OFFICE OF
INSTITUTIONAL
INTEGRITY AND
SANCTIONS
SYSTEM
2013 ANNUAL REPORT
DISCLAIMER “The unauthorized commercial use of Bank documents is prohibited and may be punishable under the Bank’s policies and/or applicable laws.” “Copyright © [year of first publication] Inter-American Development Bank. All rights reserved; may be freely reproduced for any non-commercial purpose.”
TABLE OF CONTENTS
ACRONYMS
I.
INTRODUCTION
1
II. A. B.
THE OFFICE OF INSTITUTIONAL INTEGRITY PREVENTION ACTIVITIES INVESTIGATION ACTIVITIES
III. A.
ADJUDICATIVE ACTIVITIES THE CASE OFFICER
IV.
OUTREACH ACTIVITIES OF OII, THE CO AND THE SNC
V.
LOOKING TO THE YEAR AHEAD
4
ACPC Anti-Corruption Policy Committee ADB Asian Development Bank AfDB African Development Bank AML Anti-Money Laundering ATI Access to Information Section CMS Case Management System CO Case Officer CSS Compliance Screening System EBRD European Bank for Reconstruction and Development EIB European Investment Bank IDB Inter-American Development Bank IDD Integrity Due Diligence IFI International Financial Institution IIC Inter-American Investment Corporation IRR Integrity Risk Review MDB Multilateral Development Bank MIF Multilateral Investment Fund NAA Notice of Administrative Action NSG Non-Sovereign Guaranteed OFC Offshore Financial Center OII Office of Institutional Integrity OMJ Opportunities for the Majority PNAA Preliminary Notice of Administrative Action SG Sovereign Guaranteed SCF Structured and Corporate Finance SNC Sanctions Committee WB World Bank
OFFICE OF INSTITUTIONAL INTEGRITY AND SANCTION SYSTEM ANNUAL
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Combating fraud and corruption is a crucial element of the Inter-American Development Bank’s (IDB or the Bank) broader mission to eliminate poverty, reduce inequality and promote sustainable economic growth in Latin-America and the Caribbean. It is also an institutional imperative – the IDB has a fi(i) ensuring that activities fiduciary duty to ensure that the nanced by the IDB are free of funds it uses to finance operafraud and corruption; tions are applied for their intended purposes. (ii) supporting programs that strengthen good governance, The negative impact of corrupenforce the rule of law, and tion on development in Lacombat corruption; and tin-America and the Caribbean is clear. President Moreno highligh(iii) fostering staff integrity. ted this relationship on the 2013 International Anti-Corruption This Annual Report summariDay when he said: zes the 2013 efforts of several “Corruption is an obstacle to sus- IDB offices established to comtainable and equitable develop- bat fraud and corruption in IDB ment in Latin-America and the Group1 operations. It combines Caribbean.” descriptions of the activities undertaken by the Office of InstiRecognizing both, the develop- tutional Integrity (OII), the Case ment and institutional reasons Officer (CO), and the Sanctions to fight fraud and corruption, the Committee (SNC), which together Bank adopted in 2001 a Systemic constitute the Sanction System Framework against Corruption and bear primary responsibility (GN-2117-2 Rev.). This framework for implementing the first piguides the Bank’s anti-corrup- llar of the Systemic Framework tion efforts around the following against Corruption. three pillars:
These three are not the only IDB offices engaged in fighting fraud and corruption. Other IDB offices, including the Institutional Capacity of the State Division and the Ethics Office, undertake other specific efforts in support of that goal and in pursuit of the other two pillars of the Systemic Framework against Corruption. In a larger sense, ensuring that IDB Group activities are free of fraud and corruption requires the active participation of every person at the IDB Group, as well as support from executing and enforcement agencies in our borrowing member countries, private sector entities, civil society organizations, and the public at large.
2- OII does not investigate Bank staff. Allegations of Prohibited Practices related to Bank staff are handled by the Ethics Office.
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Accordingly, this Annual Report not only reflects the work of OII, the CO, and the SNC. It also reflects the collective effort of all who have cooperated with us and to them we give our thanks.
1- The IDB Group comprises the IDB, the Multilateral Investment Fund (MIF), and the Inter-American Investment Corporation (IIC).
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PROHIBITED PRACTICES A key concept for the first pillar of the anti-corruption framework is that of Prohibited Practices, which are defined as follows:
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• A corrupt practice is the offering, giving, receiving, or soliciting, directly or indirectly, anything of value to influence improperly the actions of another party. • 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. • 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.
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• 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.
•An obstructive practice is (i) deliberately destroying, falsifying, altering or concealing evidence material to the investigation or making false statements to investigators in order to materially impede a IDB Group investigation into allegations of a corrupt, fraudulent, coercive or collusive practice; and/or 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 inspection and audit rights.
DESCRIPTION OF COVERED OFFICES As noted above, this Annual Report covers the activities of OII, the CO, and the SNC. Following is a brief description of the organization and functions of those offices, which interactions are illustrated in Figure I.1 below.
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THE CO PERFORMS TWO PRIMARY FUNCTIONS: determining the sufficiency of evidence in cases and
OII
sanctions.
PREVENTION
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recommending
INVESTIGATION
FIGURE I.1: INTERACTIONS BETWEEN COVERED OFFICES MANAGEMENT AND OPERATIONAL DEPARTMENTS
CO
If Respondent appeals
SNC
1- The IDB Group comprises the IDB, the Multilateral Investment Fund (MIF), and the Inter-American Investment Corporation (IIC).
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2- OII does not investigate Bank staff. Allegations of Prohibited Practices related to Bank staff are handled by the Ethics Office.
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OFFICE OF INSTITUTIONAL INTEGRITY OII is an independent office of the IDB that reports directly to the President. It also reports its activities and results to the Audit Committee of the Board of Executive Directors. OII has two mandates: to prevent and to investigate Prohibited Practices. It is organized into teams that correspond to these mandates. OII’s prevention team seeks to identify and mitigate integrity risk – the risk that a Prohibited Practice will occur in an IDB Operation – and any reputational impact to the IDB related to such risk. The prevention team accomplishes this by offering advice regarding specific operations, providing training, drafting policies to improve the IDB Group’s ability to detect and reduce integrity risk and designing and advising on the use of specific tools to gather and assess information that may indicate the presence of integrity risks.
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OII’s investigation team is responsible for investigating allegations of Prohibited Practices. Whenever an investigation substantiates such an allegation, OII submits the case to the first instance of the adjudicative bodies of the sanctions system –the CO. If the CO recommends a sanction, Respondents may then appeal to the second instance – the SNC.
CASE OFFICER The CO is a Bank staff member appointed by the President of the IDB, who serves as the first instance of the adjudication phase of the Sanctions System. The CO performs two primary functions: determining the sufficiency of evidence in cases and recommending sanctions. The CO reviews all cases submitted by OII to ensure: (i) that they comply with the Bank’s Sanctions Procedures and the International Investigative Guidelines; and (ii) that they present sufficient evidence to support OII’s finding that the alleged Prohibited Practice has occurred. If those conditions are met, the CO recommends a sanction against the Respondent. If the Respondent contests the recommended sanction, it triggers a second instance review by the SNC. If the Respondent does not contest the recommended sanction, it becomes effective.
THE SANCTIONS COMMITTEE The SNC is an independent seven-member committee whose Chairman, members and Secretary are appointed by the President of the IDB. It serves as the second instance of the adjudication phase of the Sanctions System. The SNC makes final decisions regarding the imposition of sanctions against parties for committing Prohibited Practices in IDB Group activities.
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IDB GROUP SANCTIONS SYSTEM The IDB Group Sanctions System involves the work of three different offices – OII, the CO and the SNC – and has two distinct phases:
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1. The Investigation Phase: OII addresses all complaints and investigates those that involve credible allegations of Prohibited Practices in IDB-financed activities. When such allegations are substantiated, cases move on to the Adjudication Phase. 2. The Adjudication Phase: The CO reviews the evidence submitted by OII and on that basis issues a Determination that may include a recommended sanction. In such cases, the Respondent may appeal the CO recommendation, triggering the second instance review by the SNC.
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II. THE
OFFICE OF
INSTITUTIONAL INTEGRITY
assess, and mitigate As noted above, OII has two distinct mandates: 1. Preventing Prohibited Practices in activities financed by the IDB Group.
OII’s prevention and investigation activities are carried out by two separate teams within the Office. In addition, members of both teams engage in outreach activities. All of these activities are described in further detail below.
A. PREVENTION ACTIVITIES
(i) beneficial ownership; (ii) politically exposed persons; and (iii) criminal, civil or regulatory history.
any related reputational impact to the IDB Group.
Applicable IDB Guidelines require project teams to conduct IDD for each NSG operation, and to update the due diligence throughout the life of the project. The prevention team monitors compliance with the IDD Guidelines and also advises project teams regarding the identification, assessment and mitigation of integrity risks in individual operations. These efforts also serve to reduce the impact that integrity risk could have on the reputation of the IDB Group. In addition, the prevention team also monitors compliance with the Guidelines regarding the use of Foreign Entities in NSG Operations, which seek to address risks that the use of offshore financial centers in NSG operations could pose, including harmful tax prac-
1- The IDB Group comprises the IDB, the Multilateral Investment Fund (MIF), and the Inter-American Investment Corporation (IIC). 2- OII does not investigate Bank staff. Allegations of Prohibited Practices related to Bank staff are handled by the Ethics Office.
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OII’s prevention team seeks to identify, assess, and mitigate integrity risk – the risk that a Prohibited Practice will occur in an IDB Group operation – and any related reputational impact to the IDB Group. The prevention team takes different approaches to identifying and mitigating such risks in non-sovereign guaranteed (NSG) and sovereign-guaranteed (SG) operations. In NSG operations, which generally provide financing directly to private sector entities, the IDB Group manages integrity
This process focuses on several types of information including:
integrity risk, and
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2. Investigating allegations that Prohibited Practices may have occurred in activities financed by the IDB Group.
risks primarily by conducting integrity due diligence (IDD). IDD is a well-established process of gathering information regarding counterparties and other relevant entities to identify integrity risk.
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OII’S PREVENTION team seeks to identify,
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tices, corruption, money laundering, and harm to the global financial system. In SG operations, integrity risk management is not focused on the Bank’s counterparty, but rather on identifying, during the design and execution phases, vulnerabilities that could allow for bidders, suppliers, contractors, consultants or other participants in IDB financed operations to engage in Prohibited Practices. An important component of integrity risk management is the assessment and strengthening of the executing agency responsible for implementing an SG operation in a given country and sector. In this regard, integrity risk management is a collective responsibility of the country, sector, fiduciary, and OII teams. An important role for OII is raising this awareness and building capacity of Bank staff and executing agencies to identify and address integrity risk. OII’s prevention team develops training and tools to this end.
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The prevention team also performs a variety of other functions, including responding to consultations from non-operational departments, contributing to the development of policies in aspects relevant to integrity risks, and conducting outreach to external stakeholders. Prevention Activities – Non Sovereign Guaranteed Operations Much of OII’s prevention work in relation to NSG Operations is in response to consultations from operational staff. OII generally
TABLE II.A.1: NSG Consultations 300 280 260 240 220 200 180 160 140 120 100 80 60 40 20 0 2011
2012
2013
FIGURE II.A.1: NSG CONSULTATIONS BY SOURCE ICC, 38
MIF, 9
45
142 (ERM & QRR)
PRE-ERM
• Before discussing potential IDB financing with a multinational construction company, a project team consulted with OII regarding the integrity risk presented by a series of price fixing penalties against the company. OII advised that the risk would depend on additional information and the project context, but that such enforcement history would likely present heightened – and could present significant – integrity risk.
QRR
• OII helped a project team gather additional information regarding a civil enforcement action pending against a board member of a borrower. Based on the additional information, OII advised that the litigation presented minimal integrity risk, because the action was still pending and because the allegations, even if true, would not constitute serious ethical or financial misconduct.
BOARD APPROVAL
• OII worked with a project team to prepare language disclosing to the IDB Board integrity risks related to a supplier of key equipment for the project that is a subsidiary of a company debarred by the World Bank. OII then attended the board meeting to help the
PRE-CLOSING
• OII worked with the IDB Legal Department, project team and a financial institution borrower to negotiate contractual language regarding: (i) the borrower’s compliance with anti-money laundering (AML) regulations; and (ii) its obligation to provide notice to the IDB of any AML violations.
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ERM
• In reviewing project documentation OII determined that the Engineering and Procurement and Construction contractor for a transportation project would be closely associated with the project and recommended that the Project Team conduct integrity due diligence on it.
project team respond to any questions regarding those risks and explain the basis for management’s decision that the risks presented were within the IDB’s tolerance.
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OII PARTICIPATION DURING THE NSG PROJECT CYCLE
PORTFOLIO
• OII advised portfolio management team regarding a proposed transfer of 60% of the shares of a Borrower to a family-owned company that was reticent to share information about its beneficial ownership. OII helped the team: (i) explain IDB’s requirement for obtaining beneficial ownership information; and (ii) establish confidentiality safeguards responsive to the incoming shareholder’s concerns.
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responds to consultations prior to project approval, but questions occasionally arise after approval (e.g., contractual language relevant to integrity issues) and during execution (e.g., integrity risks that arise in portfolio projects). OII also proactively approaches operational staff when it becomes aware of information that may impact the integrity of a project or have a reputational impact on the Bank. As shown in Table II.A.1, in 2013, OII responded to 234 consultations related to NSG Operations, which is down from 252 in 2012. Several factors may have contributed to this decrease, including an increase in early consultations from the Structured and Corporate Finance (SCF) and Opportunities for the Majority (OMJ) Departments, which allows for earlier detection of integrity risks and fewer instances of multiple consultations on a single project. NSG consultations refer to a variety of issues, ranging from questions about particular integrity risk indicators that arose in specific projects, to inquiries about compliance with integrity-related policies or guidelines. Table II.A.2 shows the most frequent issues raised in 2013 – many consultations addressed more than one issue. An important aspect of OII’s prevention work is advising project teams on the degree of risk presented by the facts of a particular project. Based on that assessment, OII may recommend the adoption of measures to mitigate integrity risks, and may recommend disclosure of such risks to Management and the appropriate Board or Committee. In making these recommendations, OII takes the approach described in Figure II.A.3, below:
TABLE II.A.2: Consultation Issues
Adverse Press
3
Conflict of Interest
3
Anti-Money Laundering
9
Relevant Entities
13
Other
13 42
Criminal, Civil & Regulatory History Beneficial Ownership
50
Political Exposed Persons
50
Use of Foreign Entities
59 175
Integrity Due Diligence Process
0 20 40 60 80 100 120 140 160 180 200
FIGURE II.A.3: ASSESSMENT, MITIGATION AND DISCLOSURE OF INTEGRITY RISKS
RISKASSESSMENT
MITIGATION
Minimal
Not Recommended
Heightened (i.e., within
Recommended, if
risk tolerance)
possible
Significant (i.e., outside of risk tolerance without mitigation)
Recommended
DISCLOSURE Not Recommended Recommended Recommended, in detail
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• OII generally seeks to mitigate identified risks so that projects can proceed. Some projects, however, present risks that cannot be mitigated to within the Bank’s risk tolerance. As discussed above, such projects are considered to present “significant” risk.
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PROJECT CANCELLATIONS DUE TO SIGNIFICANT INTEGRITY RISKS
• In 2013, OII advised that three separate projects presented significant integrity risk or reputational risk. Each of these projects proposed granting financing to a financial institution with an important percentage of ownership by high-level politically exposed persons or their immediate family. In each case, after management-level discussions, the project was cancelled. • Business units may also make such decisions without consulting OII. OII is aware of at least one additional project that was cancelled during 2013 by management due to integrity concerns.
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Another important element of OII’s prevention work relates to the use of offshore financial centers (OFC) in NSG operations. OII monitors compliance with applicable IDB Group Guidelines, which require operational teams to assess risk and disclose to Management and the appropriate Board or Committee whenever:
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(i) an entity formed outside of the project host country is used in connection with a project financed by the IDB Group, and (ii) that entity is organized in a jurisdiction classified by certain OFC Lead Organizations as having certain strategic deficiencies. OII is currently considering alternatives that would help better assess the tax transparency of NSG operations when such conditions are present. Finally, the prevention team regularly trains NSG project teams with regard to integrity risks, IDD, and the guidelines related to the use of foreign entities. In 2013, OII provided such training during a retreat for the operational and legal staff of the IIC. It provided similar training to the portfolio management unit of SCF.
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PREVENTION ACTIVITIES – SOVEREIGN GUARANTEED OPERATIONS As noted above, for SG operations, the prevention team focuses on providing training and developing tools to help operational units identify, assess and mitigate integrity risks that may arise in the operations they prepare and
supervise. This is an approach that has been emphasized during 2013 and that will continue to be pursued going forward, with an emphasis on improving OII’s tools and approaches to be more effective in its role of advising project teams and in serving as a resource to manage integrity risk in SG operations.
REVIEW OF THE IRR TOOL
The Integrity Risk Reviews (IRRs) were introduced in 2009 as OII’s principal prevention tool to identify, assess and mitigate integrity-related risks in the activities financed by the Bank at the country or sector level. In 2012, OII initiated a review of the IRR tool aimed at assessing the effectiveness of the IRRs as a risk management tool for SG operations. In 2013, OII concluded the review, which had the following main findings: (i) the preparation of IRRs served to prompt conversations among OII, staff in country offices, and national stakeholders on integrity-related matters as well as to promote the Bank’s image as an institution for which integrity is essential. (ii) operational staff did not use IRR reports as a source of information to assess integrity risk in individual SG operations. (iii) there is demand within the operational departments for a more targeted approach – one that helps SG project teams to identify and manage integrity risk during the design and execution of specific SG operations.
With these conclusions in mind OII decided to discontinue the IRR as initially conceived and introduce or reinforce the following prevention tools: (i) Reports of Investigation to share lessons with management and operational departments; (ii) OII’s direct participation in specific projects on a pilot basis; and (iii) design of specific training modules to raise awareness and build the capacity of IDB staff and partners to manage integrity risk. In addition, OII worked with other International Financial Institutions (IFIs) to share its experience with IRRs and gain knowledge of their preventive tools. IFIs have an interest in having a generally consistent approach for conducting IRRs on strategically selected projects which may present high integrity risk. Some institutions already have substantial and positive experiences with similar tools. In conducting these IRRs, integrity offices at those institutions work in close coordination with operational departments. Projects are selected on the basis of several available sources of information that indicate integrity risk. The review consists in gathering information related to internal controls, procurement and financial management procedures and contract implementation, with a view to identify the specific integrity risks of the project and recommend corrective measures. These IRRs are different from investigations in that they are proactive (there is no allegation of a Prohibited Practice) and in that they do not seek to determine whether sanctions should be imposed,
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REPORTS OF INVESTIGATION
- Training for executing agencies in relation to the application of IDB procurement policies.
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Reports of Investigations have included recommendations related to
- Introducing updated definitions of Prohibited Practices in price comparison bidding documents. - Considering unbundling price proposals for complex services offered in connection with the procurement of goods.
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IN 2013, OII INTRODUCE Reports of Investigation,
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an important new tool for managing integrity risks in
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SG operations .
SUPPORT TO SPECIFIC SG OPERATIONS
but on managing integrity risk to improve project execution. They are different from the traditional IRR performed by OII in the past in that they use knowledge on integrity risks to select and focus the analysis on specific projects.
REPORTS OF INVESTIGATION
In 2013, OII introduced Reports of Investigation, an important new tool for managing integrity risks in SG operations (they will also be prepared for NSG operations as applicable). These reports use information learned in the course of OII investigations to identify and mitigate integrity risks in specific operations. The investigation and prevention team collaboratively prepare the Reports of Investigation, which are done for full investigations that are substantiated and those unsubstantiated where deficiencies or weaknesses are identified. The Reports of Investigation are prepared for the Country and Sector Managers and operational staff, and suggest concrete actions to mitigate risks in the operation or similarly situated operations. In 2013, OII prepared six Reports of Investigation and shared them with the corresponding Country Managers and other relevant staff.
Although OII’s participation in every SG project is not viable, OII sought to participate in two specific projects to facilitate the development of appropriate tools to provide deeper and more precise support to project teams in the design and execution of specific SG operations. Participation in both projects was triggered by different factors. In the first project, multiple investigations indicated high integrity risk. In the second project, the Bank had no previous experience with the executing agency and this offered an opportunity to conduct an integrity risk analysis and draw lessons for the design of a tool applicable to other operations. In addition to participating as a team member in these two new projects, OII responded to specific consultations from project teams and proactively made recommendations in regards to operations in the design phase, when investigations in course indicated that certain design aspects merited attention. Going forward, findings of investigations that indicate high integrity risk for an operation will continue to trigger OII’s participation in consultation with the project team. In addition, OII expects to continue to participate in a few SG operations on an ad-hoc basis to gather further experience before it generates an integrity risk assessment tool.
OII advised the relevant sector and country department of high integrity risks on a project. OII became aware of these risks when OII investigations resulted in multiple substantiated allegations of Prohibited Practices in connection with the project. OII’s advice was shared with the project team and responsible managers, who invited OII to participate in the project to manage the integrity risks.
At the request of a project team, OII conducted an integrity risk assessment of an executing agency with which the Bank had not previously worked. OII identified weaknesses in the executing agency’s institutional framework that could allow third parties to circumvent IDB rules and engage in Prohibited Practices on the proposed project. OII advised that risk presented was within the IDB’s tolerance, but also recommended measures to mitigate those risks, including:
OII’s prevention team analyzed the existing risk factors, the context in which the project was being implemented and the execution arrangements. OII made specific recommendations and is working with the project team to prepare an integrity risk mitigation strategy to include: •modifying the program’s execution arrangements to strengthen the executing agency over time; •addressing immediate vulnerabilities during the project procurement cycle; and •promoting citizen oversight mechanisms.
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OII RECOMMENDATIONS INCORPORATED INTO PROJECT DESIGN
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OII WORKS TO MANAGE INTEGRITY RISKS ON AN SG PROJECT AFTER INVESTIGATIONS SHOW PROHIBITED PRACTICES
•strengthening the implementation arrangements for carrying out procurement and financial activities; •introducing safeguards into the operations manual prepared by the Bank; and •promoting citizen oversight mechanisms. The Government and project team agreed to incorporate these recommendations.
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AWARENESS AND BUILDING CAPACITY TO MANAGE INTEGRITY RISK In 2013, OII committed to a more proactive approach for raising awareness and building capacity to manage integrity risks in SG operations. OII pursued training activities on two different but interconnected fronts: (i) increasing the general awareness of integrity risk; and (ii) building internal and external capacity to manage integrity risk in SG operations. Activities on the first front sought to improve awareness of why and how the IDB fights corruption in its operations. To this end, OII provided such training to: (i) staff in ten country offices: Argentina, Barbados, Bahamas, Belize, Bolivia, Costa Rica, Haiti, Mexico, Peru, and Nicaragua; (ii) personnel of 13 executing agencies of IDB-financed activities in Haiti and to personnel of 25 executing agencies of operations financed by the MIF in Bolivia; and (iii) new IDB employees and IDB Managers.
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On the second front, OII provided customized training on integrity risk management to operational staff and executing agencies. OII provided such training in various sessions: (i) Four separate sessions were provided to fiduciary specialists corresponding to the following regional clusters: the Andean Group; the Caribbean Group and Haiti; Central America, Mexico, Panama and Dominican Re-
public; and the Southern Cone Group. (ii) An additional training session on integrity risk management was provided to fiduciary specialists and operations analysts in the Haiti Country Office. (iii) A session with three presentations organized in coordination with Transparency International was delivered to the Water and Sanitation specialists at their annual retreat. Furthermore, also on the second front, OII partnered with the Access to Information Section (ATI) to design a training course, to be delivered in 2014, that addresses both access to information and integrity risk issues. This training will provide project team leaders and other specialists with a set of tools and techniques for the implementation of the Access to Information Policy and the management of integrity risk at the project level. This cross-collaboration recognizes that transparency, access to information, and accountability are building blocks of an effective strategy to mitigate integrity risks. Through this approach, OII and ATI seek to contribute to the IDB’s agenda of development.
OTHER PREVENTION ACTIVITIES Development of Policies, Guidelines and Infrastructure To carry out its mandate to advise the Bank on issues relating to integrity in IDB-financed activities, OII provides comments to policy and strategy documents. These comments are generally aimed at mainstreaming the management
of integrity risks in the policies and strategies that guide the Bank’s work. In 2013, OII provided comments to the following policy and strategy documents: (i) the Public Utilities Policy Profile; (ii) the Infrastructure Strategy for Competitiveness Profile; (iii) the Policy Proposal for Fee-Based Advisory and Knowledge Services at the IDB; and (iv) the draft Policy and Guidelines for the Selection and Contracting of Consulting Firms for Bank-executed Operational Work. Compliance Screening System OII continued to work closely with the Information Technology Department to execute a capital project to implement a Compliance System for Screening (CSS) that will allow different departments to screen parties doing business with the IDB Group against internal and external watch lists relevant to their activities. The procurement of the system was completed in the first half of 2013 and implementation of different aspects of the CSS will roll out during 2014. When implemented, the CSS will be a powerful tool to mitigate integrity and other risks, including the risk of money laundering and financing of terrorism. Internal users are expected to include, initially, the Finance Department for the screening of payments, and subsequently, operational units, human resources, the Sanctions System and others.
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COMMEMORATION OF 2013 INTERNATIONAL ANTI-CORRUPTION DAY To commemorate the 2013 International Anti-Corruption day, OII in collaboration with the Institutional Capacity of the State Division, the Office of External Relations, the Office of the Case Officer and the Sanctions Committee conducted an awareness-raising campaign that consisted in the distribution of a defective pen to symbolically recreate the frustration that victims of fraud and corruption often experience. The President joined the campaign highlighting everyone’s responsibility in the fight against corruption and reminding staff of the negative effects corruption has in the Bank’s efforts to reduce poverty and inequality in the region.
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PREVENTION INVESTIGATIONS OII prevention work is generally (but not exclusively) forward looking, as it focuses on the possibility that a Prohibited Practice could occur in the future. Allegations that a Prohibited Practice has already occurred in an IDB Group activity are the starting point for the work of the investigative team. Investigative findings inform prevention work.
OII’s investigation activities seek to determine whether any external party2 has engaged in Prohibited Practices in an IDB Group-financed activity. OII investigations are administrative and reactive in nature, and are generally triggered by complaints. However, OII may undertake investigations based on information that it uncovers proactively or that is publicly available. Investigations can relate to operational or non-operational activities, including:
In early 2013, OII created a small intake unit and introduced three distinct stages to its investigation process. As a result, what was previously referred to as an investigation now encompasses the following three new categories:
(i) all SG operations, including loans and technical assistance; (ii) all NSG operations, including operations financed by the Bank, the MIF and the IIC; and (iii) corporate procurement. OII investigations are the first stage in the IDB Sanctions System. Based on the evidence gathered during an investigation, if OII concludes that it is more likely than not that an external party has engaged in a Prohibited Practice, OII refers that case to the Adjudication Phase of the Sanctions System to determine whether the IDB will impose sanctions on the external party. Sanctions imposed generally seek to prevent the Respondent from further participating in IDB Group-financed activities for a specified period and are also expected to have a deterrent effect on others.
1. Complaint processing; 2. Preliminary inquiries; and 3. Full investigations. The first and second stages are managed by the intake unit and the third stage is managed by a team of investigators, all under the supervision of OII’s management.
COMPLAINTS PROCESSING Complaints and other information can originate from IDB Group employees,3 third parties, and anonymous sources, and can be received through different reporting channels, including: • e-mail; • secured web-form located on the OII website; • hotline, telephone, and fax; • postal mail; and • in person.4 Complaint Processing involves two separate tasks: (i) creating records of complaints in the Case Management System (CMS); and (ii) assessing the relevance of the complaint to OII, through an initial threshold analysis to determine whether it:
(i) concerns a Prohibited Practice; (ii) relates to activities financed or to be financed by the IDB Group; and (iii) provides sufficient information to be credible. Complaints occasionally provide sufficient information to complete the initial assessment, but in most cases the intake unit must gather additional information during this stage. For this reason, during 2013, OII modified an internal requirement that the initial assessment be completed within 72 hours of receiving the complaint. Under the revised requirement, the intake unit must contact complainants within 72 hours to acknowledge its receipt. There is no time requirement for completing the initial assessment, though the intake unit strives to do so expeditiously. The revised approach recognizes that the intake unit may have to rely on others to provide information necessary to complete the initial assessment.
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INVESTIGATION PROCESS
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B. INVESTIGATION ACTIVITIES
2- OII does not investigate Bank staff. Allegations of Prohibited Practices related to Bank staff are handled by the Ethics Office. 3- This includes information obtained through research conducted by staff of OII.
[ 25 ]
4- Information on how to report fraud and corruption can be found at: http://www.iadb. org/en/topics/ transparency/ integrity-atthe-idb-group/ how-to-reportfraud-and-corruption,2872.html
OFFICE OF INSTITUTIONAL INTEGRITY AND SANCTION SYSTEM ANNUAL
Complaints that meet the initial assessment criteria are classified as allegations and become the subject of a preliminary inquiry. Complaints that do not meet such criteria are closed, though they may be referred to relevant departments or other organizations for possible action.
FIGURE II.B1: COMPLAINTS PROCESSING Intake registers and assesses Complaints Not relevant to OII
_REPORT 2013_
PRELIMINARY INQUIRIES Preliminary inquiries have two purposes: (i) confirm the conclusion of the threshold analysis conducted during the initial assessment; and (ii) triage the allegations. To this end, during a preliminary inquiry, the intake unit consults with relevant IDB Group staff and conducts preliminary interviews of the complainant and witnesses to gather information beyond the minimal level needed to pass the initial assessment, including project-related documents. This information is used to further assess the credibility of the allegation and to conduct the triage, which is done through a rational process that considers factors such as: • the egregiousness of the alleged wrongdoing;
[ 26 ]
• the possibility of systemic problems;
Heightened (
risk tolerance
Prohibited Practice
Significant (i.e risk tolerance mitigation)
Sufficient credible information
Case Closed
INTAKE REGISTERS AND ASSESSES COMPLAINTS
FIGURE II.B2: PRELIMINARY INQUIRIES PROCESSING
RELEVANT TO OII
Case Closed
• the viability of the investigation; • the amount of loss or harm resulting from the alleged wrongdoing;
Minimal
IDB Group financed activity
PRELIMINARY INQUIRY AND TRIAGE
FULL INVESTIGATION
OFFICE OF INSTITUTIONAL INTEGRITY AND SANCTION SYSTEM ANNUAL
CASE OUTCOMES
_REPORT 2013_
• A case is substantiated when a preponderance of the evidence supports the allegation of a Prohibited Practice. A preponderance of the evidence means that it is more likely than not that a Respondent has engaged in a Prohibited Practice. • A case is unsubstantiated when the evidence is insufficient either to confirm or deny that a Prohibited Practice occurred. • A case is unfounded when the evidence is sufficient to conclude that a Prohibited Practice did not occur.
[ 27 ]
OFFICE OF INSTITUTIONAL INTEGRITY AND SANCTION SYSTEM ANNUAL
tion to the Chief of OII regarding the outcome of the case. There are three possible outcomes for full investigations:
_REPORT 2013_
(i) substantiated; (ii) unsubstantiated; or (iii) unfounded • the likelihood that the subject engaged in similar conduct in other IDB Group financed activities; and • the time-sensitivity of the underlying activity. In essence, the preliminary inquiry stage helps OII better understand the allegation’s potential impact on the IDB Group-financed activity, its development objectives, and its beneficiaries and determine whether it merits the resources that would be invested in a full investigation.
[ 28 ]
FULL INVESTIGATIONS If OII management determines that a full investigation is warranted, the preliminary inquiry is converted into a full investigation and assigned to a team of investigators. The assigned investigators – usually two – conduct a fact-finding exercise and make a recommenda-
Investigative teams base their recommendations on evidentiary findings gathered during the course of investigative activities. These activities vary from one case to the next, but may include inquiries, consultations, interviews, document reviews, site inspections, and audits. Wherever possible, the team seeks to corroborate the facts by obtaining evidence from multiple sources. The Chief of OII decides the outcome of a case, based on the evidence presented. If the Chief of OII concludes that the evidence supports a finding that the subject of an investigation is more likely than not to have engaged in a Prohibited Practice, the case is referred to the post-investigation and adjudication phases. Conversely, if the Chief of OII determines that the allegation is unsubstantiated or unfounded, OII closes the case. Following a full investigation, the investigators assigned to the case will work with the prevention team
to prepare, as required, a Report of Investigation for the relevant Managers and operational staff. As discussed in the prevention section, OII introduced Reports of Investigation in 2013. These reports summarize findings of the investigation and make concrete suggestions to mitigate integrity risks in specific operations.
POST-INVESTIGATION PROCESS If the Chief of OII concludes that a case is substantiated, the investigation team prepares one or more Preliminary Notice(s) of Administrative Action (PNAA), depending on the parties and charges involved. A PNAA incorporates a statement of charges against any party that OII concludes has more likely than not engaged in a Prohibited Practice, and attaches the evidence that supports such findings, together with any exculpatory evidence.
The investigative team works with the OII team member responsible for Quality Assurance to ensure the accuracy, completeness, and consistency of all documents to be submitted to the CO and the SNC.
In the course of 2013, the intake unit registered 127 new complaints. Of these: • 67 did not meet the criteria of the initial assessment and were closed in the CMS; • 17 were undergoing their initial assessments at the end of the year; and • 43 were moved on to the preliminary inquiry phase. Of the 43 preliminary inquiries, • 8 were closed; • 22 were ongoing at the end of the year; and
• 52 were closed; and • 29 investigations were ongoing at the end of the year. In sum, at the end of 2013, OII had 17 complaints under review, 22 ongoing preliminary inquiries, and 29 investigations (of which nine were full investigations opened in 2013 and the remaining 20 had rolled-over from 2012) and had completed 127 cases in total. Compared with 104 in 2012, this constitutes a 22% increase in the number of cases resolved in 2013. The intake unit accounted for 60% of the cases resolved in 2013, which allowed investigators to focus on the remaining 40%. These numbers suggest that the investigation processes introduced at the beginning of 2013 significantly improved the efficiency of OII’s investigation process.
_REPORT 2013_
2013 CASELOAD
full investigations. Adding the 68 rollover investigations to 13 full investigations opened in 2013, OII’s investigators handled 81 investigations throughout the year. Of those:
“... AT THE END OF 2013, OII had 17 complaints under review, 22 ongoing preliminary inquiries, and 29 investigations
OFFICE OF INSTITUTIONAL INTEGRITY AND SANCTION SYSTEM ANNUAL
When cases are appealed before the SNC, the investigative team will also prepare OII’s reply to the Respondent, as well as any other information or materials required by the SNC.
and had completed 127 cases in total.”
• 13 were converted into full investigations.
[ 29 ]
OII began 2013 with 68 active cases already assigned to investigators, a number that combines what are now categorized as complaints, preliminary inquiries, and
OFFICE OF INSTITUTIONAL INTEGRITY AND SANCTION SYSTEM ANNUAL
PENDING INVESTIGATIONS (PRIOR PERIOD)
2011 65 2012 45 2013 68
NEW COMPLAINTS
_REPORT 2013_
2011 130 2012 127 2013 127
TABLE II.B1: CASE LOAD SUMMARY
TOTAL ACTIVE CASES 2011
100
2011 195 2012 172 2013 195
80
2012
2013
84 68
60 40
30
20
13
Pending cases (prior period)*
Preliminary inquiries
Full investigations
[ 30 ]
Complaints
0
2011
2012
2013
100 67
60
48
40 20 8
PENDING CASES AT PERIOD'S END
2011
4
Pending cases (prior period)
Preliminary inquiries
Complaints
0
Full investigations
2011 150 2012 104 2013 127
80
2012
2013 _REPORT 2013_
100 80 60 40 20
22 17
20 9
POST-INVESTIGATION ACTIVITIES (CASES)
2011
Full investigations
Preliminary inquiries
Complaints
0
Pending cases (prior period)
2011 45 2012 68 2013 68
OFFICE OF INSTITUTIONAL INTEGRITY AND SANCTION SYSTEM ANNUAL
COMPLETED CASES
2012
2013
100 60 40 20 0
13
6
OII Replies
* As a result of changes in internal investigation processes, cases are now tracked at different phases of investigation, which does not allow for a straight comparison with data from prior years. However, to allow for some comparison and to account for rollover cases, aggregate information on cases pending and completed in previous years is presented.
80
[ 31 ]
Preliminary Notices of Administrative Action submitted to CO
2011 2012 9 2013 18
OFFICE OF INSTITUTIONAL INTEGRITY AND SANCTION SYSTEM ANNUAL
_REPORT 2013_
SOURCES OF COMPLAINTS AND CONTACT METHODS As discussed above, complaints can originate from IDB Group employees, anonymous sources, and third parties. Third party sources include, among others, executing agencies, public officials, bidders, contractors, consultants, employees of NGOs, and the media. In 2013, 57% of all complaints were received from IDB Group employees, 34% were received from third parties, and 9% were received from anonymous sources. Of the complaints received from IDB Group employees in 2013, 70% were initially transmitted to them by third parties and subsequently communicated to OII, while 30% were complaints or concerns raised directly by Bank employees. As discussed above, complaints arrive to OII through various reporting mechanisms. Figure II.B5 provides a breakdown of the reporting mechanisms utilized in 2013. As in past years, the website and e-mail are the principal methods by which complaints are communicated to OII.
FIGURE II.B4: SOURCES OF INFORMATION 100% 90%
8%
9%
37%
37%
34%
80% 70% 60%
Minimal
50%
Heightened (
40%
risk tolerance
30%
Significant (i.e risk tolerance mitigation)
20% 10%
54%
55%
57%
0 2011
2012
Anonymous
Third Parties
2013 IDB Group employees
FIGURE II.B.5: HOW INFORMATION WAS RECEIVED IN 2013 3% In Person 4% Regular Mail 5% Hotline, Phone, Fax
55% Website
[ 32 ]
9%
33% E-mail
45
142 (ERM & QRR)
A TOTAL OF 28 COMPLAINTS THAT FAILED TO MEET (...)
Complaints Processing
were referred to other Bank offices because
_REPORT 2013_
Of the 67 complaints that did not meet the initial assessment standard: • 42 (63%) did not concern the commission of a Prohibited Practice; • 10 (15%) did not concern an activity financed by the IDB Group; and • 15 (22%) did not provide sufficient information to be considered credible (e.g. they did not provide names, project details, or the complainant did not respond to attempts to seek additional information).
OFFICE OF INSTITUTIONAL INTEGRITY AND SANCTION SYSTEM ANNUAL
INVESTIGATION OUTPUTS
they involved IDB
Figure II.B6 summarizes the results of the initial assessment.
financed activities or could otherwise
FIGURE II.B.6: MATTERS CLOSED AFTER INITIAL ASSESSMENT 15% 22%
impact on the reputation
45
of the Bank.
63%
Did not concern The IDB Group´s Prohibited Practices
Did not involve sufficient credible information
[ 33 ]
Did not concern an activity financed by the IDB Group
have an
OFFICE OF INSTITUTIONAL INTEGRITY AND SANCTION SYSTEM ANNUAL
_REPORT 2013_
EXAMPLES OF COMPLAINTS IRRELEVANT TO OII • Did not concern an activity financed by the IDB Group OII received a complaint alleging unfinished construction works in a Bank-financed project. After gathering relevant information, OII determined that the IDB had provided grant resources that were used in connection with the logistics of the project, but that the construction had been financed by local government and third parties. OII shared the complaint and its conclusion with the responsible IDB staff. • Did not concern the IDB Group’s Prohibited Practices OII received a complaint alleging coercion by a contractor in a Bank-financed project. After gathering relevant information, it was concluded that the complaint involved a contractual dispute between members of the joint venture and one of them with the executing agency. OII informed the Country Office and the Legal Department of its findings.
[ 34 ]
• Did not involve sufficient credible information OII received an anonymous complaint alleging fraud and corruption by local companies. According to the information, contracts were allegedly awarded to local firms with inadequate experience and financial capacity. The firms pre-qualified through joint ventures with overseas firms that had no active participation in the execution of the works. OII could not contact the complainant and the information did not identify a particular IDB Group-financed activity or subject, therefore the allegation lacked the sufficient credible information necessary for follow-up action by OII.
OFFICE OF INSTITUTIONAL INTEGRITY AND SANCTION SYSTEM ANNUAL
A total of 28 complaints that failed to meet the initial assessment standard were referred to other Bank offices because they involved IDB financed activities or could otherwise have an impact on the reputation of the Bank. In addition, one complaint was referred to another IFI. The offices and organizations to which OII referred complaints are listed in Table II.B2.
Ethics Office
6
Office of the Presidency
2
Operations Procurement Office
1
Project Team/Team Leader
16
Sanctions Committee
15
MICI
2
Other International Financial Institutions 1 Total:
29
_REPORT 2013_
TABLE II.B.2: OFFICES CONTACTED REGARDING MATTERS THAT DID NOT MEET THE INITIAL ASSESSMENT STANDARD
PRELIMINARY INQUIRIES Out of the 43 preliminary inquiries initiated in 2013, 21 were completed. Of these: • 13 were converted to full investigations; and • eight were closed. OII closed the eight preliminary inquiries after concluding that the allegations were unfounded because they did not involve a Prohibited Practice, or unsubstantiated because the evidence was insufficient to corroborate the occurrence of a Prohibited Practice and no further investigative activities were viable or justified. 5- The complaint was related to a decision previously adopted
[ 35 ]
OFFICE OF INSTITUTIONAL INTEGRITY AND SANCTION SYSTEM ANNUAL [ 36 ]
_REPORT 2013_
EXAMPLES OF PRELIMINARY INQUIRIES • Closed / False Complaint Against Bidder OII received a complaint alleging that a contractor presented false work experience in its proposal. Based on the information gathered during the course of the preliminary investigation, OII was able to corroborate that the prior work experience presented by a winning bidder was accurate and shared its findings with the Project Team. • Converted to Full Investigation / Executing Agency Consultant Diverts Project Funds OII received a complaint alleging that a consultant hired for project supervision services never performed the contracted services after a consultant working for the executing agency instructed the consultant to execute private works. Based on the information gathered during the preliminary investigation, OII identified evidence of fraud and collusion during the procurement process related to the supervision contract in question as well as several goods and works contracts not referenced in the original complaint.
“(...) THE 43 PRELIMINARY INQUIRIES INITIATED IN 2013, fraud continued commonly alleged
3% Coercion 55% Fraud
21% Corruption
Prohibited Practice,
_REPORT 2013_
to be the most
FIGURE II.B.7: TYPES OF NEW ALLEGATION
21% Collusion
OFFICE OF INSTITUTIONAL INTEGRITY AND SANCTION SYSTEM ANNUAL
As shown in figure II.B7 below, which refers to the 43 preliminary inquiries initiated in 2013, fraud continued to be the most commonly alleged Prohibited Practice, with no allegations of obstructive practices. OII classifies allegations based on the information obtained during the intake process. Note that an allegation can involve more than one Prohibited Practice, and as evidence is gathered over the course of an investigation, additional Prohibited Practices may be uncovered and others may be discarded.
with no allegations of obstructive practices.”
FULL INVESTIGATIONS During 2013, OII completed 52 investigations. Of these: • 25% were substantiated; • 29% were unsubstantiated; and • 46% were unfounded. [ 37 ]
OFFICE OF INSTITUTIONAL INTEGRITY AND SANCTION SYSTEM ANNUAL
_REPORT 2013_
BENEFICIARIES FRAUDULENT BIDS DEPRIVED RESULT IN INCOMPLETE FROM WORKS FOR RURAL FINANCING PRODUCERS Through technical assistance and small loans, the IDB financed a program to promote the development of young entrepreneurs in a borrowing member country. Under the program, the executing agency would provide beneficiaries with training, mentoring and financing. These three components would help beneficiaries through the initial stage of the development of their enterprise. In order to receive the Bank’s disbursements, the executing agency had to provide the Bank with a list of the beneficiaries that had received the loans and evidence of the payments made to each beneficiary. During an investigation, OII identified evidence indicating that the executing agency requested the disbursement from the Bank on the basis of false information and documents, including false loan agreements and checks.
[ 38 ]
The evidence indicated that over 30 beneficiaries never received the intended financing, as claimed by the executing agency.
The IDB financed a program for the development of rural areas in a borrowing member country. During the program, four firms allegedly submitted offers for a price comparison procurement process related to the construction of a storage building and the purchase and supply of equipment that would benefit rural producers. The activities linked to the contract would allow the community to improve their packaging and distribution processes, thus increasing the community’s income and improving their quality of life. During the investigation, OII identified that the firm that was awarded the contract had actually submitted three offers for the same contract, two of which were in the name of two unwitting companies. The evidence indicated that the submission of the unwitting companies’ offers was committed with the intent to create the appearance of a competitive process. After being awarded the contract, the firm failed to complete the storage building and did not provide the equipment for the intended community.
process have improved its
46% Unfounded 29% Unsubstantiated
efficiency by
_REPORT 2013_
FIGURE II.B.8: FULL INVESTIGATION OUTCOMES
OFFICE OF INSTITUTIONAL INTEGRITY AND SANCTION SYSTEM ANNUAL
“(...) NUMBERS SUGGEST THAT THE CHANGES OII made to its investigation
A rate of 25% cases substantiated (which would be 22% substantiated if preliminary inquiries were included) contrasts with a 12% ratio of substantiated cases in 2012. These numbers suggest that the changes OII made to its investigation process have improved its efficiency by appropriately filtering the complaints that are assigned to investigators.
appropriately filtering the complaints that are
25% Substantiated
assigned to investigators. FULL INVESTIGATIONS
POST-INVESTIGATION OUTCOMES
During 2013, OII completed 52 investigations. Of these:
OII substantiated 13 investigations in 2013. Of those:
• 25% were substantiated; • 29% were unsubstantiated; and • 46% were unfounded.
•10 were submitted to the CO with 13 PNAAs against 30 Respondents; and • 3 were in the PNAA preparation process at the end of the year. [ 39 ]
OFFICE OF INSTITUTIONAL INTEGRITY AND SANCTION SYSTEM ANNUAL
_REPORT 2013_
FRAUD RESULTS IN PURCHASE OF USELESS EQUIPMEN
FRAUD DELAYS CONSTRUCTION OF HEALTH CENTER
The IDB financed investments in the power sector in a borrowing member country. In a bidding process to acquire equipment to conduct works, firm A presented an offer jointly with firm B and was awarded the contract. The offer contained documents that showed that firm B had sold three units of similar equipment in the past ten years. OII identified that firm B had never agreed to present the offer jointly with firm A and that the sales experience related to the equipment that had been attributed to firm B was false.
The IDB financed the construction and extension of several health centers in the poorest rural areas of a borrowing member country. OII identified that during a bidding process, a firm presented offers that contained false information and documents regarding the equipment and key personnel they would use. Additionally, OII identified evidence indicating that the firm failed to disclose that it planned to subcontract a significant portion of the work. Unaware that the information was false, the executing agency awarded the contract to the firm.
[ 40 ]
Due to its inexperience, firm A bought and delivered to the executing agency equipment not suitable to perform all of the functions as required by the contract. When this was discovered, the executing agency had already paid firm A more than 88% of the contract’s value. As a result of firm A’s actions, the executing agency was forced to acquire a different unit from alternative sources, thus causing a significant project delay.
Due to the firm and subcontractor’s lack of capacity to execute the works, the works were not finished and the executing agency was forced to rescind the contract, thus further delaying the construction of a much needed health center in the remote community.
OFFICE OF INSTITUTIONAL INTEGRITY AND SANCTION SYSTEM ANNUAL
OTHER POST-INVESTIGATION OUTPUTS In addition, OII resubmitted one substantiated case that it had originally submitted in 2012 and for which the CO had issued a Determination of Insufficient Evidence.
_REPORT 2013_
While it is still early to attribute such gains to the initial analysis and preparatory work conducted by intake, these numbers suggest that the new processes succeed in allowing investigators to focus their attention on prioritized cases, advancing them more quickly than in the past. Nevertheless, it is important to note that response time does not depend exclusively on the investigative team, and that investigations are often delayed because information is not readily made available or because relevant parties are unavailable or unwilling to cooperate.
6- Note however that the duration of the rollover cases is counted from the day of the complaint, while the duration of new investigations is only counted from the date in which the case is converted into a full investigation.
[ 41 ]
Additionally, in 2013 OII submitted six Replies to Respondents that appealed 2012 and 2013 Determinations by the CO. trying to reach complainants and As authorized by the Sanctions gather additional information beProcedures, OII also presented fore closing a complaint on the additional information related to basis of insufficient credible ina case that was pending decision formation. Specifically, the intake by the SNC. The additional in- unit dedicated a median of 106 formation, which supported the days to initial assessment before conclusion that the Respondents concluding that information in engaged in Prohibited Practices, the complaint was not sufficientwas obtained after the PNAA had ly credible. been initially submitted to the CO. The median time spent to complete preliminary inquiries was RESPONSE TIME 138 days. There was very little difference between preliminary In 2013, OII focused on advan- inquiries that were closed and cing aging cases and responding those that were converted into expeditiously to complaints. The full investigations (136 and 139 new investigation processes in- days, respectively). troduced in 2013 will serve as a baseline to monitor progress on The full investigations concluded that objective in coming years. during 2013 were conducted Table II.B3 summarizes time expeditiously, lasting a median spent on investigative activities of 88 days (average of 138 days) at each stage of the process. when substantiated and 65 days when unsubstantiated. This During 2013, the median time compares favorably with the spent on the initial assessment duration of cases assigned to of all complaints was 67 days. investigators in previous years The intake unit spent substantia- and completed in 20136. For those lly more time on complaints that cases, the median was of 630 days did not ultimately pass the preli- for ten substantiated cases and of minary threshold. This is explai- 360 days for unsubstantiated and ned by the amount of time spent unfounded cases.
OFFICE OF INSTITUTIONAL INTEGRITY AND SANCTION SYSTEM ANNUAL
FIGURE II.B3: TIME SPENT IN INVESTIGATIVE ACTIVITIES Complaints Processing C: 127 d:67
120
Days> (d) Cases> (C)
100 80
C: 67 d:74
60 C: 43 d:59
Of the complaints received from IDB Group employees in 2013, 70% were initially transmitted to them by third parties and subsequently communicated to OII, while 30% were complaints or concerns raised directly by Bank employees. As discussed above, complaints arrive to OII through various reporting mechanisms. Figure II.B5 provides a breakdown of the reporting mechanisms utilized in 2013. As in past years, the website and e-mail are the principal methods by which complaints are communicated to OII.
C: 17 d:69
20 0 Cases (C)
Os, and the media. In 2013, 57% of all complaints were received from IDB Group employees, 34% were received from third parties, and 9% were received from anonymous sources.
20
40
60
Complaints processing
80
100
Closed
Days (d)
120
Under review
Preliminary Inquiries 40
TOTAL C: 21 d:138
20
C:13 d:139
C: 8 d:136
0 (C)
_REPORT 2013_
40
40
60
80
Converted to Full Investigations
100
120
Closed
Complaints Processing 80 TOTAL C: 52 d:434
60
C: 38 d:324
40 20
C:10 d:610 C: 1/ d:65 C:3 / d:88
(C)
0 50
Unfounded/ Unsubstantiated Full Investigations [ 42 ]
(d)
140
100
150
Unfounded/ Unsubstantiated Pending cases (prior period)
200
300 Substantiated Full Investigations
600
(d) Substantiated Full Investigations
In 2013, OII undertook a concerted effort to access information pertinent to its investigations and held by other international and governmental authorities. These efforts included: • Participating in a joint investigative mission conducted with the World Bank (WB) Integrity Vice Presidency and European Investment Bank (EIB) Fraud Investigations Division; and
(i) substandard quality of works delivered to the beneficiaries, which reduces sustainability and may pose safety threats;
_REPORT 2013_
COORDINATION WITH OTHER AUTHORITIES
OII has not estimated the monetary losses or other harm associated with Prohibited Practices – a difficult task for which there is no agreed methodology. However, in addition to efforts the SNC is leading to conduct a cost benefit analysis (see below), OII has determined that possible impacts on Bank-financed operations of the Prohibited Practices substantiated or under investigation by OII include:
OFFICE OF INSTITUTIONAL INTEGRITY AND SANCTION SYSTEM ANNUAL
IMPACT OF PROHIBITED PRACTICES
(ii) delays in execution of works, rescission of contracts, and the necessity of additional funding from borrowers to remedy incomplete works; (iii) cost overruns;
• obtaining assistance from three national and international investigative agencies. These collaborative efforts have produced positive results in investigations and continue to strengthen the relationship between OII, IFIs, and national investigative agencies.
(iv) noncompetitive prices; (v) threats to the success of a project because contracts were awarded to firms that did not have the technical or financial capacity to execute them; (vi) misappropriation of resources; and (vii) failure to reach intended beneficiaries.
[ 43 ]
ODITATEM QUIS QUATIS QUAS EOSSINT LABORE EST DI NE LITATE OPTASPED MAIOR SUM FACCUS, UTECTIO REPTATQUE PREIUM FUGIAM ”
[ 46 ]
_REPORT 2013_ OFFICE OF INSTITUTIONAL INTEGRITY AND SANCTION SYSTEM ANNUAL
III. ADJUDICATIVE
ACTIVITIES
OFFICE OF INSTITUTIONAL INTEGRITY AND SANCTION SYSTEM ANNUAL
A.THE CASE OFFICER As noted above, the CO is a Bank staff member appointed by the President of the IDB, who serves as the first instance of the adjudication phase of the Sanctions System. The CO has two primary functions: 1. To determine whether there is sufficient evidence to support OII’s findings that the alleged Prohibited Practices have occurred, and to ensure that the investigations complied with the Bank’s Sanctions Procedures and International Investigative Guidelines; and 2. To recommend sanctions to be imposed against the Respondent(s). The CO’s Office consists of the CO, one full-time consultant, and
one seasonal intern. The CO’s Office shares facilities, budget, and administrative resources with the SNC.
CASE OFFICER DETERMINATIONS After his review of the Preliminary Notices of Administrative Action (PNAAs) submitted by OII, the CO makes three types of decisions known as Determinations: 1. Notices of Administrative Action (NAA) that recommend a sanction; 2. Determinations of Insufficient Evidence that return the case to OII; and
If the CO determines that the evidence submitted by OII supports a finding that the Respondent has engaged in a Prohibited Practice, the CO recommends an appropriate sanction to be imposed and issues a NAA against the Respondent. The CO recommends sanctions based on the Sanctioning Guidelines. These Guidelines were adopted by the SNC and the CO based on an analysis of the decisions made by the SNC, as constituted prior to April 2011. The Sanctioning Guidelines include the set of possible sanctions to be imposed as well as the impact of mitigating and aggravating factors. The Sanctioning Guidelines were designed in consultation with the Anti-Corruption Policy Committee (ACPC) and are in line with the IFIs General Principles and Guidelines for Sanctions. Some of the administrative sanctions that may be recommended or imposed by the Case Officer
[ 47 ]
3. Determinations of Temporary Suspension that bar a Respondent from participating in IDB Group financed operations while an investigation or a sanctions process is ongoing.
_REPORT 2013_
The Bank’s Sanctions System has two instances of review. The CO makes initial sanctions Determinations that become effective unless appealed. If the CO’s Determination is appealed, the SNC conducts a second review and makes a final Determination.
OFFICE OF INSTITUTIONAL INTEGRITY AND SANCTION SYSTEM ANNUAL
IN 2013, FOR THE FIRST TIME, the CO issued a Determination of
[ 48 ]
_REPORT 2013_
Temporary Suspension against a Respondent.
and the Sanctions Committee include reprimands, debarment for a determined period, permanent debarment, conditional debarment, debarment with conditional release and restitution of funds or imposition of fines. According to the Sanctioning Guidelines, the base sanction is a three-year debarment period that can be enhanced and/or reduced from a range of one to five years based on a set of mitigating and aggravating factors to be considered by the CO and the SNC. After being effectively notified, respondents have 60 calendar days to appeal before the SNC the NAAs and recommended sanctions issued by the CO. If the Respondents fail to submit an appeal to the SNC within this period, the CO’s recommended sanctions are imposed. If the CO determines that the evidence submitted by OII is insufficient to support a finding of a Prohibited Practice, the CO consults with the Chairperson of the SNC and issues a Determination of Insufficient Evidence. In this case, proceedings against the Respondent are concluded without prejudice. This means that a new PNAA with additional evidence may be submitted to the CO by OII. Finally, the CO may, upon the recommendation of the Bank or the Corporation and in consultation with the Chairperson of the SNC, issue a Determination of Temporary Suspension in cases where there is a risk of imminent financial or reputational harm to the IDB Group. The Determination of Temporary Suspension issued by the CO suspends the Respondent from being eligible to be awarded additional contracts in any IDB Group-financed activity, pending the conclusion of OII’s investigation or sanctions procedures.
2013 CASELOAD: PNAAS ANALYZED AND NOTICES ISSUED The CO began 2013 with two PNAAs submitted by OII for review in 2012. During 2013, the CO received 13 additional PNAAs and one request for Temporary Suspension. In 2013, the CO reviewed the request for Temporary Suspension and 11 PNAAs – the two carried-over from 2012 and nine submitted in 2013. The remaining four PNAAs were received in late December and carried over into 2014. These 11 PNAAs and the request for Temporary Suspension resulted in 20 Determinations by the CO: (i) two Determinations of Insufficient Evidence; (ii) 18 NAAs with a recommended sanction; and (iii) one request granted for Temporary Suspension. The number of PNAAs and Determinations are different because some PNAAs bring allegations against more than one Respondent and each Respondent needs to be assessed and sanctioned individually, according to the merits of the case.
OFFICE OF INSTITUTIONAL INTEGRITY AND SANCTION SYSTEM ANNUAL
TEMPORARY SUSPENSION _REPORT 2013_
The IDB financed the supply of equipment for an agricultural project. During the procurement process for two contracts, the Bank learned that a firm had potentially submitted several false and misleading references for its previous experience. The matter was referred to OII which confirmed the likelihood that the information in question was false. Concerned that additional contracts would be tendered in coming months, the Bank requested a Temporary Suspension for the firm, barring participation in subsequent procurement processes pending OII’s investigation. Upon review of the request, the Case Officer, in consultation with the Chairperson of the Sanctions Committee, issued the first Temporary Suspension under the current Sanction Procedures.
[ 49 ]
OFFICE OF INSTITUTIONAL INTEGRITY AND SANCTION SYSTEM ANNUAL
_REPORT 2013_
DURING THIS REPORTING PERIOD, for the first time, the CO used the Constructive Notice mechanism to notify two Respondents.
NOTIFICATION PROCESS Two CO Determinations issued in 2013 were communicated to the Respondents through Constructive Notice. The remaining Determinations were effectively notified using courier services. According to the Sanctions Procedure, the CO notifies the Respondents using certified mail or other courier services that provide evidence of delivery. However, in some cases, and due to multiple factors, the courier services or certified mail are not able to deliver the NAAs to the Respondents. To ensure that all Respondents effectively receive the NAAs and to afford them a right to appeal, the CO applies the ACPC approved Protocol for Constructive Notice.
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This Protocol establishes in great detail all steps to be followed by the CO’s Office to ensure proper notification. If the CO cannot deliver an NAA to the address obtained by OII during the investigation, the Protocol provides a Constructive Notice mechanism to notify those Respondents through a public notice published on the Bank’s website. The public notice will indicate that the CO is attempting to locate a Respondent in order to deliver an NAA in relation to the Sanction Proceedings initiated by the Bank. The NAAs will be deemed delivered after 30 calendar days of posting the public notice.
CO OUTCOMES Recommended Sanctions As noted above, during 2013 the CO recommended sanctions against 18 Respondents. All sanctions recommended by the CO were debarments and ranged from one to seven years. The average recommended sanction was three years. The following example illustrates one of the NAAs issued by the CO, in which the Respondent appealed the recommended sanction before the SNC, as the second instance of the Sanctions System.
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A member of the IDB Group signed a nonrefundable cooperation agreement with an NGO (executing agency). The project was cofunded both by the member of the IDB Group and the executing agency.
OFFICE OF INSTITUTIONAL INTEGRITY AND SANCTION SYSTEM ANNUAL
FICTITIOUS SELECTION PROCESS FOR CONSULTANTS AND FRAUDULENT ACCOUNTING INFORMATION
To implement the project, the executing agency hired consultants. The executing agency conducted what appeared to be competitive processes and submitted the appropriate documentation to the IDB Group. OII received an allegation that the executing agency was retaining a percentage of the consultants’ salary. The alleged amounts arbitrarily retained by the executing agency were recorded as its contribution to the project. OII submitted a PNAA to the CO who determined that it was more likely than not that the Respondents committed fraud. The CO issued three Determinations recommending debarments upwards of six years. The CO’s Determinations were appealed.
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OFFICE OF INSTITUTIONAL INTEGRITY AND SANCTION SYSTEM ANNUAL
SANCTIONS IMPOSED FIGURE III.A1: DEADLINE FOR APPEALING CO'S DETERMINATON
(5) 36% Appealed
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(9) 64% Did Not Appeal
FIGURE III.A2: CO SANCTIONS IMPOSED IN 2013
4,5 4 3,5 3 2,5 2 1,5 1 0,5 0
Total: 9 Sanctions 4
2 1
1- Year Debarment
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2
2- Year Debarment
3- Year Debarment
4- Year Debarment
During 2013, the deadline for appealing the CO’s Determinations and recommended sanction elapsed for 14 Respondents During 2013, five Respondents appealed the CO’s Determinations and one presented an Opposition to the Determination of Temporary Suspension. Nine Respondents did not appeal, and the deadlines for four Respondents carried over into 2014. For the nine Respondents who did not appeal the CO’s Determination, the recommended sanctions were imposed and published in the IDB Group’s list of sanctioned parties. Five of these sanctions met the criteria for Cross-Debarment under the Agreement for Mutual Enforcement of Debarment Decisions entered into by the African Development Bank (AfDB) Group, the Asian Development Bank (ADB), the European Bank for Reconstruction and Development (EBRD), the WB Group and the IDB on April, 2010 (Cross-Debarment Agreement). As shown in Figure III.A2 below, those sanctions imposed by the CO resulted in debarments ranging from one to four years. The following example illustrates a Determination and recommended sanction issued by the CO, in which the Respondent did not appeal; therefore, the CO’s sanction became final.
OFFICE OF INSTITUTIONAL INTEGRITY AND SANCTION SYSTEM ANNUAL
FORGED REPORTS IN A SUSTAINABLE FISHING PROJECT The IDB signed a non-refundable cooperation agreement with a regional foundation (executing agency) to develop a regional management framework for sustainable fisheries.
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The executing agency appointed a consultant as the project manager whose terms of reference required him/her to organize workshops and meetings to collect information. The consultant submitted monthly reports to the executing agency with summaries of activities and related invoices that the executing agency alleged had never occurred. OII substantiated the allegations after an investigation and the CO determined that it was more likely than not that the Respondent had committed fraud and recommended a two-year debarment sanction against the consultant. The CO’s Determination was not contested and the recommended sanction was imposed. As a result of this Prohibited Practice, project resources were misused and some of the objectives of the technical cooperation were not met.
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OFFICE OF INSTITUTIONAL INTEGRITY AND SANCTION SYSTEM ANNUAL
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AFTER THE CO ISSUES A DETERMINATION AND THE RESPONDENT is notified, the Respondent has 60 days to appeal. If the Respondent fails to submit and appeal within this period, the CO recommended sanction becomes
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final.
FIGURE III.B1: 2013 SANCTION DECISIONS BY THE SNC Total: 8 Respondents 3,5 3
3
3
2,5
2
2 1,5 1 0,5 0 1- Year Debarment
5- Year Debarment
Five of the eight sanctions imposed by the SNC met the criteria for the Debarment under the Cross-Debarment Agreement. The SNC also processed one Opposition to a Determination of Temporary Suspension imposed by the CO. In that case, the Respondent requested a Hearing, which was granted and scheduled for January, 2014. During the Hearing, the Respondent withdrew its Opposition and expressed its conformity to the Temporary Suspension. In 2013, ten sanctions imposed by the IDB Group met the requirements for Cross-debarment. The IDB Group recognized sanctions from the WB, 52 cases involving 319 parties, and ADB, two cases
7- Year Debarment
involving three parties. There were no requests for recognition from the AfDB or the EBRD. The following example illustrates a case that reached the SNC after the Respondents appealed the CO’s Determination.
OFFICE OF INSTITUTIONAL INTEGRITY AND SANCTION SYSTEM ANNUAL
FICTITIOUS SELECTION PROCESS
The Bank signed a loan contract with a member country for the construction of water supply infrastructure in rural areas.
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As part of the project the executing agency selected a company in a bidding process that failed to meet the Bank’s acquisition requirements and was annulled. Unbeknownst to the Bank, construction work had already started so executing agency officials entered into an agreement with the winning company and later formalized the selection through a fictitious selection process. After revising the evidence presented by all parties, the SNC imposed a seven-year debarment against both Respondents in alignment with the CO recommended sanction. The sanctions met the CrossDebarment Agreement requirements.
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OFFICE OF INSTITUTIONAL INTEGRITY AND SANCTION SYSTEM ANNUAL
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ONCE AN APPEAL IS RECEIVED, it takes approximately 65 days for a case to mature. It is then that the Committee can decide cases.
FIGURE III.B2: AVERAGE NUMBER OF DAYS TO DECIDE A CASE AFTER MATURI
140 120
111
100 80 Days
60 40
23
20 0 2012
DECISION-MAKING TIME
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In 2013, the SNC took an average of 23 days to decide a case after it reached maturity. This constitutes a 79% reduction in the time the SNC took to decide a case in 2012. This significant increase in efficiency is the result of an increase in human resources and improved internal protocols, including the CMS implementation.
2013
OFFICE OF INSTITUTIONAL INTEGRITY AND SANCTION SYSTEM ANNUAL
FORGED DOCUMENTS IN CHILD HEALTH PROJECT The IDB Group signed a loan contract with a member country to improve maternal health services and reduce child mortality in rural areas.
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In one of the project’s tenders a company submitted forged bank guarantees to qualify for the contract. In communications with the executing agency, the company provided additional forged documents in an attempt to prove the first document’s authenticity. After reviewing Respondents and OII submissions, the SNC imposed a five-year debarment on the Respondents, decreasing the six-year debarment term recommended by the CO which met the Cross-Debarment Agreement requirements.
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_REPORT 2013_ OFFICE OF INSTITUTIONAL INTEGRITY AND SANCTION SYSTEM ANNUAL
IV. OUTREACH ACTIVITIES OF OII, THE CO AND THE SNC
OFFICE OF INSTITUTIONAL INTEGRITY AND SANCTION SYSTEM ANNUAL
NATIONAL AUTHORITIES During 2013, outreach activities also included participation in events with national authorities. In July, OII, the CO’s office, and the SNC participated in the First Seminar for Latin American Judges to Discuss Rulings on Competition Cases, sponsored by the Regional Competition Center for Latin America and the IDB. This event was designed to build a bridge of communication between competition authorities and the judiciary in Latin America. In November, the Secretary to the SNC was invited by the Brazilian Ministry of Justice to provide anti-corruption training to the Comptroller General’s office and the Federal Prosecutor’s office. This event was organized in light of the recently enacted Brazilian Clean Company Act. [ 59 ]
Each of OII, the CO, and the SNC collaborated and met with their respective IFIs’ counterparts to complement each other and benchmark their practices, ensuring In June, the CO organized the that all are operating harmo- first meeting of the MDBs Sancniously. tions Systems’ First Tier Working Group. Attendees to this event In May, OII participated in the included the Suspension and DePrivate Sector Integrity Confe- barment Officer from the WB, the rence hosted by the EBRD. This Sanctions Commissioner and Alconference offered a forum for ternate Sanctions Commissioner representatives of integrity, com- of the AfDB, and the Policy Adpliance, and legal offices and de- viser Inspectorate General of the partments of several institutions EIB. This event served as a forum to share views and approaches on to exchange experiences and conintegrity due diligence issues and solidate best practices. Within related contractual provisions. the framework of this meeting, In September, OII participated OII and the Secretary to the SNC in the 14th Conference of Inter- had an informative session with national Investigators hosted by the participants of the other IFIs. the AfDB. During these two con- During the same month, the SNC ferences, the “Heads of Integrity” and the WB’s Sanctions Board offices of the ADB, AfDB, EBRD, met to exchange views and geneEIB, WB and IDB held their re- rate closer ties. Later in Decemgular meetings to discuss issues ber, the SNC, the Sanctions Board related to the implementation of of the AfDB, and the WB’s Sancthe Cross-Debarment Agreement, tions Board met for a two-day among other topics. summit to exchange decision-making and operational experiences in an effort to further harmonize their respective practices.
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INTERNATIONAL FINANCIAL INSTITUTIONS
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As previously mentioned, during 2013, OII coordinated investigative activities with national and international agencies in order to have access to additional sources of information. OII also participated in the Inter-American Alliance for the Defense of Competition, a regular conference call during which competition authorities throughout the region share experiences.
ACADEMIA, PRIVATE SECTOR AND CIVIL SOCIETY
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To raise awareness about the Bank’s anti-corruption efforts and the importance of adhering to the highest integrity standards when participating in Bank financed activities, outreach efforts also covered activities with academic institutions, the private sector and, civil society. The CO participated as a guest speaker in the US and International Anti-corruption Law Summer Program at American University Washington College of Law and as guest lecturer at the Duke Center for International Development, Sanford School of Public Policy.
During 2013 OII, the CO, and the SNC organized a series of presentations. These included topics such as investigations on global offshore banking, suspension and debarment in US federal contracts, challenges posed to the WB in a proactive review of a large-scale Malaria project in Nigeria, efforts to investigate and sanction bid-rigging in public procurement by the Mexican Federal Competition Commission, and investigations and prosecutions in post-financial crisis Iceland.
The Chief of OII participated on a panel sponsored by the ABA and Anti-Corruption Compliance Committee of the Brazilian Institute of Business Law (IBRADEMP) that compared certain features of Brazil’s new Anti-Bribery Law to the MDBs’ sanctions regimes. Finally, the CO was one of the speakers invited to talk at the Edward Bennett Williams American Inn of Court on Sanctions Investigations by the WB and Other MDBs.
Finally, OII, the CO’s Office, and the SNC Secretary individually delivered multiple presentations in different venues. The CO participated in the Global Anti-Corruption Compliance Conference, the 2013 World Bribery & Corruption Compliance Forum, and the Global Investigations Summit.
Lastly, in 2013, OII, the CO, and the SNC revamped their website, making information about the Sanctions System more accessible to the public. Some of the website’s new features included a link for reporting fraud and corruption on the Bank’s homepage, added visibility to the list of sanctioned parties, and a special site to post constructive notices.
The CO’s office also presented at the Global Anti-Corruption Congress and the Colloquium on the International Fight Against Corruption at The George Washington University Law School. The SNC Secretary was a panelist at the third Latin-America Summit on Anti-Corruption, where he gave a presentation about the MDBs’ Sanctions Systems to an audience of lawyers and compliance officers from the region.
WEBSITE
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_REPORT 2013_ OFFICE OF INSTITUTIONAL INTEGRITY AND SANCTION SYSTEM ANNUAL
V. LOOKING TO THE YEAR AHEAD
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OII expects to see further improvements from the changes introduced in its internal process, including the ability to process simpler cases in an expeditious manner, while focusing a larger percentage of its resources on investigating more complex cases with more severe implications on IDB Group-financed activities. OII also expects to further strengthen the relationship between the prevention team and the operational staff responsible for SG operations, making concrete contributions to improve development results. In regard to NSG operations, OII expects to make the necessary adjustments to meet the needs of a restructured private sector operations complex.
In terms of policy development, the Sanction System will work on furthering and completing efforts currently underway, including: (i) the amendment to the Sanction Procedures; and (ii) the adoption of a Settlement Protocol.
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During 2014, OII, the CO, and, the SNC will continue to ensure the efficient and effective functioning of the Sanctions System, incorporating lessons learned from the initial three years of implementation. OII will also benchmark against the International Finance Corporation, the EBRD, the EIB and other comparators, as it devises tools to ensure an adequate response to the use of offshore financial centers in NSG operations. Finally, OII expects to make progress in the adoption of tools to manage integrity risk in SG operations.  
On the prevention side, OII will seek to incorporate the CSS into the IDD process, to make it more robust and efficient. It will also review the IDD Guidelines to incorporate lessons learned during the initial three year period of implementation. These lessons include the need to have specific approaches to certain types of clients, including state-owned enterprises, and recipients of technical cooperation resources.
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