How will latest changes to Volcker Rule affect non-US banks?
Kathleen A. Scott discusses the final Volcker Rule, focusing on some of the issues raised by non-US banks in their comments.
“The World Bank Group is fully committed to its fiduciary responsibility to see that funds are used for their intended purpose: ending extreme poverty and boosting shared prosperity”
Jim Young Kim, President, World Bank Group
The World Bank’s “Report on Functions, Data and Lessons Learned” (the Report), issued in the spring of 2016, explains the sanctions process adopted when a firm (or individual) involved in a World Bank-financed project is accused of a sanctionable practice, and reflects on lessons learned as the World Bank seeks to build a more transparent, fair and effective suspension and debarment system.
In the fiscal year ending 30 June 2015, the International Bank of Reconstruction and Development (IBRD) and the International Development Association (IDA), which together comprise the World Bank, committed $42.5 billion in loans, grants, equity investments and guarantees to help promote economic growth and overcome poverty in developing countries. The World Bank has a fiduciary duty to ensure that the proceeds of these financings are used for their stipulated purpose. The sanctions system (as the suspension and debarment process is often called) excludes proven wrongdoers from operations financed by the World Bank and is a tool through which it seeks to enforce this duty.
The Report, and specifically the use of debarment as an effective sanctioning mechanism, should however be viewed in the wider context and as a reflection of a more general desire to supplement traditional monetary fines with other penalties. In addition to the World Bank, many governments and leading International Financial Institutions (IFIs) implement similar debarment procedures, as discussed in further detail below.
The Report recognises and defines five sanctionable practices as: fraud; corruption; collusion; obstruction; and coercion. Of the 303 sanctions cases brought before the Office of Suspension and Debarment (OSD) by the end of the 2015 fiscal year, the vast majority (83%) related to a “fraudulent practice”, defined as “any act or omission, including a misrepresentation, that knowingly or recklessly misleads, or attempts to mislead, a party to obtain a financial or other benefit or to avoid an obligation”. According to the Report, most cases involved forged performance or experience documentation; forged bank guarantees or securities; or misrepresentation regarding past performance or experience. The OSD acknowledges in the Report that one of the key lessons learned in its 8 years of operation, is that fraudulent practices can be as damaging to development as corruption or collusion.
Where sanctionable practices are suspected, the Integrity Vice President (INT) will first conduct an initial fact-finding exercise. Where it believes there to be sufficient evidence of sanctionable misconduct, it will initiate proceedings by issuing a “Statement of Accusations and Evidence” (SAE) in relation to the accused firms or individuals (Respondent(s)) to the OSD. The OSD’s Chief Suspension and Debarment Officer (SDO) will then thoroughly evaluate the information contained in the SAE and determine whether INT has presented “sufficient evidence” that the Respondent engaged in the alleged sanctionable practice(s). If sufficient evidence is found, the SDO will issue a Notice of Sanctions Proceedings and formally notify the Respondent of the commencement of sanctions proceedings against it. The SDO will also recommend an appropriate sanction, which will be implemented unless the Respondent contests the allegations.
As such, the OSD is primarily designed to act as a check and balance and must impartially review the evidence before it. Since its inception, the OSD has referred 36 per cent of cases back to INT having determined that there was insufficient evidence to support one or more of the accusations made. However, only 4 per cent were rejected in their entirety.
One of the underlying objectives of the sanctions process is to ensure that it is fair to the Respondents and that they have the right to be heard. To this end, INT must disclose all relevant evidence including that which does not support its case. A Respondent has 30 days to submit a written explanation to OSD and 90 days to appeal the case to the World Bank’s Sanction Board, which will review the case “de novo”. Having done so, the Sanctions Board will issue a fully reasoned decision stating whether it is “more likely than not” that the Respondent engaged in sanctionable misconduct. If their finding is affirmative, it will then impose the appropriate sanctions having considered any mitigating or aggravating circumstances. According to the Report, appeals to the Sanctions Board were only made in 33 per cent of cases.
It is common for the OSD to impose a temporary suspension on a Respondent preventing it from entering into new contracts for World Bank financed projects whilst investigations are on-going. Whilst a temporary suspension is not announced publicly, it is posted on the World Bank’s intranet and the Client Connection extranet site used by borrowing countries. It should be noted that, whilst the sanctions system is a “quasi-judicial administrative process” – meaning that it does not have jurisdiction to enforce criminal or civil penalties - the World Bank may refer cases to national governments where the wrongdoing would likely be considered a criminal act.
Once the investigation has been concluded, and likely wrong doing established, there are 5 possible sanctions that may be implemented: debarment with conditional release; debarment for a fixed period (without conditional release); conditional non-debarment; public letter of reprimand and restitution. By far the most common sanction is debarment – meaning that the Respondent is declared ineligible to receive World Bank financed contracts. Where a debarment with “conditional release” is granted, the conditions for release will 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 (using standards reflective of global consensus). Debarments are public and printed on the World Bank’s website.
As of 30 June 2015, the World Bank has publicly debarred or otherwise sanctioned more than 700 firms and individuals. Of the 368 cases concluded since the creation of the two-tier sanctions system in 2008, 39 per cent have been sanctioned during the last two fiscal years. The recent increase in suspension and debarment actions suggests the efficacy of the OSD’s sanctions regime has improved and further demonstrates the World Bank’s continued commitment in the fight against corruption.
This trend is reflected in the legislative changes in Canada, the EU and UK where the number of offences for which companies can be debarred has recently increased. In Canada, for example, amendments to the Public Works and Government Services Canada Supply Manual in 2014, mean that companies convicted of dishonesty offences (including bribery, extortion, forgery and insider dealing, as well as the offences under the Corruption of Foreign Public Officials Act) are prohibited from obtaining a federal government contract for a period of 10 years, regardless of subsequent efforts to “clean house” and remediate corrupt behaviours within the business. In contrast the UK imposes a maximum debarment of 5 years and enables companies convicted of a corruption or dishonesty offence to recover eligibility to bid for public contracts having undergone a “self-cleaning” process.
Interestingly in the US, an upward trend in suspension and debarment actions has recently plateaued. The Interagency Suspension and Debarment Committee Annual Report, suggests that after consistent increases from 2009, the number of cases levelled off in 2015 with a slight decrease in reported instances of debarment from 1,929 in 2014 to 1,873 the following year. According to the Committee, this should not however be seen to reflect the effectiveness or otherwise of the system but regarded as “purely a function of need”. Ultimately, Congress remains keen that the administrative powers of suspension and debarment are utilised where appropriate, a sentiment that is echoed in other quarters. The most recent OECD Foreign Bribery Report dated December 2014, for example, notes that out of 427 cases brought only 2 resulted in debarment and concluded that countries need to do more to ensure those that are sanctioned for having bribed a foreign public official are suspended from participation in national public procurement contracting.
Following amendments to the sanctions system in 2010, cases before the World Bank may be resolved prior to, or during, sanctions proceedings by means of a negotiated resolution agreement or settlement. In these circumstances, the SDO’s role is limited to reviewing the settlement to ensure it was entered into voluntarily, without duress and the agreed-upon sanction is broadly consistent with the Sanctioning Guidelines. The SDO may not modify the terms of the settlement in any respect. The proportion of cases concluded pursuant to settlement agreements has increased from 17% to 21% since the World Bank’s first edition of this report in 2014, suggesting that the World Bank has become more open to Respondents seeking negotiated solutions.
The suspension and debarment system presents (as it is intended to) a significant deterrent for businesses particularly those that rely heavily on World Bank or government contracts. For those companies that do little else, a debarment may have a significant adverse impact on its ability to generate revenue. Debarment, as a sanction of choice, has a number of advantages. Not only does it act as a financial deterrent, it also excludes dishonest contractors from significant business transactions and sends an important message that sanctionable practices are not and will not be tolerated.
Whilst we expect the number of debarments imposed by the World Bank and government agencies to continue to rise, sanctions alone are not sufficient to combat the problem of fraud and corruption. As such these institutions would be advised to begin focussing more on incentives for cooperation in addition to the adoption of robust compliance measures.
Going forward, the World Bank is likely to continue to work with other multilateral development banks and organisations, as well as national governments. After all, the more rigorous those organisations and governments are in their pursuit of misconduct, the more straightforward the World Bank’s own mission will be to ensure that its funds are used for their intended purpose.
In the meantime, the Report is an important tool for seeking to balance requirements of confidentiality with the need for transparency. To be effective, the OSD must retain its independence from external and internal pressures and must resist pressure to impose sanctions where there is insufficient evidence of wrongdoing.
OFAC published a final rule that modifies the Cuban Assets Control Regulations to revoke the so-called "U-turn" authorization.