International financial institutions, like the World Bank, play an increasingly important role in confronting companies and individuals who revert to unethical and unlawful conduct to gain a competitive advantage in the marketplace. And conditional non-debarment might be the most powerful tool they have.
Through negotiated resolutions between malfeasant companies and the respective International financial institutions (IFIs), or through contested adjudication resulting in findings of guilt, sanctions levied on such companies have often included multi-year periods of debarment or ineligibility. Conceptually this makes sense — one way to prevent a recurrence of malfeasance is to simply prevent a party from bidding for a period of time. However, this sanction, the equivalent of a corporate “time-out,” if not held in reserve for the most serious cases, can actually be counter-productive in the long term.
Increasingly, over the last decade, the anti-corruption enforcement community recognized that placing a company in corporate time out without requiring it to change the business practices that got the company in trouble in the first place was, in effect, just kicking the can of corrupt practices down the road. Out of this realization grew the increased use of sanctions with mandatory conditions for rehabilitation, the underpinning of both U.S. DOJ Deferred Prosecution Agreements as well as the African Development Bank and World Bank’s “debarment with conditional release,” the World Bank’s default sanction since Fall 2010. In virtually all sanctions of this type, a company legally obligates itself to institute (or improve) and effectively implement a corporate compliance program in exchange for a reduced penalty or term of debarment.
While an Integrity Compliance Officer for the World Bank Group, I worked with many companies as they sought to implement such corporate compliance programs that follow generally recognized international standards, particularly the World Bank’s Integrity Compliance Guidelines.
Through this experience, I went from seeing debarment with conditional release as an appropriate default sanction for fraud, corruption, and other forms of misconduct, to viewing it as but one response to corporate misconduct, but not the one that necessarily merits being the default sanction, especially in instances where the misconduct is not egregious or pervasive.
The effects of a debarment ripple out far beyond the sanctioned entity and are acute. This is especially true in cases brought by IFIs where cross debarment is triggered, and which involve small to medium-sized enterprises in developing countries. Two specific cases stand out in my mind. Each involved relatively small but locally important civil works companies, which were separately found to have submitted fraudulent documents with their respective bids. Both were sanctioned with debarment with conditional release.
As a result, one went from having approximately 36-day laborers to less than a half dozen, and the other laid off nearly its entire daily workforce of nearly 100. Both companies were ultimately released from debarment after putting in place and implementing effective corporate compliance programs. However, in the intervening years, approximately 120-day laborers found themselves unemployed — and unable to provide for the probably hundreds who relied on their wages — as a result of misconduct in which they had no part.
As anti-corruption enforcement efforts mature beyond the “nail ‘em and jail ‘em” approach, there is much to recommend the less flashy, but often more-effective and less-disruptive, sanction of conditional non-debarment. Debarment with conditional release is a stick with a carrot, whereas conditional non-debarment is a carrot with a stick. Under a conditional non-debarment, the admitted offending entity does not lose its ability to continue with its commercial activities, but must agree to certain conditions, like full cooperation with the relevant investigative body; the adoption and effective implementation of a corporate compliance program, often under the watchful eye of a retained compliance professional; and when appropriate, monetary fines (which serve to negate the corrupt incentive).
This sanction, with agreed-upon rigorous and legally enforceable conditions, has clear benefits.
It enables a company to stay in business and those that work for it to remain employed, something of increased importance in a Covid-19 world. By keeping another participant in the marketplace, competition remains robust.
It also keeps in the marketplace a company now bound to enhance and effectively implement its ethics and compliance program — under threat of crushing sanctions if they fail to meet the conditions of non-debarment — rather than risking abandoning the playing field to perhaps untested competitors. Further, the company’s obligation for full cooperation means that authorities learn from the inside how the fraudulent and corrupt schemes worked, and participants in them are no longer protected by the corporate Omerta upon which they used to rely.
Such companies also have strong incentives not only to police themselves but also to police their competitors and report others’ misconduct on IFI-financed projects.
I do not suggest that there should not be severe consequences where justified, or that for first-time offenders there would not be circumstances that might justify debarment. But it is time to reconsider the default sanction of debarment with conditional release in favor of conditional non-debarment. By giving the company the opportunity to become part of a solution, conditional non-debarment can help enable the private sector, and not just authorities, “to level the playing field.”