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How does the European Investment Bank assess fraud risks in its lending operations?

The European Investment Bank’s Inspectorate General Investigation Division started conducting Proactive Integrity Reviews (PIRs) in 2010, with the main objective to identify potential vulnerabilities and major fraud risks of EIB-funded operations and projects.

The major difference between a PIR and an investigation is that an investigation is opened on the basis of an allegation received, while a PIR is launched as a result of a risk assessment or a request from other European Investment Bank (EIB) services.

PIRs look at whether the funds are being used for their intended purpose(s), to assess the project’s vulnerability to prohibited conduct, and to identify areas of higher risk (red flags) and recommend remedial action.

In each case, the EIB’s Inspectorate General Investigation Division looks to see if there should be a follow-up investigation.

The main challenge in the proactive detection exercise is the selection of the operation (or operations) for review, especially in the context of time, staff and budget constraints. For that reason, the PIR team at EIB developed its own unique methodology.

As described in the Fraud Investigations Activity Report 2018 (available here), the team mobilized the efforts of EIB colleagues from different departments (operations, finance, control, monitoring, IT etc.) in 2017  to identify, from a fraud risk perspective, the most relevant data available within the Bank and create a Fraud Risk Scoring Tool (FRST). Several external databases were also integrated in the system to complete the “big picture.” In addition, algorithms were developed to build up more than 30 fraud risk indicators (red flags).

A specific fraud score is attributed (the sum of the 30+ indicators) to every operation. All projects are compared according to these risk factors, which capture different issues such as project implementation delays, procurement, social and environmental issues, contractual breaches, adverse media news, borrowers’ internal EIB and external ratings, country specific risks, compliance issues, sanctions, and so on.

The PIR team also uses a data visualization tool (see image below). It allows the team to monitor the current risk score of all operations through various graphics, and filter the results which can then be reviewed against peers.

FRST provides the possibility to change the weighting of the various risk factors in the total fraud score, depending on the importance of each of them for the specific group of projects under assessment. During the pilot phase of FRST in 2018, results confirmed the relevance and importance of the fraud risk indicators used in the model.

After an EIB employee spots a particular risk, pre-selected by the PIR team, this will immediately be reflected in the scoring model and consequently increase the overall fraud risk of the operation. In addition, access to current project information allows active monitoring of the fraud risk evolution so that risk trends can be spotted in particular sectors, financial products, or geographical regions.

For example, a lending operation was highlighted by FRST in a country in Africa due to its high fraud risk score. The project had experienced significant delays and EIB’s operational appraisal deteriorated. Finance contract covenants were breached and several other red flags emerged.

Following a detailed review of the available documentation and internal discussions with operational staff, as well as a review of external databases, the red flags were confirmed. Shortly after the PIR review, the CEO of the company in charge of the project was accused of corruption by local authorities (unrelated to the PIR). A criminal investigation is ongoing and the EIB is closely monitoring the project.

PIRs have proven to be an effective tool for identifying indications of unreported irregularities which would otherwise continue undetected despite the existence of other, regular controls.

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Duncan Smith is Deputy Head of Fraud Investigations at EIB, responsible for a range of policy, training, outreach, prevention and deterrence issues. After being called to the Bar, he spent 10 years prosecuting at the UK’s DTI and Serious Fraud Office. He joined World Bank’s Investigation Unit as Team Leader then policy/debarment adviser, moving to EIB in 2007. He’s co-author of the IFI Task Force’s Uniform Framework Agreement (2006) that harmonized the definitions of fraud and corruption across the multilateral development banks.

Anton Karadimov works for the EIB’s Fraud Investigations Division. He’s in charge of the continuous development of the fraud risk scoring tool and also takes part in the PIRs performed by the unit. After obtaining his Masters in Audit, Accounting and Control, he worked more than 13 years as consultant in fraud investigations, anti-corruption audits, fraud prevention and detection projects and as internal auditor.

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