Measures agreed in Luxembourg yesterday would prevent a company found to be using corrupt means by one development bank from obtaining contracts from another, which is possible under current practices.
“It means an injury to one is an injury to all,” said Leonard McCarthy, who heads the World Bank’s anti-corruption unit. “For those companies that do wrong, the world is going to become a smaller place and it will cause a significant rise in the cost of fraudulent and corrupt business practices.”
McCarthy, who is vice president of the Department of Institutional Integrity at the World Bank, said the new measures amounted to “an internationalization of punishment” for companies and individuals involved in wrongdoing.
“What we see happening is that companies debarred by the World Bank create a new identity with very much the same DNA, the same role-players, call it something else, and then go and do business with another development bank,” he told Reuters.
The banks include the European Bank for Reconstruction and Development, the World Bank, the Asian Development Bank and the African Development Bank, which invest billions of dollars a year in projects to reduce poverty and promote economic growth in developing countries.
‘Cancer of corruption‘
It is difficult to estimate how much money is lost to fraud and corruption in bank-funded projects.
Since the Enron scandal which erupted in 2001 and the global financial crisis that reached a climax in 2008, governments and institutions have been tightening the rules under which big financial firms operate to try to ensure that their actions are open and more easily monitored.
Sanctions by the institutions typically include reprimand, conditions on future contracting, or debarment either for a period of time or permanently.
The World Bank has barred 44 companies so far this year, reflecting its stepped up effort to root out fraud and corruption in projects it finances.
World Bank President Robert Zoellick said the measures gave the banks a strong new tool to hold accountable firms that are engaging in fraudulent and corrupt practices and were a powerful incentive for firms to clean up their operations.”
“The rules of the road have gotten tougher,” he said in a statement.
McCarthy said he believed the rules would deter corruption and carry both financial and reputation risks for companies whose actions would be published on a public database.
Fraud and corruption generally occur during the planning and design phases of development projects when many of the funding commitments are made.
McCarthy said experience over the years had also shown that health, education, infrastructure and energy sectors appeared to be most vulnerable to fraud and corrupt practices.
“Much of the wrongdoing is around simple fraudulent conduct coupled with collusion although it is very difficult to often put your finger on corruption,” he added.
