The World Bank’s Sanctions System: Using Debarment to Combat Fraud and Corruption in International Development

Abstract

This chapter presents the main features of the World Bank Group’s sanctions system and considers its contribution to global efforts to promote good governance. It first introduces the basic features of the World Bank Group’s sanctions system, an administrative law system that has evolved since its inception in 1996. The chapter then briefly reviews the history of that evolution and considers where the system stands today. The chapter also considers the broader international context in which the system was established and continues to operate and concludes by examining some of the lessons learned over the course of the system’s 20-year evolution. * Pascale Hélène Dubois, Vice President, World Bank Group Integrity Vice Presidency, [email protected]. † J. David Fielder, Manager, World Bank Group Integrity Vice Presidency, [email protected]. ‡ Robert Delonis, Senior Litigation Specialist, World Bank Group Integrity Vice Presidency, [email protected]. § Frank Fariello, Lead Counsel, World Bank Legal Vice Presidency, [email protected]. ** Kathleen Peters, Senior Legal Consultant, World Bank Group Integrity Vice Presidency, [email protected]. †† The authors wish to thank Sheherezade C. Malik, Consultant, World Bank Legal Vice Presidency; Corinne Champilou, Legal Analyst, World Bank Group Integrity Vice Presidency; Lisa Miller, Integrity Compliance Officer, World Bank Group Integrity Vice Presidency; and Arjun Ponnambalam, Senior Consultant, World Bank Group Integrity Vice Presidency, for their invaluable assistance and contributions in the preparation of this article. The World Bank’s Sanctions System: Using Debarment to Combat Fraud and Corruption in Int’l Development 130 1. A SHORT HISTORY OF ANTI-CORRUPTION DEVELOPMENTS IN THE INTERNATIONAL CONTEXT The World Bank Group’s (WBG)1 sanctions system grew out of its operational procurement framework, and its evolution has been shaped by the broader international fight against corruption. It would seem now intuitively obvious that the ability to exclude corrupt actors from WBG-financed development activities would be a logical, and perhaps essential, measure to ensure the proper use of WBG funds. But the sanctions system was not an original, or even early, part of the WBG’s fiduciary toolkit. The Articles of Agreement establishing the International Bank for Reconstruction and Development (IBRD)—which, together with the International Development Association, is referred to as the “World Bank” (Bank)—date from 1945, when the Bank was created under the Bretton Woods Agreement to help rebuild Europe after the Second World War.2 The WBG sanctions system, on the other hand, dates only from 1996, nearly 50 years later.3 What brought about this change in approach? In part, the establishment of the sanctions system was a reaction to contemporaneous changes in anti-corruption laws, norms and practices at the national level. The first legal instrument to support this change, the US Foreign Corrupt Practices Act (FCPA), had been enacted some 20 years prior, in 1977.4 But it was not until the 1990s and 2000s that the FCPA began to be robustly enforced.5 Early enforcement efforts were tempered by the US Department of Justice’s (DOJ) concerns that strong enforcement of the Act could potentially harm US relations with its allies.6 Since the early 2000s, acknowledging that corruption “is a hugely destabilizing force,” the DOJ has moved toward more vigorous FCPA enforcement, and has increased the severity of the penalties imposed for violations. 7 Since the mid-2000s, enforcement by the US Securities and Exchange Commission (SEC) has also become more muscular, with the creation of a specialized unit within its Enforcement Division that investigates potential FCPA violations.8 A change in attitude on the part of firms, governments and public opinion helped accelerate a move towards the criminalization of foreign bribery. Before this change, it had been generally accepted—indeed often expected—for firms to pay bribes to secure public contracts abroad. In fact, in many countries bribes were a tax-deductible business expense.9 1 The WBG consists of the International Bank for Reconstruction and Development (IBRD), International Development Association (IDA), International Finance Corporation (IFC) and Multilateral Investment Guarantee Agency (MIGA). The International Centre for the Settlement of Investment Disputes (ICSID) is also a part of the WBG, but its operations are not covered by the sanctions system. 2 International Bank for Reconstruction and Development Articles of Agreement (IBRD Articles of Agreement) (as amended effective 27 June 2012) arts I & IX, s 3. 3 World Bank, “World Bank Sanctions Regime: An Overview” accessed 19 April 2018; see Dick Thornburgh, Ronald Gainer & Cuyler Walker, “Report Concerning the Debarment Processes of the World Bank” (14 August 2002) (“Thornburgh Report”) 10–12. 4 Foreign Corrupt Practices Act of 1977 (as amended 15 U.S.C. ss. 78dd-1, et seq). 5 See Stanford Law School, “Foreign Corrupt Practices Act Clearinghouse, A Collaboration with Sullivan & Cromwell LLP: DOJ and SEC Enforcement Actions” accessed 17 January 2018 (providing a chart of the FCPA’s enforcement history from 1977 to the present); see also Tov Krever, “Curbing Corruption? The Efficacy of the Foreign Corrupt Practices Act” (2007) 33 NC J Intl L & Com Reg 83, 93 (stating that in its first two decades, FCPA enforcement was “sporadic” at best and confined to high profile cases); Russell Gold & David Crawford, “US, Other Nations Step Up Bribery Battle” Wall Street Journal (New York, 12 September 2008) B1 (noting that the FCPA’s early years were characterized by “long periods of little activity and few prosecutions”, experiencing a drastic increase in activity since the early 2000s). 6 W. L. Larson, “Effective Enforcement of the Foreign Corrupt Practices Act” (1980) 32 Stan L Rev 561, n 1. 7 “Mendelsohn Says Criminal Bribery Prosecutions Doubled in 2007” (16 September 2008) 22 Corporate Crime Reporter 36(1) accessed 18 January 2018; see Gold & Crawford (n 5). 8 Steven R. Peikin, “Reflections on the Past, Present, and Future of the SEC’s Enforcement of the Foreign Corrupt Practices Act” (US Securities and Exchange Commission, 9 November 2017) accessed 18 January 2018 (noting that since the unit’s creation, the SEC has initiated 106 FCPA-related actions against 101 entities and 38 individuals). 9 See Martine Milliet-Einbinder, “Writing Off Tax Deductibility” (OECD Observer, April 2000), accessed 18 January 2018 (noting that in the late 1990s, in countries such as Australia, Austria, Belgium, France, Germany, AIIB Yearbook of International Law, 2018 131 In 1996, the Member States of the Organization of American States (OAS) adopted the InterAmerican Convention Against Corruption, which was the first international anti-corruption convention.10 The following year, the Organization for Economic Cooperation and Development (OECD) concluded the landmark Convention on Combating Bribery of Foreign Public Officials in International Business Transactions, commonly known as the “OECD Anti-Bribery Convention”. 11 The OECD Anti-Bribery Convention advanced international anti-corruption enforcement across regions and now has 43 States Parties across all parts of the world.12 The 1990s also saw more open recognition and discussion of corruption’s harm to development outcomes—in economic literature and beyond.13 This emerging consensus helped prompt the 1993 foundation of Transparency International by Peter Eigen, a former Bank staff member.14 It also helped international financial institutions (IFIs) to understand that corruption is more than just a minor “transaction cost”, or a political issue that they were prohibited from tackling.15 The now-famous speech by WBG President James Wolfensohn in 1996, in which he described corruption as a cancer,16 was a landmark in this change in IFIs’ approach to corruption. There have been numerous other milestones in the 20 years since. In 2005, the United Nations (UN) Convention Against Corruption (UNCAC) entered into force.17 UNCAC has perhaps been the most far-reaching international anti-corruption convention, as it requires its 183 States Parties to, among other things, pass domestic legislation criminalizing the bribery of foreign public officials and the officials of public international organizations.18 Luxembourg, The Netherlands, Portugal, New Zealand and Switzerland, bribes to foreign public officials were considered tax-deductible expenses, sometimes with the caveat that the recipient’s identity be disclosed). 10 Organization of American States, Inter-American Convention Against Corruption (B-58) (adopted at the third plenary session of Member States, 29 March 1996). 11 Organization for Economic Cooperation and Development, Convention on Combating Bribery of Foreign Public Officials in International Business Transactions (OECD Anti-Bribery Convention) (adopted by the Negotiating Conference 21 November 1997, opened for signature 17 December 1997). 12 ibid; OECD, “OECD Anti-Bribery Convention Ratification Status as of May 2017” accessed 17 January 2018. 13 See, for example, World Bank Group, “World Development Report 1997: The State in a Changing World” (1997) 99–109; Cheryl Gray & Daniel Kaufmann, “Corruption and Development” (March 1998) Finance & Development 7. More recently, the World Bank’s entire 2017 World Development Report was dedicated to governance issues. World Bank Group, “World Development Report 2017: Governance and the Law” (2017). 14 Transparency International, “FAQs on Transparency International: Why Was Transparency International Founded? & How Was Transparency International Founded?” accessed 17 January 2018. 15 The IBRD’s Articles of Agreement prohibit it from interfering in the “political affairs of any [of its] member[s]”, and from being “influenced in [its] decisions by the political character of a member”. IB