Infrastructure projects in Latin America: Fraud and Corruption - World Bank Sanctions 

LatAm infrastructure environment

The Latin American region ("LatAm") has become one of the largest recipients of foreign investment for infrastructure in recent decades. For example, China has loaned more than USD 140 billion to Chile, Peru and Brazil for infrastructure projects in the past decade alone. However, foreign direct investment (FDI) in infrastructure projects has been stalled for the last six years in LatAm.

There are several factors that have contributed to this situation: decline in commodity prices; Brazil's economic downturn; deterioration of inter and intraregional trade; emerging market turmoil; and fraud and corruption scandals.

Corruption and fraud can occur in different ways. Perhaps the most common is in the form of bribes in order to achieve benefits or obtain influence in a specific area. Other forms include theft and the misuse of public assets, falsification of accounts, abuse of official discretion or the disclosure of privileged information.

One of the consequences of such corruption and fraud are the sanctions imposed by international finance institutions ("IFIs"). Once made public, these sanctions have a negative and global impact on the whole economy of a country in terms of foreign investment: IFIs play an important role in the investment community by providing financial support, professional advice and international economic cooperation and stability; IFIs are the largest source of development finance in the world, providing USD 30-40 billion to low and middle-income countries per year. As such, fraud and corruption and its consequences can adversely affect FDI and international support provided by IFIs to the projects financed by them.

IFIs' involvement is key for lenders, sponsors and governments in project finance transactions and IFIs may be essential to unlock a transaction given their commitment to development; attitude to risk; ability to provide longer tenors for loans or bear the risk of local currency lending. 

The role of the World Bank

The World Bank is, together with the International Monetary Fund, the most significant IFI in terms of promoting international investment in infrastructure projects in the world, and has been no stranger to imposing sanctions for fraud and corruption.

Before entering into a transaction, the World Bank conducts exhaustive due diligence and implements a range of measures in order to prevent fraudulent and corrupt practices in the projects in which its institutions¹ participate, but unfortunately these activities cannot be prevented in their entirely.

Some of the most significant actions taken by the World Bank in order to prevent fraudulent and corrupt activities include (i) imposing compulsory contractual commitments and provisions on the borrower under a loan agreement, (ii) cancellation of a portion of a loan if corrupt or fraudulent practices are determined, (iii) declaration that a firm is ineligible, either indefinitely or for a period of time, (iv) the retention of the right to inspect and audit financial statements, by an auditor appointed by the World Bank, related to the performance of a contract, (v) a review of procurement laws, regulations and practices, and (vi) supervision and inspection of project sites.

Identifying damaging practices in a project cycle

Given that corruption and fraud can occur at any stage of the project cycle, the World Bank has flagged a number of practices to be aware of:

1. During the period when the project is being created, assessed and set up, corruption and fraud can occur in the following areas: when the project design is manipulated for the benefit of third parties (such as suppliers, consultants or contractors); allowing borrower discretion in allocating project resources or management arrangements that entitle managers to divert funds for unauthorised purposes; weak oversights; supervision mechanisms; or unjustified alteration of project timing.
2. During the procurement stage, the following could be symptoms of corruption and fraud: insufficiency of advertising; an excessively short time for bidding; misuse of legal and administrative requirements; inappropriate bidding procedures; unjustified complaints; collusion schemes; and misleading bids.
3. Lastly, during the implementation phase, fraudulent and corrupt practices can be related to suspicious contract amendments, unjustified complaints, overbilling or overpayment, lower than specified quality, unjustified delays, theft and the manipulation of the dispute resolution procedure.

From a financial point of view, standard fraudulent behaviour can be seen in the duplication of payments, alteration of invoices, adulteration or duplication of accounting records, lack of supporting records, ineligible payments, misuse of funds, unauthorised advance payments without guarantee, unauthorised use of project property, excessively high operational expenditure and unreported discounts. This financial misconduct affects all stages.

In addition to the above, the World Bank has designed and implemented the Anti-Corruption Guidelines²  in order to prevent and combat fraud and corruption.

Sanctionable practices

The independent unit that investigates and pursues sanctions related to allegations of fraud and corruption in projects financed by the World Bank Group is the Integrity Vice Presidency ("IVP"). The sanctionable practices targeted by the IVP are fraud, corruption, coercion, collusion and obstructive conduct.

According to the World Bank Group policies, such practices can be defined as follows:

Corrupt practice: a corrupt practice is the offering, giving, receiving or soliciting, directly or indirectly, of anything of value to influence improperly the actions of another party. Both active and passive bribery are prohibited.

1. Fraudulent practice: a fraudulent practice is 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. The action must be done knowingly or recklessly, in the case of being a negligent or innocent misrepresentation or omission does not constitute a violation.
2. Collusive practice: a collusive practice is an arrangement between two or more parties designed to achieve an improper purpose, including influencing improperly the actions of another party.
3. Coercive practice: a coercive practice is impairing or harming, or threatening to impair or harm, directly or indirectly, any party or the property of the party to influence improperly the actions of a party.
4. Obstructive practice: an obstructive practice is (i) deliberately destroying, falsifying, altering or concealing of evidence material to the investigation or making false statements to investigators in order to materially impede a Bank investigation into allegations of a corrupt, fraudulent, coercive or collusive practice and threatening, harassing or intimidating any party to prevent it from disclosing its knowledge of matters relevant to the investigation or from pursuing the investigation; or (ii) acts intended to materially impede the exercise of the Bank's contractual rights of audit or access to information.

In all cases, mere intention is enough to be considered punishable conduct regardless of its result. 

Sanctions process

The World Bank's investigation and process for establishing sanctions is divided into two steps. The first step begins with an investigation by the IVP of the potentially punishable practice. If the IVP finds enough grounds or evidence to continue the investigation, the case is elevated to the Evaluation and Suspension Officer ("ESO").
The second step focuses on the evaluation of facts and evidence by the ESO in order to determine if the facts and evidence are sufficient to impose the sanction. If that is the case, the ESO issues a "Notice of Sanctions Proceedings" which immediately suspends the individual or entity and imposes a sixty-day summons period in which to hear allegations.

Once allegations have been heard, sanctions will be made final or the procedure will be closed. Notwithstanding this, IVP retains the right to reopen the procedure in case of new evidence or relevant information. In any event, if the malpractice occurred more than ten years ago, the sanctions process is closed.

Sanctions are determined by a special board established by the World Bank's sanctions board. Potential sanctions include the following:

1. Debarment with conditional release: The individual or entity will not be able to participate in any more projects financed by the World Bank until certain conditions are fulfilled (such as creating or implementing a compliance programme or taking action against the responsible person).
2. Debarment: The individual or entity will not be able to participate in any more projects financed by the World Bank for a fixed period of time. A variety of this practice is the "Conditional non-debarment", in which the prohibition applies unless certain conditions are met.
3. Letter of reprimand: a letter usually sent due to a failure to supervise an affiliate company – this is published on World Bank's website for a period of time.
4. Permanent debarment: The individual or entity is debarred indefinitely from participating in projects financed by the World Bank.
5. Restitution and other remedies: The individual or entity pays back a quantifiable amount to the client country or project.

After the sanctions procedure has been completed, the World Bank publishes the names of the individuals or entities sanctioned on the World Bank's website, provided that the publication of the information does not endanger someone's life, health or safety.

Recent cases

As previously noted, these sanctions can not only have a negative impact on the reputation of the individuals and entities involved, but also on FDI. Since 1999, the World Bank has sanctioned more than 330 entities and individuals for fraud and corruption in World Bank financed projects^3. A telling example in LatAm is Brazil's Odebrecht S.A. ("Odebrecht") corruption scandal.

Odebrecht was considered the biggest construction and engineering company in LatAm and a global leader in terms of infrastructure. Their work included roads in Mexico, a water-purification plant in Argentina, a hydroelectric plant in Peru and railways in Colombia among other projects. So, when the corruption scandal erupted, its consequences adversely affected the activity and foreign investment in infrastructure projects in LatAm at all levels.

Colloquially known as Operation Car Wash ("Operação Lava Jato"),the Odebrecht fraud scandal was initially a money-laundering investigation involving Brazilian state-controlled oil company (Petróleo Brasileiro S.A., known as Petrobras) which became a fraud and corruption investigation into certain executives that allegedly were paid bribes in return for being awarded overpriced contracts with construction firms. The corruption investigations involved nine of the major Brazilian construction firms, in more than eleven countries (mainly in LatAm), bribes to a value higher than USD 800 million and more than one hundred contracts that have possible earnings of more than USD 3 billion. To date, it represents the largest corruption scandal in the history of LatAm.

In this context, one of projects affected by the Odebrecht scandal was the Rio Bogotá Environmental Recuperation and Flood Control Project in Colombia. In this project, the Brazilian-based entity and subsidiary of Odebrecht, Constructora Norberto Odebrecht S.A. ("CNO"), received funding from the World Bank in order to assist the government of Colombia in mitigating certain environmental risks, including water quality and flooding near the Bogotá river.

However, after corresponding investigations, the World Bank alleged that CNO failed to disclose fees paid to commercial agents during the tender prequalification and bidding processes and that certain agents helped the CNO to obtain confidential information related to tender prequalification and bidding. Also, the World Bank considered that CNO, along with an agent to whom CNO had paid undisclosed fees, tried to obtain improper influence in the tendering project package. This behaviour was understood as collusive practice according to World Bank's procurement guidelines.
Following an anti-corruption and fraud procedure, the World Bank and CNO announced a settlement on 29 January 2019. A few days later, on 1 February 2019, the World Bank made a public announcement debarring CNO from participating in projects financed by the World Bank for three years as part of the settlement. In its public announcement, the World Bank noted that the debarment was reduced due to CNO's cooperation.

Another recent case refers to three construction companies in Argentina (Gavinor S.R.L., J.C. Segura Construcciones S.A. and a joint venture) in relation to the advancement of the Second Provincial Agricultural Development Project in Argentina. This project was also financed by the World Bank for the purpose of supporting the government in its aim to increase the productivity and profitability of small and medium-size producers in the agriculture sector, and contributing to the improvement of competitiveness.

The parties agreed to enter into a negotiated resolution agreement, under which the companies acknowledged responsibility for undertaking prohibited practices, agreed to meet certain corporate compliance conditions and a three-year debarment which would make the three companies ineligible to participate in projects financed by the World Bank for a period of 18 months⁴.

Conclusion

As we have seen, fraud and corruption can have serious consequences and the sanctions imposed by IFIs, such as the World Bank, can have a major impact on the activity and development of infrastructure projects including in the LatAm region. For this reason, the entire international community should be conscious of how damaging fraud and corruption can be and strive to implement corresponding preventive and corrective measures in order to prevent these types of activities, to contribute to a more reliable and stable environment that will allow sponsors, lenders and IFIs to continue in their role as the promoters of prosperity for infrastructure in LatAm.

1. The World Bank Group achieve its purposes through the following international institutions: (i) the International Bank for Reconstruction and Development ("IBRD"), that lends to governments of middle-income and creditworthy low-income countries; (ii) the International Development Association ("IDA"), that provides interest-free loans, or credits, and grants to governments of the poorest countries; (iii) the International Finance Corporation ("IFC"), that provides loans, equity, and advisory services to stimulate private sector investment in developing countries; (iv) the Multilateral Investment Guarantee Agency, that provides political risk insurance and credit enhancement to investors and lenders to facilitate foreign direct investment in emerging economies; and (v) the International Centre for Settlement of Investment Disputes, that provides international facilities for conciliation and arbitration of investment disputes.

2. The anticorruption policy in relation to procurement under World Bank projects is described in (i) the Guidelines on Preventing and Combating Fraud and Corruption in Projects Financed by IBRD Loans and IDA Credits and Grants: (https://policies.worldbank.org/sites/ppf3/PPFDocuments/40394039anti-corruption%20guidelines%20(as%20revised%20as%20of%20july%201,%202016).pdf); and (ii) Guidelines: Selection and Employment of Consultants by the World Bank Borrowers
(http://documents.worldbank.org/curated/en/796061468126898713/Guidelines-selection-and-employment-of-consultants-under-IBRD-loans-and-IDA-credits-and-grants-by-World-Bank-Borrowers).

3. Link to World Bank Listing of Ineligible Firms and Individuals: http://web.worldbank.org/external/default/main?theSitePK=84266&contentMDK=64069844&menuPK=116730&pagePK=64148989&piPK=64148984

4. The parties agreed to enter into a negotiated resolution agreement, under which the companies acknowledged responsibility for undertaking prohibited practices, agreed to meet certain corporate compliance conditions and a debarment which would make the three companies ineligible to participate in projects financed by the World bank for a period of 18 months.

With special thanks to Rafael Fernandez, Lawyer, Madrid Office, for his contribution to this article.