An Investigation in Sheep’s Clothing: Multilateral Development Bank “Audits”

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Enforcement actions against international construction companies have been on the rise in recent years, culminating in the headline-grabbing $3.5 billion joint U.S./Brazilian action against Odebrecht S.A. in late December 2016.  Less prominently, however, enforcement actions against construction companies by the multilateral development banks (“MDBs” – such as the World Bank and the European Bank for Reconstruction and Development) have also risen sharply, and in many cases have been putting companies out of business.  Here are some basics you should know in case you ever get a letter from an MDB saying you are about to be “audited.” 

It’s Not an Audit
The letter a company will receive launching this kind of investigation will usually say that the integrity office (as the enforcement arms are generally known) is conducting an “audit” of a particular project.  This is unlike any audit you have ever experienced – because it is actually a full-blown investigation that in many ways resembles an investigation by traditional law enforcement.  They will demand documents and access to your emails and financial records, they will interview your employees (with and without the company’s permission or knowledge), they will try to get dirt on you from your competitors, they will show up on site unannounced, and they will treat everything you say as a potential admission or deliberate misrepresentation, even if you are just trying to help.  Don’t think of them as auditors – think of them more like the FBI.

Their Jurisdiction is Broad
The MDBs have jurisdiction to investigate any individual or company that receives even a dime of the bank’s money – even if the company does not know it is MDB funded.  You can be a third-tier subcontractor, or think the government is funding the contract.  You will nonetheless be subject to the procurement or consultant guidelines that are applicable to the loan the MDB made to the government. It is important to know the funder of every project you work on, even if you are not the prime.

The Rules are Different – Companies have Far Fewer Rights in the Multilateral Development Bank Sanctions System
The sanctions systems of the MDBs operate under their own rules. No domestic legal system, not even the legal system where the MDB is headquartered, applies. That means there is no right to discovery, no right to interview (or cross-examine) witnesses, and in fact you might not even see the evidence of a violation until after a determination has been made to sanction you. They do not have to tell you what the allegations are, or even what they are investigating. In fact, the subject of an investigation has very few rights, basically only the minimums under international law, and sometimes those are not fully respected either. The investigators have diplomatic immunity and can travel basically anywhere and can interview anyone they think might have relevant information, including government officials. It is unlikely that the company under investigation will be able to do the same.

The investigators also can, and very often do, refer their allegations – no matter how unfounded or speculative – to domestic law enforcement where the conduct occurred as well as where the company is headquartered. Because this is a communication to a sovereign government, it is immune – the company that is the subject of the referral has no right to see it or to defend against the allegations it contains. This can cause significant adverse consequences, ranging from investigation and prosecution to “pocket” debarment (when a country effectively refuses to issue any further contracts on the basis of the MDB referral).

It is important to remember that these investigations are different, and should not be treated like an investigation by a domestic agency (like an Office of the Inspector General). The investigations are governed by international law, and the process is quite different from prior audits or investigations you may have experienced.

Consequences can be Severe and Wide-Ranging
The primary punishment by the MDBs is debarment from contracts that bank funds.  That is deceptively simple, however.  If one of the five major multilateral development banks debars you for more than a year, the other four will automatically cross-debar you as well.  There are also a number of governments – including India and the European Union – that will likely find you ineligible for contracts based on the debarment of an MDB, and virtually every country will at least take it into consideration. This can result in a multiplication of the impact of a sanction – to the point where companies that do a lot of development work cannot survive even a relatively short debarment period.

Unfortunately, unlike most domestic systems, the multilateral development banks do not have to take into account whether the sanction they are imposing will destroy the company, and they usually do not consider it.  In the Odebrecht case, the penalties were reduced by both the Brazilian and U.S. Governments to ensure the company could continue to operate and that innocent third parties were not harmed, but the banks do not do the same.  Brazil and the U.S. also considered the fine being paid in the other country.  Not so with the MDBs – they may or may not consider penalties being imposed for the same conduct by other enforcement agencies, and they will not consider the impact on the company of multiple punishments.  There is no such thing as “double jeopardy” in these systems, and conduct can be punished by the MDBs even if it has already been punished by a domestic government.

There is No Redress or Appeal from the Decision of a Multilateral Development Bank Sanctions System
The immunity of the MDBs from any kind of sovereign nation is near absolute.  The only option for challenging the decision of the integrity office is through the sanctions system, which generally consists of two levels (an officer who determines the sanction and a board who hears appeals of the sanction), and that is it.  No other court can reverse the decision of the sanctions system, even if the integrity office violated its own rules or domestic laws.  Nor can any government take action against the investigators, who enjoy diplomatic immunity, even if the violate local law or their own guidelines. In some systems, if the investigators in the integrity office engage in misconduct while conducting the investigation, the only redress is to report their misconduct – to the integrity office.

What to Do Now
Conduct a review of contracts you know are MDB funded, or that might be MDB funded, to be sure you know which ones they are.  Get familiar with the guidelines of the MDB’s Procurement, Consultant, and Anti-Corruption Guidelines.  Update your existing compliance program to ensure you have covered all the issues raised by the guidelines.  Consider a risk assessment or review of your compliance system to prevent any issues, or to detect any issues you may already have – you are much better off if you find the issue first, as you can remediate it.  If you identify a serious issue, most of the MDBs have voluntary disclosure program that significantly reduces the sanction – or may eliminate the sanction all together – if you tell the MDB about the problem before they start investigating.

What to Do if are Contacted by a Multilateral Development Bank Integrity Office
Unfortunately, you are probably already under investigation.  Be cautious even if they say they just want assistance and are not investigating you – that may be true, but it might not be.  If they say they just want to conduct some interviews and do not discuss with senior executives or the general counsel the specific nature of their inquiry, insist on receiving that information in writing before agreeing to interviews.  Be cooperative in tone, at least in the early stages, but remember you do have some rights.  Call outside counsel with experience specifically with the MDBs investigative arms, preferably one that has significant familiarity with international law – this may be particularly important in these cases, because in many countries communications with in-house counsel is not protected from disclosure, but communications with outside counsel nearly always is protected.  Ensure that outside counsel is on the ground with you when the investigators arrive, and stays with the investigators for the duration.  Do not allow your employees to be interviewed without outside counsel present, and do not give the investigators direct access to your records.  And brace yourself – you might be in for a bumpy ride.

Published in Under Construction Volume 18, Number 3, Spring 2017. © 2017 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.