The Bank’s sanctions process was first formulated in a paper presented to the Executive Directors in July 1996 and implemented in a January 1998 Operational Memorandum. The original process included a Sanctions Committee, composed of senior Bank staff, which reviewed allegations of fraud and corruption by bidders, contractors, suppliers and consultants in IBRD-financed projects and recommended an appropriate sanction to the President of the Bank, who took the final decision on any sanction, usually a debarment but, in cases of minor misconduct, a letter of reprimand.
Since then, the Bank has periodically made incremental improvements to the sanctions process to address various ‘loopholes’ that had been discovered in the system, and to otherwise increase its efficiency and effectiveness.
The first major step was the establishment of the Integrity Department (INT) in 2001 with a mandate to investigate allegations of fraud and corruption in Bank-financed projects and present its findings to the Sanctions Committee. Prior to INT’s establishment, allegations had been investigated by a variety of means, including by outside law firms, internal auditors (IAD), and a Corruption and Fraud Investigations Unit (CFIU). A review by a panel led by former UN Under-Secretary General and US Attorney General, Mr. Dick Thornburgh, in 2000 found that the Bank’s anti-corruption efforts would be better served by consolidating the Bank’s investigatory responsibility within a single department.
The Thornburgh panel was again commissioned in 2002 (cf. Report Concerning the Debarment Processes of the World Bank) to review the sanctions process, resulting in a major overhaul of the process in 2004 which established the basic two-tiered structure that still operates today. It was at this point that a first tier review by the Evaluation and Suspension Officer (EO) was introduced, to allow for the relatively quick disposition of cases. The EO was also authorized to impose temporary suspensions, which under the procedures later adopted, took place 90 days after the commencement of formal proceedings. The Sanctions Committee was replaced with an autonomous Sanctions Board including a majority of external members, which would take final decisions in sanctions cases, in order to enhance the credibility of the process and help insulate it from political pressures. The 2004 reforms also included the expansion of possible sanctions to include the current range of different sanctions, albeit under guidance later developed by Management, the ‘baseline’ or default sanction was ‘plain vanilla’ debarment. Also in July 2004, the Board approved (in principle) the adoption of a Voluntary Disclosure Program (VDP) to provide incentives for cooperation with Bank investigators.
Also in 2004, the Procurement and Consultant Guidelines were amended in 2004 to update the definitions relating to fraud and corruption and to increase the Bank’s access to bid and contract documentation through the so-called ‘third party audit clause’.
In the following year, the sanctions process was expanded to include the Bank’s private sector operations in MIGA and IFC, as well as Bank partial risk guarantee operations (see below). Similar procedures were adopted for these entities, with adjustments appropriate to their different business models, in particular separate EOs with more expansive standards of review and the appointment of alternate members of the Sanctions Board to hear cases relating to private sector operations. However, the new sanctions process, for both IBRD/IDA and private sector cases, was only implemented in 2006, in tandem with a number of further reforms to the process.
Meanwhile, work began to address a significant lingering loophole in the regime. While the early emphasis on Bank financed procurement may have been justified by the particular vulnerability of public procurement to fraud and corruption, experience had shown that fraud and corruption could also occur outside procurement, for example, in the case of implementing agencies such as NGOs or financial intermediaries which are identified in the course of project design rather than selected through procurement. At the same time, there was a growing realization that anti-corruption efforts would be far more effective if undertaken in collaboration with the Bank’s partners. As a result, the Bank had begun to work with other multilateral development banks (MDBs) to harmonize approaches to fraud and corruption in projects, culminating with the formation of an International Financial Institution (IFI) Task Force in February 2006, which developed a uniform framework for preventing and combating fraud and corruption, including harmonized definitions for corrupt, fraudulent, collusive and coercive practices.
These efforts bore fruit in 2006, when further improvements to the sanctions regime were proposed by Management and approved by the Executive Directors, including (1) the expansion of the sanctions regime beyond procurement to cover more generally fraud and corruption that may occur in connection with the use of Bank financing in the preparation and/or implementation of Bank-financed projects through, among other things, the adoption of new IFI Task Force harmonized definitions; and (2) adoption by the Bank of "obstructive practice" as a separate sanctionable offense, covering both non-compliance with the Bank’s third-party audit rights and deliberate obstruction of Bank investigations into fraud and corruption. Also in 2006, the Bank rolled out the detailed programmatic elements of the VDP based on a number of pilots that had been undertaken under the authorization in the 2004 Board Paper.
Along with the foregoing changes to the sanctions process, a number of reforms were made to the legal framework for Bank operations as part of the 2006 Reforms. Most importantly, the Bank introduced Anti-Corruption Guidelines which, like the Procurement and Consultant Guidelines, are incorporated by reference into the Bank’s legal agreements. The Anti-Corruption Guidelines set out the newly harmonized definitions, as well as a set of undertakings by the Borrower and other recipients of Bank funds aimed at preventing and combating fraud and corruption in connection with the use of such funds. The Guidelines also established the Bank’s right to sanction firms and individuals found to have engaged in any fraud and corruption in connection with the use of loan proceeds, not only in connection with procurement. The Procurement and Consultant Guidelines were concurrently amended to include the harmonized definitions and the General Conditions were amended to add additional ‘contractual remedies’ relating to fraud and corruption, including the right to suspend disbursements in the event that fraud and corruption occurs without timely and appropriate action being taken to address the situation.
More recently, a panel led by former US Federal Reserve Chair, Mr. Paul Volcker, recommended in September 2007, and Management adopted in January 2008, a number of measures to strengthen INT and the Bank’s approach to anti-corruption more generally. Among these were the proposals that INT be upgraded to a Vice Presidency, which was implemented in 2008. The Volcker panel also recommended that the Chair of the Sanctions Board (and of any panel thereof) should be one of its external members, in order to enhance the effectiveness and perceived independence of the sanctions process. A separate note implementing that change was circulated to the Executive Directors and approved by them on an absence of objection basis.
While the current sanctions process was authorized by the Executive Directors in 2004 and its legal framework finalized in 2006, the process only began operations in earnest in the spring of 2007. As the various actors in the system, in particular the Office of Suspension and Evaluation (OES) and the Integrity Vice Presidency (INT), as well as the Legal Vice Presidency (LEG), which advises both offices—gained experience with the new process, it quickly became obvious that much still remained to be worked out. The procedures proved to contain a number of ambiguities on some key points and the internal guidance materials soon proved too generic to be truly useful, particularly in determining appropriate sanctions and in dealing with corporate groups and changes in corporate form.
At the same time, experience had also shown that there were inefficiencies and lingering vulnerabilities that undermined the effectiveness of the system, both at the ‘front end’ (e.g. firms under investigation remain eligible to bid for Bank financed contracts) and at the ‘back end’ (e.g., sanctioned firms were normally released from debarment without any demonstration of rehabilitation). The drive for greater efficiency also led the Bank to consider and then pilot negotiated resolutions to sanctions cases (aka settlements) in lieu of full-blown sanctions proceedings. Finally, momentum was building for greater transparency and accountability in the system, which led to calls for publication of Sanctions Board decisions and, later, to calls for publication of the determinations of the Evaluation and Suspension Officer (EO) as well.
Early Temporary Suspension
The first reform proposal, discussed with the Audit Committee in April 2009 and adopted by Management in May 2009, allows INT, in exceptional cases, to request that the EO impose a temporary suspension on the subject of an INT investigation prior to the commencement of formal sanctions proceedings, if INT believes it has sufficient evidence that the subject has engaged in at least one sanctionable practice.
The Bank Group faced fiduciary and reputational risks when it had credible evidence that a firm or individual had engaged in fraud and corruption and the firm or individual remained eligible to bid on Bank Group-financed projects up until the time it is formally sanctioned by the Bank Group. Before the adoption of the Early Temporary Suspension (ETS) tool, those risks had been partially addressed by the introduction of temporary suspension in the Sanctions Procedures as part of the 2004 reforms, but temporary suspension occurred only after formal proceedings commenced, leaving a ‘window’ of vulnerability between the time that evidence was uncovered and the time that a suspension could be imposed—a period that could be considerable, up to many months or over a year, since INT still needed to complete its investigation (often including inquiries into related allegations) and subsequently prepare a proposed Notice of Sanctions Proceedings for submission to the relevant EO. Given the open eligibility for IBRD/IDA-financed procurement, in particular, the Bank needed a formal mechanism to remove such firms and individuals from eligibility during this ‘window’ of vulnerability. In the absence of this mechanism, task teams were faced with severe challenges in finding ways to mitigate the risks that the Bank faces, leading at times to delays in processing projects.
Application of the Sanctions Regime to Partial Credit Risk Guarantees (PCG)
Although the most frequently utilized Bank Group guarantee instrument is the partial risk guarantee, the Bank Group also offers PCGs. There are specific sanctions regimes applicable in respect of Bank Group loans and the Bank Group’s partial risk guarantees, but neither of those sanctions regimes had been expressed to apply in the context of PCGs. The Bank therefore extended the scope of application of the sanctions regime to PCGs in October 2009.
A number of further improvements and refinements to the sanctions process were discussed with the Audit Committee in April and July 2009, and again in May 2010, and then adopted by Management, effective as of September 15, 2010. These included adoption of debarment with conditional release as the ‘baseline’ sanction, enhanced internal guidance on dealing with corporate groups and restructurings, updated sanctioning guidelines, introduction of a formal mechanism for the negotiated resolution of sanctions cases (aka settlements), a mechanism for the removal of Sanctions Board members and a new Code of Conduct, and a series of ‘tweaks’ to the procedures to remove various ambiguities, inefficiencies and vulnerabilities. Also in 2010, the Bank concluded a major agreement with other multilateral development banks (MDBs) on ‘cross-debarment’.
Debarment with Conditional Release as the ‘Baseline’ Sanction
As mentioned above, the 2004 reforms introduced a range of sanctions besides ‘plain vanilla’ debarment, including debarment with release conditioned on the fulfillment of certain conditions, notably improvements in corporate governance. The 2004 Board Paper proposed that respondents subject to this sanction “would be declared ineligible for a stated period of time, but would only become eligible again after the period if it had complied with the conditions of release.”
Under the Sanctioning Guidelines adopted by Management in 2006, the ‘baseline’ sanction to be imposed for any sanctionable practice was debarment for a stated period of time. Under this sanction, the Bank Group has no discretion as to whether sanctioned firms may become eligible again for Bank Group-financed contracts once they ‘serve their time’, and often no way of determining whether they have actually been rehabilitated or will simply continue to engage in fraud and corruption. At the same time, debarment with conditional release had been modified so that fulfillment of the conditions was optional for the debarred party, leading to a reduction in the initial debarment period rather than being a sine qua non for release. This left the Bank Group and Borrowers alike with considerable residual fiduciary and reputational risk. This state of affairs led Bank Group staff to examine ways to increase the effectiveness of the sanctions process in achieving its primary purpose—safeguarding Bank Group funds—by devising a mechanism to provide the Bank Group with better assurance of rehabilitation before firms are let back into the system.
After discussions with the Audit Committee in July 2009 and again in May 2010, Management adopted debarment with conditional release, rather than ‘plain vanilla’ debarment, as the baseline sanction for sanctions. And debarment with conditional release was revised to reflect the original 2002 Thornburgh recommendation and the 2004 Board Paper, whereby the debarred party would be required to meet certain conditions before it would be released, after a certain minimum period of time. The purpose of this change in the baseline sanction is not to debar companies for a longer period of time or indefinitely, but to place greater emphasis on rehabilitation, encouraging sanctioned firms to adopt adequate, effective policies and measures that make it less likely that they will engage in such misconduct again.
Between its first discussion with the Audit Committee in April 2009 and further discussion in May 2010, Management developed detailed guidance on the principal conditions for release, which focus on the debarred party demonstrating that it has in place, and has implemented for an adequate period, an integrity compliance program satisfactory to the World Bank Group. Bank Group staff engaged in extensive consultations with both public and private sector stakeholders, and extensively studied international best practice models including the 2010 OECD Good Practice Guidance on Internal Controls, Ethics, and Compliance, in developing integrity compliance guidelines for the World Bank Group against which its compliance programs would be evaluated.
Enhanced Guidance on Corporate Groups
Also in 2010, Management adopted enhanced guidance in two key areas: more detailed guidance on dealing with corporate groups and restructurings, and more granular—but still flexible—sanctioning guidelines. The Sanctions Procedures had included the ability to sanction certain affiliates of the Respondent (i.e., those controlling and those controlled by the Respondent) since 2001. This ability helps guard against circumvention of Bank Group sanctions through the use of affiliates or changes in corporate forms. Some guidance had been developed at the time with criteria for applying sanctions to affiliates as well as to successors and assigns, but the guidance was relatively ‘thin’, leading to uncertainty when issues had arisen, for example in a case involving the appropriate application of sanctions after a complex corporate restructuring.
Updated Sanctioning Guidelines
The update of the Sanctioning Guidelines had the three main objectives of providing: (1) greater predictability for both the decision makers and the potential parties to sanctions proceedings; (2) greater clarity about the basis of sanctions decisions to MDBs and other institutions participating in mutual recognition of sanctions (a.k.a. ‘cross-debarment’) with the Bank Group (see below); and (3) guidance and flexibility to INT in negotiating agreed resolutions of sanctions cases. As a secondary objective, these Guidelines may also serve as a benchmark for further harmonization of sanctions policies and practices with other MDBs. The updated Sanctioning Guidelines, unlike the previous version, are made public to further these objectives.
The current formal mechanism for the negotiated resolution of sanctions cases was also introduced in 2010. Negotiated resolutions such as plea bargaining or settlement agreements are a near universal feature of civil, administrative and criminal procedure across legal systems as a useful means to enhance efficiency by resolving disputes using less time and fewer resources while providing certainty of outcome for the parties, but were missing as a formal part of the Bank Group sanctions process. Prior to this amendment, the Bank had already resolved two major sanctions cases through negotiation with actual or potential Respondents, but settlements will be more efficient and add more value now that they will operate within a clear, formalized framework.
New Code of Conduct and Removal of Sanction Board Members
The Sanctions Board Statute was amended to fill a rather obvious ‘loophole’ by introducing a mechanism for the removal of Sanctions Board members in the case where they may have become incapacitated, violated their duties under the Conflict of Interest Guidelines or otherwise engaged in serious misconduct that negatively affects their ability to serve, the credibility of the sanctions process or the reputation of the Bank. At the same time, the ability to remove Sanctions Board members was carefully delimited and properly checked and balanced, to avoid undermining the independence of the Board.
The 2009-2010 reforms also corrected a number of ambiguities, inefficiencies and vulnerabilities in the process through relatively minor ‘tweaks’ to the Sanctions Procedures and related practices. These included (i) the adoption of several new practices to strengthen the confidentiality of sanctions proceedings, including the limited redaction of certain types of information from pleadings and evidence, in camera review of certain evidence, and an explicit obligation for the parties to keep proceedings confidential; (ii) elimination of voluntary restraint in lieu of listing temporarily suspended Respondents on Client Connection; (iii) making temporary suspension automatic, applicable across the Bank Group upon issuance of a Notice of Sanction Proceedings by the relevant EO, (iv) formal rules on delivery (including so-called ‘constructive delivery’ in cases where Respondents cannot be located after reasonable attempts to do so); (v) allowing the EO to modify his/her recommended sanction in light of an Explanation from the Respondent; (vi) eliminating the ‘rubber stamp’ of EO recommendations by the Sanctions Board in cases where the Respondent does not contest; and, finally, (vii) various ‘quick fixes’ to clarify some ambiguities in the drafting of the procedures.
In April 2010, the Bank Group and four other major MDBs signed an agreement for mutual enforcement of debarment decisions. This agreement provided that each MDB would inform each other of their debarments of over one year and, subject to an exceptional ‘opt out’ for legal or policy considerations, would enforce each other’s debarments. The agreement dramatically increased the effectiveness of each MDB’s debarments by multiplying their effect on debarred parties. To date, the Bank and two other MDBs have indicated that they have taken the necessary steps to make the agreement effective to their operations.
At the request of the World Bank’s Audit Committee, the Legal Vice Presidency conducted the first phase of a review of the World Bank Group sanctions system, which focused on the various reforms that have been implemented since the newly configured sanctions process began operations in 2007, the impact of the regime on Bank operations, and the legal adequacy of the system in light of current developments in national and international law. The second phase will address the larger, first-principles issues of the overall efficiency and effectiveness of the system—i.e., whether the system as a whole is meeting its objectives of excluding corrupt actors and deterring fraud and corruption in Bank Group operations, at an appropriate cost to the Bank Group. A preliminary Phase I report was discussed with the World Bank Audit Committee in March 2013 in executive session. The review team’s main findings and recommendations may be found here.