Multilateral development banks and integrity: know the rules of the road

Other Author       Sophie Drouliscos, Trainee Solicitor

Towards the end of 2020, the World Bank Group (WBG) debarred Berky GmbH, a German engineering company, and Aktor Technical Société Anonyme, a Greek construction company, in unrelated cases concerning their conduct in bids for projects in (respectively) Myanmar and Colombia. These cases provide a valuable reminder to companies bidding for projects financed by multilateral development banks (MDBs) about the integrity compliance risks associated with them:

• Debarment by an MDB can have a severe impact on a company that can extend beyond just the projects financed by that MDB. Debarment by one MDB can incur "cross-debarment" by other MDBs, as has happened in the case of Berky and Aktor, and reputational loss more generally. In 2020, the WBG debarred 267 firms and individuals globally.
• Companies participating in MDB-financed projects should be aware of these potential penalties and take steps to assess the integrity compliance risks that such projects present. The cases of Berky and Aktor highlight the range of risks that can arise and, by extension, the importance of an effective integrity compliance programme that aligns with MDB Integrity Compliance Guidelines ("ICP") – which Berky and Aktor are now required to do as a condition for being released from debarment.
• In particular, the Berky case points to the many and varied risks associated with third party intermediaries, which should be a point of focus in the design of any ICP where intermediaries are in play. The Aktor case demonstrates that what MDBs regard as sanctionable conduct (corruption, fraud, collusion, coercion and obstruction) can even include conduct that is legal for a company in its home jurisdiction.

Berky

In November 2020, the WBG debarred Berky, which specialises in water maintenance machines, for two years and six months for its conduct in relation to the Ayeyarwady Integrated River Basin Management Project in Myanmar. According to the WBG¹, Berky allegedly engaged in a range of sanctionable conduct, including:

• entering an arrangement to submit a second bid for the project using its subsidiary’s brand name (collusion);
• failing to disclose commission paid to a local Myanmar agent in its initial bid and on a later amendment to the contract (fraud); and
• arranging a trip to Europe for three officials from the project management unit to improperly influence their acceptance of Berky's equipment (corruption).

The debarment extends to five affiliate entities of Berky. The severity of the sanctions was reduced in light of Berky’s "extraordinary cooperation and voluntary remedial actions". As is common in such cases, Berky is required to implement an ICP that is consistent with the WBG's Integrity Compliance Guidelines as a condition for release from debarment.

The range of conduct at issue here highlights the potential panoply of integrity risks that companies face when bidding for MBD-financed projects. To focus on just one, the use of third parties in securing bids is a significant risk across many industries and jurisdictions. In Berky's case, the issue was an apparent failure to disclose the payment of commission, although we do not know the relevant circumstances. In practice, this can happen for a range of reasons. An agent may be reluctant to be disclosed where this means having to go through a formal registration process, or where their commission might be legally capped or subject to certain tax consequences. Or, of course, an agent may be corruptly connected to the customer entity and does not want this connection to come to light.

In any event, a key aspect of an effective third party management system is a process to confirm the existence of all third party intermediaries (however they may be categorised) and to determine what legal requirements are associated with using an intermediary in a given jurisdiction. If the intermediary is reluctant to follow the requirements, this is a clear red flag. If the intermediary says that they are not subject to the requirements, consider taking local legal advice to confirm the position. If the company already has a prior history with the intermediary and there are those who say "this is always how we have done business with this person" – do not assume that someone else has in fact confirmed the legal position, but verify it.

Aktor

In December 2020, the WBG debarred Aktor for one year and three months for allegedly fraudulent practice in the context of bidding for the Río Bogotá Environmental Recuperation and Flood Control Project in Columbia².

Aktor was one of three companies that formed a consortium bidding for the project. It was alleged that, although Aktor represented itself as leader of the consortium, it in fact had no intention of playing a material role in the execution of the contract. Instead, Aktor would receive a 3% success fee and a project reference in exchange for the use of its credentials, and a second consortium, including two consortium partners and two other local businesses, would execute the contract. Aktor's employees thereby allegedly misrepresented Aktor's role in the project documentation, and Aktor was held responsible for this.

Notably, Aktor argued that its conduct was legal under EU, Greek and Colombian law. The WBG Sanctions Board, in its decision on the case, did not take a position as to legality under EU and Greek law. Rather, it stated that this issue was immaterial to its decision, which concerned only WBG rules and not the law of particular jurisdictions. The Sanctions Board also questioned the value of the Colombian advice, which (it said) did not substantively address the consortium's obligations under the WBG framework to disclose the actual entities participating in the contract. Thus, the fact that Aktor had taken legal advice did not affect its state of mind with respect to the misrepresentations in the project documentation.

This highlights a key point for companies bidding for MDB-financed projects: what matters is whether a company has complied with the MDB's procurement rules (and related bidding and contractual documentation), and  not the laws of any jurisdiction that the company might be subject to. It is therefore not enough for a company to ensure that its conduct on a given bid is legal under applicable law – although that of course is essential. The company must also be familiar with the MDB's rules, including the concepts of sanctionable conduct – corruption, fraud, collusion and coercion – and ensure that its integrity compliance programme (ICP) is appropriately designed to mitigate these risks.

Mayer Brown is experienced in advising on all aspects of MDB integrity compliance and enforcement. For further details of our capabilities in this area, please visit the Multilateral Development Banks - Integrity Compliance and Enforcement page of our website.