ASIA AND THE PACIFIC

Annual performance review

WORKSHOP1-4 March 2009

Bangkok, Thailand

Combating Fraud and Corruption

in IFAD-funded Projects and Programmes

IFAD, Office of Audit and OversightKaren Juergens

Kofi Annan

“Corruption hurts the poor disproportionately – by diverting funds intended for development, undermining a government’s ability to provide basic services, feeding inequality and injustice, and discouraging foreign investment and aid.”

Secretary-General of the United Nations - Statement to the General Assembly on the UN Convention Against Corruption

(31 October 2003)

Overview

Context

IFAD’s Anti-corruption policy (“rules”)

Fraud/corruption indicators

Prevention & practical countermeasures (“tools”)

Investigation process

Your input

How big is the problem?

$40 billion per year in corrupt money flowing out developing countries.

40 % of annual official development assistance funds.

It’s only 10%?

IFAD-financed procurement: > USD 500 million a year 50 million

No one works for free – 10% is the profit margin

Domino effect: Fraud committed to recover the bribe, kickback

Poor quality – bridge built badly / falls down The bribe was too much – bridge is not

built

The problem

Delays in implementation Selection of unqualified contractors Inflation of costs Failure to complete works

Deters investment Prevents development Adds to unproductive debt

Transparency International Corruption Perception Index

This …

…won’t help!

The IFAD Anti-Corruption Policy

Approved by the IFAD Executive Board in 2005

Established a zero-tolerance policy towards fraud and corruption both at HQ and in IFAD activities and operations in the field

Zero-ToleranceThe Fund shall apply a zero-tolerance policy where it has determined,through an investigation performed by the Fund, the borrower or another competent entity, that fraudulent, corrupt, collusive or coercive actions have occurred in projects financed through its loans and grants, and it shall enforce a range of sanctions in accordance with the provisions of applicable IFAD rules and regulations and legal instruments. “Zero tolerance” means that IFAD will pursue all allegations falling under the scope of this policy and that appropriate sanctions will be applied where the allegations are substantiated. This policy applies to IFAD-funded activities whether supervised directly by the Fund or by a cooperating institution. The Fund will continue to improve its internal controls, including controls inherent in or pertaining to its project activities, so as to ensure that it is effective in preventing, detecting and investigating fraudulent, corrupt, collusive and coercive practices. The Fund shall take all possible actions to protect from reprisals individuals who help reveal corrupt practices in its project or grant activities and individuals or entities subject to unfair or malicious allegations. This policy is in line with the policies adopted by the other international financial institutions.

Meaning?

i. All significant allegations received will be investigated

ii. Appropriate sanctions will be applied in all proven cases

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Obligation of IFAD staff and consultants

1.3. Staff members and consultants have an obligation to report potential or alleged fraud/corruption without delay.

3.2. Staff members and consultants are required to cooperate unreservedly with any investigation conducted by OA and to respond promptly and fully to OA requests for information.

IFAD President’s Bulletin 2007/02, Annex I IFAD Investigation and Sanction Processes

It is the Government’s money - Does IFAD have the

right? IFAD member states agreed AC Policy Loan Agreement To be used only for the purposes for which

the financing was provided** To help rural poor, not project / government

officials or suppliers beneficiaries’ money Highly concessional loan - not commercial* Other IFAD restrictions: non-objections,

project design and audit reports Reputational risk

Types of fraudulent/corrupt practice

Corrupt practices

Fraudulent practices

Collusive practices

Coercive practices

Embezzlement

Conflict of interest

Interests that could improperly influence performance of official duties or responsibilities, contractual obligations or compliance with applicable laws and regulations

Problem if undeclared, may constitute a prohibited practice under the anticorruption policy

Why is this a problem?

Perception of corruption – undermines confidence in the process

Leads to false accusations

Protect yourself – be transparent

– declare every connection to suppliers

– declare property ownership in relevant areas

How do I know?

The $ in your pocket – if it comes from a supplier, it’s probably not allowed

Would I be happy for IFAD to know about it?

Red Flags of fraud / corruption

Persistent high prices Poor quality works

Unnecessary agents (“middlemen, ”local partners”)

Inadequate/incomplete documentation

Lack of or inadequate inspections

Project official ‘micro managing’

Bid Manipulation Red Flags

High prices

Connections between bidders

Vague/narrow bid specifications

Split contracts just below threshold ($9,999)

Same bidders bid, rotation of winning bidders

Questionable disqualification of bidders

How to combat the problem

Acknowledge Prevent: Training; contractor

compliance; voluntary disclosure programs Transparency: Project financial details

(contract log; proc. plan); CoI; checks & balances

Encourage and facilitate reports of concerns;

Enforce sanctions: withhold payments;

debar; refer violators f. prosecution

How to combat the problem

Practical countermeasures

“Rules but no tools?” Accountability for results:

– Red flags present? – Fair price? - Good quality?

Look behind the documents, “Professional Skepticism”

Closer reviews/SPN and inspections, procurement audits

Publicize contract register, procurement plan Inquire and report to IFAD Prevent: Get beneficiaries & civil society involved Create complaint mechanisms

What will IFAD do?

We will call or e-mail you We will corroborate what you say We will come and investigate if

credible We will be discreet We will exercise “healthy suspicion” We will support you

What will we NOT do?

Fly across the world whenever an allegation is made

Shut down the project immediately Tell your boss what you said about him Tell other staff/suppliers that you have

spoken to us Pay you anything or give you a better job

following your complaint

Protection from retaliation and from malicious accusations

Retaliation against good faith complainants / witnesses not tolerated*

– “no proof”

Absolute confidentiality throughout the investigative process

What do we need?

Details – Who?– What? – Where? – When?– Why?– How?

Documents Discretion

Then what?

Investigation Try to work with government Suspension or Debarment of firms /

individuals Criminal prosecution Suspension of loan Cancellation of loan

Contact ?

k.juergens@ifad.orgTel: +39 06 5459 2006

anticorruption@ifad.org

Confidential online complaint form: www.ifad.org/governance/anticorruption

Substandard goods

  

First class transport links

Universal Healthcare

Sustainable infrastructure

High quality schools

Diversion of resources: School?

Actual school

Questions?

Definitions

Corrupt practices

“the offering, giving, receiving, or soliciting, directly or indirectly, anything of value to influence

improperly the actions of another party”

Fraudulent practices

“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”

Collusive practices

“an arrangement between two or more parties designed to achieve an

improper purpose, including influencing improperly the actions of

another party”

Coercive practices

“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”.

Conflict of interest

“a situation in which a party has interests that could improperly

influence that party’s performance of official duties or responsibilities,

contractual obligations or compliance with applicable laws and regulations, and that such conflict of interest, if undeclared, may contribute to or

constitute a prohibited practice under the anticorruption policy”.

AC Provisions

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Paris Declaration on Aid Effectiveness Art. 4(v)

We commit ourselves to taking concrete and effective action to address the remaining challenges, including:…

“corruption and lack of transparency, which erode public support, impede effective resource mobilisation and allocation and divert resources away from activities that are vitalfor poverty reduction and sustainable economic development”.

Agreement Establishing IFAD

“The Fund shall make arrangements to ensure that the proceeds of any

financing are used only for the purposes for which the financing

was provided […]”

Article 7, sec. 1 (c)

Model Loan Financing Agreement - August 2007 Article VI

Remedies of the Fund

Section 6.01. Suspension. (a) The Fund may suspend, in whole or in part, the right of the Borrower to request withdrawals from the Loan [Grant] Account […] if:(k) The Fund has given notice to the Borrower that credible allegations of corrupt or fraudulent practices in connection with the Project/Programme have come to the attention of the Fund, and the Borrower has failed to take timely and appropriate action to address the matters to the satisfaction of the Fund.

General Terms and Conditions for Agricultural Development Financing

Section 12.02. Cancellation by the Fund. If any of the following events has occurred, the Fund

may terminate the right of the Borrower to request withdrawal […] from the Loan Account:

(c) at any time, after consultation with the Borrower, the Fund hdetermines that corrupt or fraudulent practices were engaged in by representatives of any Loan Party, Project Party or beneficiary in respect of any amount of expenditures incurred during the procurement or the carrying out of any contract financed by the Loan, and that the Borrower has failed to take timely and appropriate action to remedy the situation;

General Terms and Conditions for Agricultural Development Financing

Section 10.03. Visits, Inspections and Enquiries.The Loan Parties and the Project Parties shall enable agents and representatives of the Fund and the Cooperating Institution from time to time to:

(a) visit and inspect the Project, including any and all sites, works, equipment and other goods used for Project-related purposes;

(b) examine the originals and take copies of any data, accounts, records and documents relevant to the Loan, the Project, or any Loan Party or Project Party; and

(c) visit, communicate with and make enquiries of all Project personnel and any staff member of any Loan Party or Project Party

IFAD Procurement Guidelines (projects) IPart A, sec. 15

“It is IFAD’s policy to require that the staff of IFAD and the Borrower (including

beneficiaries of IFAD loans) as well as all bidders, suppliers, contractors and consultants under IFAD-financed

contracts observe the highest standard of ethics and integrity during the

procurement and execution of such contracts.[...]”

IFAD Procurement Guidelines (projects) IIPart A, sec. 15

IFAD will reject a proposal for award if it determines that the

bidder or consultant recommended for award has […] engaged in corrupt, fraudulent, collusive or coercive practices in competing for the contract […];

(iii) will cancel the portion of the loan allocated to a contract […] if it determines […] that representatives of the Borrower or of a beneficiary of the loan engaged in corrupt, fraudulent, collusive or coercive practices during the procurement or the execution of that contract, without the Borrower having taken timely and appropriate action satisfactory to IFAD to remedy the situation;

(iv) will sanction (which includes the possibility of declaring ineligible) an individual or firm – either indefinitely or for a stated period of time – to be awarded an IFAD-financed contract if it […] determines that the individual or firm has […] engaged in corrupt, fraudulent, collusive or coercive practices […] “

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IFAD President’s Bulletin 2007/02, Investigation and Sanction Processes

Annex I 1.3. Staff members and consultants who, in

the course of their official duties, become aware of potential or alleged irregular practices have an obligation to report their observations and/or information in their possession to OA through any of the above mechanisms, without delay.

IFAD President’s Bulletin 2007/02, Investigation and Sanction Processes

Annex 1 3.2. Staff members and consultants are required to

cooperate unreservedly with any investigation conducted by OA and to respond promptly and fully to OA requests for information. Staff members and consultants are also expected to provide any additional relevant information that might be unknown to OA, whether or not requested to do so. Additionally, staff members shall provide assistance to OA in its dealings with borrowers/recipients and projects/programmes with whom a staff member, by virtue of his/her duties, has more direct involvement. Failure to cooperate with investigations may constitute misconduct.

Consultants’ Declaration

11. I understand that if in the course of my contract I become aware of potential or alleged irregular practices, I have an obligation to report my observation and/or information in my possession to the Office of Audit and Oversight without delay.

12. I understand that I have an obligation to cooperate unreservedly with any investigation conducted by the Office of Audit and Oversight even after the duration of my contract.

(to be signed by all IFAD consultants since 2008)

Contact ?

k.juergens@ifad.orgTel: +39 06 5459 2006

anticorruption@ifad.org

Confidential online complaint form: www.ifad.org/governance/anticorruption