As one of the foremost international financial institutions, the World Bank (“Bank”) aims to strengthen economic progress in middle- and lower-income nations by providing financial aid for various development projects.[1] However, in 2018, the Bank sanctioned an Indian enterprise which was engaged in executing a Bank-funded project[2], highlighting the accountability of these funds. Recipients of these funds are held accountable by the Bank for using the proceeds responsibly, which is where the Bank’s sanctions regime becomes relevant.
Fiduciary duty and jurisdiction to impose sanctions
To combat widespread corruption and fraud in development projects worldwide, the sanctions regime aims to target entities engaged in such practices. By doing so, the Bank ensures financial aid is provided to only those entities that adhere to the highest standard of ethical conduct while using such funds for executing Bank-funded projects, thereby fulfilling its ‘fiduciary duty’[3]. The Articles of Agreements that the Bank executes with recipient entities establish this fiduciary duty by mandating specific obligations on the entity, including adherence to prescribed guidelines. Through these Articles, the Bank derives the ability to impose sanctions.
Sanctionable conduct and imposition of sanctions
The Bank defines corrupt, fraudulent, coercive, and collusive practices as ‘sanctionable conduct’ and imposes five kinds of sanctions:
- Absolute Debarment implies that the sanctioned entity cannot be involved in any Bank-funded project in any capacity for a fixed duration of time. However, it must be noted that such debarment is forward looking, and no existing contracts come within the scope of this sanction.
- Conditional Debarment is debarment for a fixed period, which can be removed if the sanctioned entity undertakes Bank-prescribed remedial action.
- Conditional Non-Debarment implies that the Bank agrees not to sanction the entity, provided certain prescribed remedial conditions are fulfilled.
- Letter of Reprimand is issued by the Bank to formally admonish the entity for engaging in sanctionable conduct.
- Financial Restitution results in the entity returning the Bank-allocated funds, along with any illicit profits earned. It could also involve funds furnished to remedy the harm caused to the public.
Sanctioning procedure
The Bank’s sanctioning procedure is a two-tiered model:
- The Integrity Vice Presidency (INT) uses its investigation cum audit powers to investigate whether the entity in question has engaged in sanctionable conduct during the execution of a Bank-funded project, and submits its final observations, backed by relevant evidence to the Evaluation and Suspension Officer (EO).
- The Office of Debarment and Suspension to which the EO belongs, reviews the final submissions, of the INT and if satisfied these submissions, imposes a sanction on the entity. The office also has the power to temporarily suspend the entity from participating in any Bank-funded project. If the entity does not contest the imposed sanctions, it becomes final. The World Bank Sanctions Board is called upon to adjudicate the matter if the entity chooses to challenge the order of the Office of Debarment and Suspension. However, the decision of the Sanctions Board, post reviewing the evidence and hearing the arguments of the entity, is final, and there can be no further appeal. This decision is subsequently published in the designated list maintained by the Bank for such barred entities and individuals.
Who can be sanctioned?
The Bank can target any stakeholder, who is a part of the entire ecosystem involved in the implementation of development projects, including borrowers, bidders, contractors, sub-contractors, suppliers, consultants, sub-consultants, vendors, representatives of a legal entity or any recipient of loan proceeds; encompassing agents responsible for the transfer of such funds or individuals who significantly influence the use of such loan proceeds.[4]
The Bank can even pursue and sanction third parties associated with such projects under the ‘Third Party Audit’ clause, which allows it access to contract and bid documentation.[5]
Impact of the Bank’s sanctions on Indian companies
Direct consequences include loss of access to the Bank’s funds and prohibition from participating in Bank-funded projects in any capacity. Furthermore, the Agreement for Mutual Enforcement of Debarment Decisions allows other Multilateral Development Banks, i.e., Asian Development Bank, African Development Bank, European Bank of Reconstruction and Development and Inter-American Development Bank, to debar the sanctioned entity, cutting off access to multiple major sources of foreign financing.
Indirect impacts include reputational damage, challenges in entering international trade agreements/ partnerships/ joint ventures, difficulty attracting private foreign investment, restricted access to foreign markets, and potential declines in share prices and investor confidence.
Impact of the Bank’s sanctions on Indian banks and financial institutions
Indian banks often engage in refinancing schemes with the Bank, which involves borrowing a large sum of money from the Bank to lend to entities for a specific development project in the country, as was the case with the SBI’s $500 million loan from the Bank.[6] If an Indian bank lends money to a sanctioned Indian company under such schemes, it risks exposure to severe sanctions from the Bank for inadequate due diligence before lending the Bank’s funds.
Domestic engagement with sanctioned Indian companies can lead to severe scrutiny from both the Indian government and the Reserve Bank of India if countermeasures have to be imposed due to international pressure.[7] This would impede the functioning of such domestic banks/ financial institutions due to potential penalties or investigations by domestic law enforcement authorities.
Ways to Lift the Bank’s sanctions
A sanctioned company can pursue ‘Negotiated Settlements’with the Bank, with permission from the General Counsel of the World Bank and the Vice President of the Operations Policy and Country Services.[8] Certain factors are considered by the Bank before deciding if settling is a feasible option, including free will, degree of cooperation by the alleged entity, whether significant resources can be saved, and the value of any information the alleged entity can provide about its own or others’ malfeasance.
Implementing an ‘Integrity Compliance Policy’, aligned with the Bank’s prescribed guidelines[9], is another avenue. While typically adopted post-sanction, implementing a robust compliance policy can benefit Indian companies seeking Bank-funded projects. Key areas for internal compliance controls include:
- Employee Due Diligence: Establish a robust policy that thoroughly vets employees at all levels of the organisation, emphasising connections with public officials, prior misconduct, conflicts of interest, background, qualifications, and personal attitude toward integrity compliance.
Employee contracts must contain detailed clauses that place emphasis on compliance with applicable laws and regulations, prohibition from engaging in misconduct, disclosure of potential conflicts of interest, having to report suspected misconduct, need for cooperation during investigations and audits.
Special emphasis also needs to be placed while hiring public officials to ensure that they do not engage in business activities related to their former governmental roles, for an adequate period after vacating office.
- Due Diligence of Business Partners: Conduct comprehensive due diligence of business partners before their on-boarding, focusing on their history of suspected misconduct, sanctions by a national authority or international organisation, or association with sanctioned entities or individuals, undisclosed beneficial owners, opaque ownership structures, involvement of government officials in senior roles. Establish strong policies and procedures that govern essential parameters during project bidding, mandatory vetting, approval rules for engagements with consortium partners and other third parties (contractors, suppliers) while project execution.
Contracts should mandate clauses requiring compliance with applicable laws and regulations, abstinence from any activity constituting misconduct, divulgence of potential conflicts of interest, mutual support in investigations and audits, termination of agreement, disclosure of changes in corporate structure.
- Financial Controls: Establish proper policies for identification and verification of how the Bank funds are being utilised for the execution of the development project. This requires placing special emphasis on identification, approval of financial transactions by the senior management, regular internal and external audits, proper recording of financial transactions with supporting transactions, ensuring no “off the books” accounts are used, no recording of expenditures that do not exist, or of liabilities that are not correctly or adequately identified.
- Training, Monitoring and Reporting of Violations by the Employees: Train employees to understand and identify sanctionable activities, and monitor all activities related to the development project, both internally and externally. Employees must be empowered through channels such as whistleblower mechanism to come forward and report any violations, which may have occurred during the execution of the development project.
Key Considerations for Indian Entities
Indian companies and banks must be aware of the extent of the World Bank’s jurisdictional arm, if a sanctionable practice occurs during the execution of a Bank-funded development project. Depending on the degree of exposure, such sanctions may be imposed on the primary entity, its subsidiaries and associated third parties.
Defending themselves during formal adjudication proceedings in front of the Bank’s Sanctions Board requires proper understanding and interpretation of the Bank’s sanction guidelines, review of evidence/ circumstances, and strategic planning for constructing defence in front of the Sanctions Board.
Indian companies and banks must develop comprehensive compliance measures that align with the Bank’s expectations. A strong compliance framework not only mitigates the risk of engaging in sanctionable conduct, but also positions entities favourably when seeking future opportunities with the Bank. By proactively addressing these considerations, Indian companies and banks can navigate the complexities of the World Bank’s sanctions regime effectively and engage in productive engagements in international development projects.
* The authors were assisted by Varun Vishwanathan (Intern)
[1] Development Projects : Uttar Pradesh Agriculture Growth and Rural Enterprise Ecosystem Strengthening Project – P178253.
[2]World Bank bars Famy Care, Olive Healthcare from receiving its contracts.
[3] IBRD Articles of Agreement: Article III.
[4] Procurement Guidelines:, Section 1.16 (e); Consultant Guidelines, Section 1.23 (e); and Anti-Corruption Guidelines
[5] Procurement Guidelines:, Section 1.16 (e); and Consultant Guidelines, Section 1.23 (e).
[6] India’s largest state bank refinances an IBRD loan via private lenders, with MIGA1 guarantee. Case-Study-India-SBI-Refinancing.pdf
[7] RBI KYC Master Guidelines, Guideline 53B, Reserve Bank of India.
[8]The World Bank Group’s Sanctions Regime: Information Note The_World_Bank_Group_Sanctions_Regime.pdf
[9] Integrity Compliance Programs: Practical Guidance and Resources. World Bank Document.
