate a large degree of risk. But if we don’t know where the risks lie, we don’t know when to use mitigating mechanisms.

Finally, understanding integrity risk gives the Bank the option to choose relatively less risky projects in a given area. Between two projects of otherwise equal potential, the less risky one would theoretically be preferable.

Without a doubt, knowledge of integrity risk has value. Evaluating whether that value outweighs the cost, however, is a separate question—one that the Bank must confront in years to come. 

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