Fighting Fraud and Corruption at the World Bank PDF
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Stefano Manacorda · Costantino Grasso Fighting Fraud and Corruption at the World Bank A Critical Analysis of the Sanctions System Fighting Fraud and Corruption at the World Bank (cid:129) Stefano Manacorda Costantino Grasso Fighting Fraud and Corruption at the World Bank A Critical Analysis of the Sanctions System StefanoManacorda CostantinoGrasso UniversityofCampania CoventryUniversity “LuigiVanvitelli” Coventry,UnitedKingdom Caserta,Italy ISBN978-3-319-73823-9 ISBN978-3-319-73824-6 (eBook) https://doi.org/10.1007/978-3-319-73824-6 LibraryofCongressControlNumber:2018932036 ©SpringerInternationalPublishingAG,partofSpringerNature2018 Thisworkissubjecttocopyright.AllrightsarereservedbythePublisher,whetherthewholeorpartofthe materialisconcerned,specificallytherightsoftranslation,reprinting,reuseofillustrations,recitation, broadcasting,reproductiononmicrofilmsorinanyotherphysicalway,andtransmissionorinformation storageandretrieval,electronicadaptation,computersoftware,orbysimilarordissimilarmethodology nowknownorhereafterdeveloped. Theuseofgeneraldescriptivenames,registerednames,trademarks,servicemarks,etc.inthispublication doesnotimply,evenintheabsenceofaspecificstatement,thatsuchnamesareexemptfromtherelevant protectivelawsandregulationsandthereforefreeforgeneraluse. The publisher, the authors and the editors are safe to assume that the advice and information in this bookarebelievedtobetrueandaccurateatthedateofpublication.Neitherthepublishernortheauthorsor theeditorsgiveawarranty,expressorimplied,withrespecttothematerialcontainedhereinorforany errorsoromissionsthatmayhavebeenmade.Thepublisherremainsneutralwithregardtojurisdictional claimsinpublishedmapsandinstitutionalaffiliations. Printedonacid-freepaper ThisSpringerimprintispublishedbytheregisteredcompanySpringerInternationalPublishingAGpartof SpringerNature. Theregisteredcompanyaddressis:Gewerbestrasse11,6330Cham,Switzerland To my PhD students, who made my academic life a collective experience and an enjoyable adventure. Stefano Manacorda To my loving wife, Anna Maria, because of hercontinuedsupportandlove,andourthree children, Aurora, Luna and Leo, because of the joy they have brought in our lives. Costantino Grasso Foreword The Important Role of the World Bank’s Sanctions Regime in Deterring Foreign Corruption Publiccorruptionandfraudareamongthemostimportantimpedimentstoeconomic development.Corruptionalsofundamentallyunderminestheruleoflaw.Deterring bribery requires a concerted effort to punish both those who pay bribes and those who receive them. To achieve this goal, we cannot rely only on enforcement by nation-states. In addition, deterrence requires active intervention by intergovern- mentalorganizations,suchastheWorldBank. Countries’ Efforts to Deter Foreign Corruption The World Bank sanctions regime is vital to the battle against corruption because enforcement by government authorities alone is not enough to deter corruption. Although many bribe-paying countries are improving their efforts to deter corrupt paymentsmadebycompaniesundertheirjurisdiction,countriesvaryconsiderablyin their commitment to, and the effectiveness of their legal regimes for, deterring corruption. Countries where public corruption remains a serious concern—and an impedimenttoeconomicdevelopment—alsooftenremainunable,andinsomecases unwilling,totakethestepsneededtopreventandpunishcorruptionbypublicofficials. HowHaveThingsImproved? The picture has improved. In the 40 years since the United States adopted the Foreign Corrupt Practices Act (FCPA) and the more than 20 years since the Organisation for Economic Co-operation and Development (OECD) adopted the vii viii Foreword Anti-briberyConvention,manycountrieshavemadegreatstridesinreformingtheir lawsandenforcementpracticestoaggressivelypursue,anddeter,publiccorruption. PriortotheOECDconvention,onlyonecountry,theUnitedStates,hadanexplicit lawcriminalizingforeignbribery(OECD2016,p.14).Indeed,manycountries,such as Germany, even allowed companies to deduct bribe payments on their taxes. By contrast,todaymostcountrieshavelawscriminalizingforeignbribery. Inaddition,priortotheOECDconvention,almost40%oftheOECDpartiesdid nothaveanestablishedsystemforholdingcorporationsliableforthebribespaidfor theirbenefit(OECD2016,p.14).Inaddition,somecountries,suchasJapan,Poland, Norway, and Iceland, had corporate liability to a subset of crimes, not including foreign corruption(id.).Bycontrast,today,almostallthepartiestotheconvention have adopted some form of corporate liability for foreign bribery (OECD 2016, p.14).Corporateliabilityisessentialtodeterringbribery1becausecompaniesdirectly determine their employees’ incentives to bribe through control over compensation and promotion policies and internal corporate culture; corporations also are often better able than government officialstodetectbriberybytheirown employees and obtainevidenceneededtoconvictthoseresponsible(Arlen2012).Corporateliability isimportanttotheefforttodeterbriberybecauseitcaninducecorporationstowork activelytodetertheiremployeesfrombribingandmayeveninducefirmstohelpthe governmentdetectandsanctionmisconduct(Arlen2012,2018). Ofcourse,corporateliabilityisonlyeffectivetotheextentthatitisstructuredto include firms to deter bribery by employees. Given corporations’ comparative advantage in detecting and investigating their own corruption, this implies that liability should be structured to incentivize corporations to adopt compliance pro- gramsthatareeffectiveatdetectingbribery,genuinelyinvestigatesuspicioustrans- actions, self-report detected misconduct, and cooperate with government enforcementofficialstoprovidethemwithevidenceofcorruptionthatcanbeused tosanctionbribepayersandbriberecipients(seeArlen2012,2018). Historically, most countries failed to provide these incentives. Some deterred firms from detecting, obtaining evidence about and self-reporting misconduct by usingrespondeatsuperiortoholdcorporationscriminallyliable,whetherornotthey detected and self-reported this misconduct and fully cooperated. Others failed to incentivize either effective compliance or self-reporting and cooperation by restricting corporate liability to bribes paid by employees “in the directing mind” of the firm. Yet recently, more and more countries are considering approaches to corporateenforcementthatdeterbriberybyprovidingcompanieswithincentivesto adoptgenuinelyeffectivecomplianceprograms,toinvestigatesuspiciousactivities, and to self-report detected misconduct to government enforcement officials and provide them with the evidence needed to sanction the individuals who paid the 1The OECD convention recognized the essential role that corporate liability plays in deterring corruptionintherequirement,includedinArticle2,thateachcountrymust“takesuchmeasuresas maybenecessary,inaccordancewithitslegalprinciples,toestablishtheliabilityoflegalpersons.” See‘ConventiononCombatingBriberyofForeignPublicOfficialsinInternationalBusinessTrans- actions’(OECD,2011)art.2<www.oecd.org/daf/anti-bribery/ConvCombatBribery_ENG.pdf>. Foreword ix bribes(Arlen2018).Theseapproachesincludelawsthatrequirecompaniestoadopt effectivecomplianceprograms,aswellasthosethatenablecompanieswithaction- able bribery to avoid formal conviction by entering into a deferred prosecution agreement2ifthefirmself-reportedthemisconductandcooperated.3 ProblemsThatRemain Notwithstandingthegreatstridesthathavebeenmade,foreigncorruptionhasnotbeen, andwillnotbe,deterredthroughrelianceentirelyonenforcementactionsbynational enforcement authorities alone because many countries remain unwilling or unable to undertakeallthereformsneededtodeterforeignandlocalcorruptioneffectively. For example, one party to the convention, Argentina, did not adopt a law imposingliability oncorporations forforeigncorruption until nearly20years after theOECDconventionobligatedittodoso(OECD2016,p.22). Other parties to the convention adopted laws but structured their corporate liability regimes in a way that limits their deterrent effect. Some, such as Ireland, Italy,France,Germany,Portugal,andSweden,havelimitedtheeffectivenessoftheir corporateliabilitylawsbyinsulatingcorporationsforliabilityforbriberyunlessthe misconductwascommittedorcondonedbyamanager,e.g.,someoneconsideredthe “directing mind” of the firm or a “responsible person” who is “acting for the management” (OECD 2016, pp. 49–51d).4 Others reduce the deterrent effect of corporateliabilitybyadoptingcorporateliabilityandsanctioningregimesthatdonot 2UnderaDPA,theprosecutorfilescriminalchargesbutagreesnottoseekconvictionsolongasthe firmsatisfiesthetermsoftheagreement.UnderanNPA,theprosecutoragreesnottochargethefirm solongasitsatisfiestheagreement.DPAsgenerallyrequirethefirmtoadmittoastatementoffacts detailingthemisconduct.Bothtypesofagreementsalsogenerallyimposefinancialsanctions.In addition,mostDPAsandsomeNPAsrequirethefirmtoundertakeinternalreforms(hereinafter mandates),whichcanincludehiringandpayingforaprosecutor-approvedmonitor.SeeBenjamin M. Greenblum, ‘What Happens to a Prosecution Deferred? Judicial Oversight of Corporate Deferred Prosecution Agreements’ (2005) 105 Columbia Law Review 1863; see also Jennifer ArlenandMarcelKahan,‘CorporateRegulationThroughNon-Prosecution’(2017)84University ofChicagoLawReview,323. 3See,e.g.,‘TheFraudSection’sForeignCorruptPracticesActEnforcementPlanandGuidance’(U. S.DepartmentofJustice–CriminalDivision,5April2016)<www.justice.gov/criminal-fraud/file/ 838416/download>; see also ‘Schedule 17 of Crime and Courts Act 2013’ (U.K. Government, 2013)<www.legislation.gov.uk/ukpga/2013/22/schedule/17/enacted>. 4France,inSapinII,hasexpandeditscorporateliabilityregimetoincludeanobligationtohavean effective compliance program. Other countries, such as Chile, only hold a corporation liable if enforcementauthoritiescanproveeitherthatanownerormanagerparticipatedinorcondonedthe crimeorthatthecrimewascommittedbya“personundertheirdirectionorsupervision”provided thattheoffensealsoresultedfrombreachofanentity’ssupervisoryfunction.Russia’slawappears to impose broad corporate liability but courts have not yet held a corporation liable for acts by peopleother thana“director orfounder.”See,e.g.,‘TheLiabilityofLegalPersonsforForeign Bribery:AStocktakingReport’(OECD,2016)49,51<www.oecd.org/daf/anti-bribery/Liability- Legal-Persons-Foreign-Bribery-Stocktaking.pdf>. x Foreword provide for any mitigation of the form of liability or the sanction in the case of companies that either self-report misconduct or fully cooperate with authorities (OECD2016,pp.148–154;seeArlen2012,2018,explainingwhysuchmitigation isvitaltoeffectivedeterrence). Moreover, even when a country has an apparently effective corporate liability regime on the books, some in effect neutralize the deterrent effect of their own regimes. Countries can do this in a variety of ways. Some have established a maximum sanction for corruption that is sufficiently low to be unlikely to present athreattolargecorporationscontemplatingprofitablecorruption.5Othershavelaws thatarenotenforcedeffectivelyeitherbecauseenforcementofficialsarerequiredto take all cases to trial, notwithstanding the resulting long delay (OECD 2016, pp.158–164),orbecause governmentofficialshave consistently notpursuedcom- paniesforpubliccorruption.6 Deterrence of foreign corruption is also undermined by practices in developing countries that create conditions that encourage corruption through actions like underpaying government workers and failing to genuinely enforce internal laws prohibitingcorruption.7ItalsoisunderminedbythefailureofRussiaandChinato takethefirststepstowardattemptingtodeterforeignbriberybytheircompanies. These problems are not entirely surprising. Corruption is a source of enormous potentialpersonalbenefitsfortheelitesinmanydevelopingcountries.Italsocanbe the key to obtaining enormous profits for corporations doing business in such countries.Countrieswithstronganticorruptionenforcementriskputtingtheircom- panies at a competitive disadvantage when they compete with companies from jurisdictions with either no foreign antibribery laws or little if any commitment to enforcement. While some countries, such as the United States and the United Kingdom,canmutetheanticompetitiveconsequencesthroughthebroadjurisdiction providedbycompanies’desiretoeitheraccesstheircapitalmarketsordobusinessin the jurisdiction, many other countries cannot. In this situation, even when all countries would benefit if all countries could truly commit to eliminating foreign corruption,some,ifnotmany,countriesappeartohaveincentivestosoft-pedaltheir own enforcement efforts. In this situation, truly effective deterrence requires the interventionofotherplayers,withsufficientpowertoprovideadeterrenceeffectand nodirecttiestoeitherthecorporatebribepayersorthebriberecipients.TheWorld Bankisideallysuitedtothisrole. 5For example, ten countries have a fixed maximum sanction for corporations that is less than 1millionEuros,ibid130. 6Forexample,Francefinedonlyonecompanyformakingpaymentstoforeignofficialsbetween 2000and2016. 7Thisincludesexcessivelylowwagesforgovernmentworkersandacustomunderwhichcertain officials,suchaspoliceofficers,mustpayaformof“keymoney”toobtainpositionsindesirable locations—keymoneythatexceedsthevalueofthepositionifnobribesareobtained. Foreword xi The World Bank as an Instrument for Deterring Bribery The World Bank is a powerful force in the developing world. In FY 2017 and FY 2016, it committed $58.8 billion and $61.3 billion, respectively, in loans, grants, equityinvestments,andguaranteestodevelopingcountries.8Accesstothisfunding canbevitallyimportanttomanydevelopingcountries.TheWorldBank’ssuccessful actiondependsonitsabilitytoensurethatitsfundsinfactgotowell-constructedand effectiveprojectsthatbenefitthepeople.CorruptionunderminestheWorldBank’s efforts at their very core. Corruption dooms projects from the outset through both costoverrunsandtheselectionoflow-qualityprovidersofgoodsorservices.When corruption distorts development projects, loans intended to promote development may simply lead a country farther into debt without providing any much-needed economicdevelopment. The World Bank, like other multilateral development banks, has a powerful tool—sanctions—thatcanbeusedtohelpensurethatitsmoniesareusedtobenefit developingcountries.ThepotentialpoweroftheWorldBanksanctionsregimelies in the vesting of sanctioning authority in officials who are not subject to the economic and political pressures that have led enforcement officials in the home jurisdiction of many bribe-paying individuals and entities to eschew aggressive enforcement of their own laws against foreign corruption. Those seeking to deter corruption canbenefit enormouslyfrom understanding theexisting structure ofthe World Bank sanctions regime and ways in which it could be improved through analysisofthisimportantbook. WorldBankSanctionsRegime The World Bank sanctions regime allows the bank to exclude individuals and entities for a variety of violations—including both paying bribes and committing fraud. Rather than relying on external authorities to determine whether actionable misconductoccurred—suchaslocalauthoritiesintherecipientcountryorauthorities with jurisdiction over an entity involved in corrupting or defrauding the recipient country—theWorldBankregimeempowersitsownofficialstoidentifyandinves- tigatemisconductsuasponte.Inaddition,andasdescribedindetailbyManacorda andGrasso,thebankhasestablisheditsownquasi-judicialprocessfordetermining whether sanctions should be imposed, complete with charges and an adjudicatory processwhereitispossibleforbothsidestopresentevidencetoapanelofinternal andexternaladjudicatorswhoassessthesufficiencyoftheevidencethataviolation occurred(ManacordaandGrasso2018,p.[xv]). 8See‘Nearly $59billioninWorldBankGroupSupporttoDevelopingCountries inFiscalYear 2017’(TheWorldBankGroup,PressRelease,18July2017)<www.worldbank.org/en/news/press- release/2017/07/18/nearly-59-billion-in-world-bank-group-support-to-developing-countries-in-fis cal-year-2017>.
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