Eluding sanction related risks through enhanced compliance

Eluding sanction-related risks through enhanced complianceFraud Investigation & Dispute Services

Eluding sanction-related risks through enhanced compliance | 1

1The Business Case against Corruption, A joint publication by the International Chamber of Commerce, Transparency International, the United Nations Global Compact and the World Economic Forum Partnering Against Corruption Initiative (PACI)

Fraud and corruption thrives in an environment that has latitude for manipulation, minimal transparency and where decision-makers can leverage their dominant position for personal gain. According to informed estimates, the cost of corruption is more than 5% of global GDP (US$2.6 trillion) with over US$1 trillion paid in bribes each year1. Therefore, the quest to battle these threats remain a key global challenge.

Today, the impact of corruption has permeated multiple levels. It has emerged as a serious impediment to the initiatives of financial institutions, which are actively involved in driving economic growth and sustainability across nations. Projects led by development banks such as the World Bank, the Asian Development Bank, the African Development Bank and other Multilateral Development Banks (MDBs) have seen an increase over the last few years. However, this rise in funding has also magnified the fraud and corruption related risks with which governments and organisations need to deal. Dubious practices in these projects continue to jeopardize the efforts of stakeholders that are looking to drive inclusive development. Consequently, MDBs have increased their efforts to identify and weed out unethical practices through effective utilization of the sanctions framework to penalize delinquent organisations and ensure compliance with guidelines on integrity in the corporate environment.

In this report, we elaborate on sanctionable practices, enforcement trends and steps that can be taken by organisations to mitigate risks related to sanctions or debarment.

Introduction

Arpinder SinghPartner and National Leader Fraud Investigation & Dispute Services

2 | Eluding sanction-related risks through enhanced compliance

The UN Global Compact (UNGC) is the world’s largest corporate citizenship and sustainability initiative with over 200 members in India and over 12,000 members worldwide. It is a strategic policy initiative for businesses that are committed to aligning their operations and strategies with ten universally accepted principles in the areas of human rights, labour, environment and anti-corruption.

Increased adoption of the 10th Principle

The 10th Principle on Anti-Corruption is often identified as the most difficult principle to implement. However the number of organizations adopting the 10th principle has been increasing over the years due to increased traction emanating from various stakeholders’ expectations from businesses and growing regulatory requirements both at the national and international levels. This is more so at a time when businesses continue to go global and governments continue to localize.

Peer learning and knowledge creation

UNGC is a creating a platform where organizations with mature compliance programs are sharing their experiences and best practices with their peers and training programs for senior leadership. Knowledge creation and peer learning is further aiding scale up and adoption of the 10th UNGC principle and the same is adequately getting reflected in businesses disclosure and reporting initiatives through Communication of Progress (CoP) as prescribed by the UNGC as a non-financial reporting standard.

Focus also on Small and Medium-sized Enterprises (SME)

SME’s in India today have a presence in all business sectors and employ a large work force in India. UNGC has been creating a wealth of practical knowledge for continuous improvement on internal controls and leading practices that are helping SME’s build a better corporate governance framework.

The 10th principle has universal applicability and has been also adopted by Multilateral Development Banks (MDB)

In addition to adopting the 10th principle themselves, MDB’s are also using the adoption of the 10th Principle as a barometer to assess investments in countries and the private sector. MDBs are gradually tilting towards applying the UNGC principles including the 10th principle to de-risk their investments and also as a tool for transparency.

We are pleased to present this joint report along with EY, which focusses on the enforcement trends and sanctionable practices and hope it will provide useful insights for organizations to mitigate risks related to sanctions or debarments.

Foreword

Pooran Chandra PandeyExecutive Director United Nations Global Compact, India


Multilateral Development Banks (MDBs) are dedicated to investing resources in the form of grants and loans to help countries as they drive their economic growth. This is an initiative that started 70 years ago. It has affected millions and been instrumental in the holistic development of many countries. The last three years saw funding agencies such as multilateral banks and bilateral agencies spending over US$100 billion on various global projects. The World Bank’s aggregate funding to India was around US$15 billion (INR 900 billion) in the last four years. These investments are expected to grow significantly in coming years, including in India, which has been on an upward trajectory for quite some time.

The following are some projects that receive funding from agencies across various sectors2:

These agencies have stringent mandates to ensure that donor funds are utilized for their intended purpose, to achieve transparency in spending of funds and execution of projects. They also focus on preventing fraud, waste and abuse during the entire life cycles of projects. Consequently, companies executing projects funded by these agencies need to be cognizant of the policies, processes and sanctionable practices applicable for them.

8%

7%

11%

17%

16%

5%

8%

4%1%

23%

Education

Agriculture,Fishing andForestry

Water, Sanitation and FoodProtection

Transportation

Energy and Mining

Finance

Health and other socialservices

Industry and Trade

Share of a total lending of $40.8 BillionFiscal 2014 IBRD and IDA Lending By Sector -

Background

2World Bank Annual Report 2014, Poverty –Prosperity, The roles of IBRD and IDA, Page : 57


Funding agencies usually maintain a formal process for sanctioning organizations or individuals found to be engaging in unethical practices in any development project allotted to them. The following are sanctionable practices: • Corrupt: Influencing other parties to take improper action by offering, giving, receiving or

facilitating payments directly or indirectly (bribes for expediting payments, to fake vendors/suppliers, etc.)

• Fraudulent: Any act or omission including misrepresentation of facts that leads to gain or financial benefit or any other benefit (financial, technical details, etc.)

• Collusive: Arrangement between two or more parties to benefit both in achieving improper purposes (leaking information, showing undue favor during evaluation, etc.)

• Coercive: Impairment or harm caused to influence action (obstruction during bidding or investigation process, etc.)

• Obstructive: Obstructing a sanction investigation or deliberately destroying, falsifying or concealing evidence

Types of sanctions

• Debarment with conditional release: A minimum period of debarment is imposed for three years, after which the sanctioned party may be released from debarment if it has complied with certain defined conditions.

• Debarment for a fixed term: A sanctioned party may be debarred for a specified period of time, after which it is automatically released from debarment.

• Conditional non-debarment: The sanctioned party is not debarred, provided it complies with certain defined conditions within a set time frame.

• Letter of reprimand: A letter of reprimand is issued in a case where debarment or even conditional non-debarment may be disproportionate.

• Restitution: Restitution is made to the borrower at a minimum disgorge of illicit profits.

What are sanctionable practices?


Over the years, funding agencies are becoming more aggressive in identifying and penalizing sanctionable practices. MDBs have been investing in data analytics to identify and mitigate fraud and corruption risks. These data-driven solutions alert banks on high-risk projects and flag possible reputational risks when funds are disbursed by them.

The World Bank has introduced a new mobile application to report fraud and corruption-related allegations about its projects. Users of the application can identify projects (by name, country, sector or key word) and submit a confidential report about their concerns. The application also complements other tools and information resources to support detection of red flags raised for fraud and corruption.

Percentage of cases/settlements received by type of sanctionable practice3

A number of companies have come out of the sanctions process with a renewed commitment to preventing fraud and corruption. INT’s investigations and sanctions often prod them to improve their corporate compliance policies. However, it is only when enterprises or individual adopt and execute a high level of corporate compliance that industries as a whole begin to change for the better.

3World Bank, SUSPENSION AND DEBARMENT Report on Functions, Data and Lessons Learned 2007–2013, slide 28

According to the World Bank’s Integrity Vice Presidency (INT) Annual Report 2014, the overall number of cases presented for sanctions has increased by almost 15% and INT has submitted substantially more corruption cases (up from 18%) and collusion cases (up from 9%). These statistics highlight the World Bank’s commitment to addressing cases of misconduct that hamper completion of projects from completion.

In FY14, INT reviewed and opened 355 complaints from 91 countries, out of which it selected 40 for a complete investigation. Out of the external cases opened in FY14, 31% of the complaints received were from banks’ employees and 69% from non-bank sources, including contractors of multilateral development banks, concerned citizens, government officials and employees of NGOs.

1%

2%

9%

14%

86%

0% 20% 40% 60% 80% 100%

Coercion

Obstruction

Collusion

Corruption

Fraud

Percentage of cases/ settlements received by typeof sanctionable

Enforcement trends



An effective compliance framework is a critical firewall for reducing the adverse effect of sanctions.

Voluntary corrective action Including ceasing the misconduct and taking internal action against responsible individuals, establishing an effective compliance program and voluntarily addressing any inadequacies, can warrant a sanction reduction of up to 50% or more, depending on the case.

Voluntary disclosure program

Allows an organization not under-active investigation and acome forward to disclose past misconduct to the agency.

Co-operation with INT’s investigation

Including by conducting an effective internal investigation into the misconduct and making timely voluntary disclosures, accepting responsibility for the misconduct and voluntarily restraining from bidding on bank-financed projects, can warrant a sanction reduction of up to 33% or more depending, on the case.

Settlements Funding agencies establish a formal mechanism for settlements with appropriate checks and balances to ensure fairness and equal treatment of companies. These settlements are an efficient way to resolving sanctions cases and save considerable resources without resorting to full sanction proceedings.

Defense mechanism

Remedial measures: defense mechanism


What could potentially go wrong? Planning & Bidding Design & Budgeting Procurement Implementation Completion

Sanc

tion

able

pra

ctic

es

Corrupt practices

• Lobbying for internal information on bids

• Improper payments for approvals and permits

Improper payments for favourable approval for design and budgeting

• Improper payments for regulatory clearances

• To avoid physical audits during statutory inspections

• Bribing approving authorities like Pollution Control, Labour, Health & Safety, Environment for Non-compliances

• Bribing consultants for favourable survey report

Improper payments for completion certification and release of payments

Fraudulent practices

Misrepresenting

• Credentials

• Financials

• Certifications

• Client testimonials

• Misrepresentation project cost

• Forging bank guarantees

• Forging of design approvals

• Claims against the partial supply of material

• Forging inward and logistics documents

• Changes in manpower, sharing of equipment with other contractors or replacement of material without consent

• Sub-standard quality

• Submission of inflated invoice and reports to receive higher claims

• Misrepresentation in completion reports

• Forging work certifications

• Submit fake invoices and expenses to show escalation in cost

Collusive practices• Bid rigging

• CartelizationCollusion with certifying professionals

• Collusion with supplier for personal benefits / inflate costs

• Formation if a cartel within competitors

• Collude with the procurement agency

• Collusion with survey agencies to obtain favourable reports

Collude with supervising authority

Coercive practicesThreats to influence the decision or to gain confidential information on bids

• Obstruction in surveys

• Harming public safety

Obstructive practices• Non cooperation during investigation

• Deliberately falsifying and destroying evidence

• Obstruction during investigation

Sanctions enforced by MDBs• Barred company and its affiliates from bidding on

any of the bank’s development projects

• Ineligibility to receive proceeds of any MDBs loan

• Barred to participate in the preparation or implementation of any project, financed or governed by MDBs

• The defaulter company and its affiliates cannot be nominated for any MDBs financed contract


What could potentially go wrong? Planning & Bidding Design & Budgeting Procurement Implementation Completion

Sanc

tion

able

pra

ctic

es

Corrupt practices

• Lobbying for internal information on bids

• Improper payments for approvals and permits

Improper payments for favourable approval for design and budgeting

• Improper payments for regulatory clearances

• To avoid physical audits during statutory inspections

• Bribing approving authorities like Pollution Control, Labour, Health & Safety, Environment for Non-compliances

• Bribing consultants for favourable survey report

Improper payments for completion certification and release of payments

Fraudulent practices

Misrepresenting

• Credentials

• Financials

• Certifications

• Client testimonials

• Misrepresentation project cost

• Forging bank guarantees

• Forging of design approvals

• Claims against the partial supply of material

• Forging inward and logistics documents

• Changes in manpower, sharing of equipment with other contractors or replacement of material without consent

• Sub-standard quality

• Submission of inflated invoice and reports to receive higher claims

• Misrepresentation in completion reports

• Forging work certifications

• Submit fake invoices and expenses to show escalation in cost

Collusive practices• Bid rigging

• CartelizationCollusion with certifying professionals

• Collusion with supplier for personal benefits / inflate costs

• Formation if a cartel within competitors

• Collude with the procurement agency

• Collusion with survey agencies to obtain favourable reports

Collude with supervising authority

Coercive practicesThreats to influence the decision or to gain confidential information on bids

• Obstruction in surveys

• Harming public safety

Obstructive practices• Non cooperation during investigation

• Deliberately falsifying and destroying evidence

• Obstruction during investigation


Implications of exclusionImposition of sanctions by development banks can be detrimental to companies’ growth prospects. Therefore, it is imperative for organizations to be cognizant of the consequences if they are found liable of any violation.

How an effective compliance program can helpAn effective compliance program is part of the overall internal control system of a company and provides reasonable assurance to its management and stakeholders on its compliance with applicable laws. Various regulators, government agencies and MDBs suggest best practices for companies to put in place and implement corporate compliance programs.

Generally, “effective” programs have the following elements:

• A strong tone at the top with board of directors and senior management’s oversight of the program

• A clearly articulated and visible corporate policy prohibiting sanctionable practices including an emphasis on individual employee responsibility for compliance

• Specific guidance on high-risk activities

• Strong internal controls in place to ensure accurate record-keeping and prevention of concealment of sanctionable practices

• Risk assessment and monitoring

• Communication and training

• Support of whistle-blowing activity

• Appropriate disciplinary measures

Implication on violation


1 Conduct a risk assessment Thorough risk assessment adds efficiency and credibility to companies’ anti-corruption compliance efforts.

2 Setting the tone by developing corporate policies

Organizations should design and implement policies, based on their requirement of applicable laws and regulations.

3 Implement specific policies and controls based on risk

Procedures used to manage risks should be proportionate with them.

4 Implement robust financial controls

Strong control is the first line of defence against potential risks.

5 Conduct compliance training Enhance the understanding and awareness of employees about policies on compliant growth.

6 Monitor the compliance program

Periodically monitor and test a program’s controls to address its potential weaknesses and risk areas.

7 Periodically reassess risk and modify the program

Ensure that a comprehensive assessment is carried out to address new risks that arise by a changing business and external environment.

Steps for implementation of an effective compliance program

Our services

• Anti-fraud and fraud risk assessment

• Fraud Investigation

• Anti-bribery and Anti-corruption Compliance Services

• Dispute Advisory Services

• Competition and Trade Services

• Ethics and Integrity Due Diligence

• Third-party Due Diligence

• Whistle-blowing Services

• Supply Chain Compliance

• Forensic technology & discovery services

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• Forensic Data Analytics

• e-Discovery

• Software License and Forensic Disputes Services

• Cybercrime Investigation and Intelligence Services

Dealing with complex issues of fraud, regulatory compliance and business disputes can detract from your efforts to achieve your company’s potential. Enhanced management of fraud risk and compliance is a critical business priority — whatever the industry sector. With our more than 2,000 fraud investigation and dispute professionals around the world, we will assemble the right multi-disciplinary and culturally aligned team to work with you and your legal advisors. In addition, we will provide you the benefit of our broad sector experience, our deep subject matter knowledge and the latest insights from our global activities.

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Eluding sanction related risks through enhanced compliance