Managing Fraud and Corruption Risks in Development Projects

1
Managing Fraud and Corruption Risks in
Development Projects

• Department of Institutional Integrity
• World Bank

2
INTs Mandate

• INT is to play a key role in ensuring that Bank
  Group and
• Donor funds are used for their intended purposes.
  
• To this end, INT is tasked to
• Investigate allegations of fraud and corruption
  (FC) in Bank Group operations allegations
  staff misconduct
• Use its expertise lessons learned from its
  findings to recommend measures to prevent misuse
  of these funds
• Train staff to prevent/detect FC in WBG
  operations
• Devise proactive efforts to identify and
  eliminate FC
• INT Terms of Reference (Approved by Board July,
  2004)

3
INT - What We Do

• Investigate allegations of fraud, corruption,
  collusion
• Assess Risk in Bank projects and programs and
  mainstream information into future operations
• Advise staff early in the project design stage
  on measures that can protect projects from fraud
  and corruption
• Train Bank staff and clients on fraud and
  corruption
• Deter malfeasance through education, proactivity,
  and publication of sanctions
• Promote an environment whereby staff can report
  allegations without fear of retaliation
• Contribute to the international fight against
  corruption

4
GAC and INT

• INT has a role within the broader governance and
  anti-corruption agenda together with other Bank
  entities
• Strengthening Governance and Anticorruption
• Strategy
• Need for feedback loop to incorporate lessons
  learned from INT investigations into future
  project designs and sector and system reforms
• GAC Implementation Plan
• INT has role in preventing corruption at all
  phases of the project cycle

5
Volcker Panel Review

• Independent panel (Feb. 2007) chaired by Paul
  Volcker
• As part of strengthening the Banks governance
  and anti-corruption (GAC) strategy
• To review INTs role, responsibilities and
  working relationships in and outside the Bank
• Input from Bank staff, other MDBs, Governments
  and Civil Society
• Final Report September 13, 2007

6
Volcker Implementation

• Working Group established in September 2007
• Staff views and public comments incorporated
• Report was published in January 2008
• All recommendations were accepted
• Ensured that implementation strengthens GAC
  strategy

7
Preventive Services Unit (PSU)

• Created in response to Recommendation 3 The
  Need for an INT Consulting Unit
• PSU has NO clearance function
• Identified need for rotation of investigative and
  operational staff into PSU
• Responds to Volcker recommendation for greater
  integration of INT with Operations

8
INT and the Project Cycle
Classic (Reactive) Focus Complaint-triggered
investigations during and after implementation

Country Assistance Strategy


Identification
Evaluation

Preparation

Implementation and Completion


Implementation and Supervision
Appraisal

Negotiations and Board Approval
Pro-active (Preventative) Focus Risk-specific
advice and training in parallel with the Project
Cycle
9
Key Business Lines PSU

• Fraud and corruption risk assessment and
  mitigation advice to operational staff
• Training of both WBG staff and client
  stakeholders
• Research to distill lessons learned and
  promulgate best practices
• Support to client anticorruption functions

10
PSU Resources

• Seven staff members (1 GH, 1 GG,
• 2 GF, 2 GE, and 1 GC)
• Expertise in Bank operations, PR, FM, training,
  research, outreach and DB management
• Staffing budget 1,300,000
• Work budget 500,000

11
Challenges

• Establishing a knowledge database
• Prioritizing the many competing demands
• Recruiting new staff
• Clarifying working modalities vis-à-vis the
  Investigations Unit
• Positioning the PSU as a constructive partner
  among internal clients

12
Opportunities

• Become a preferred partner for advice to
  operational colleagues based on the advantages
• Become a positive agent of change of attitude
  towards issues of fraud and corruption in Bank
  projects by operational staff
• Foster an environment in which managers encourage
  staff to be alert of and report indicators of
  fraud or anticorruption in Bank Group operations

13
Value Added by PSU

• Center of knowledge of fraud and corruption
• Expertise in on-the-ground governance issues
• Diverse background of INT staff
• Findings in different sectors/regions/countries

14
PSU Knowledge Database

• Engine of the Preventive Services Unit
• Organization of Findings and Recommendations
  from
• INT Investigative Reports
• Detailed Implementation Reviews (DIRs)
• Voluntary Disclosure Program (VDP) Disclosures

15
The Two Pillars of PSU
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Operational Advice

• Fraud and Corruption Risk Assessment and
  Mitigation Advice

17
Objective

• Present a structured approach to staff in
• operations to help prevent fraud and
• corruption throughout the project cycle

18
Benefits of PSU Advice

• Mitigation measures have been considered on a
  rational, cost-benefit basis
• Task Teams accountability in the supervision
  phase has been clarified up-front
• Risk control framework can be adjusted in light
  of events and INTs experience in Region and
  Sector

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Some Common Pitfalls (1)

• Fraud and corruption risks not mentioned, even
  where relevant
• Risks are described at too high a level
• Mitigation measures are not specific in terms of
  who does what when
• Government and donor roles in risk mitigation not
  mentioned / explicit

20
Some Common Pitfalls (2)

• Capacity building efforts seen as synonymous with
  risk mitigation
• Supervision, prior review thresholds, etc. are
  not linked to specific threats
• Monitoring framework not clearly spelled out
• No integration of fraud corruption risks in
  overall risk mitigation and reporting plan

21
Building Blocks

• Task Teams / Regional teams are the most valuable
  resource for identifying risks
• Past project audit reports, ICRs, etc.
• Knowledge of donors, government officials and
  trusted third parties
• Lessons learned from INT investigations, DIRs and
  VDP disclosures

22
Risk Assessment

• Identifying and Prioritizing Risks
• Identify Fraud and Corruption Threats
• Identify Critical Decision Makers
• Identify Critical Project Assets
• Identify Control Weaknesses
• Determine Possible Impact
• Rank Risks

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Identify Fraud Corruption Threats
Identification
Design
Procurement
Implementation
Project benefits decision makers constituency
Specifications tailored to particular company
Bidders collude to seek higher prices
Goods not delivered according to specification
Project benefits particular company / few
companies
Officials steer contracts to favored bidders
Invoices are over-paid
Invoices are over-paid
Officials demand facilitation payments
Officials exclude eligible beneficiaries
Ineligible beneficiaries misrepresent their status
Beneficiary payment for free services
Officials embezzle project funds
Higher
Medium
Lower
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Identify Control Weaknesses
Procurement
Financial Mgt.
Oversight
Supervision

• Procurement staff split contracts to avoid Bank
  prior-review
• Poor document retention
• Just below threshold
• ECE is leaked
• Contract awarded prior to Banks NOL
• Audit clause is omitted from the contract
• Procurement manuals not existing
• Procurement plan is poorly defined
• BEC Members steer contracts
• Procurement documents are not retained

• Ledger cannot be balanced
• Accounting records are not matched with invoices
• Receipts are missing

• Audits are not effective
• Supervision agent signs-off on poor quality work

• Time set aside for supervision not adequate in
  light of risk
• Supervision does not target key risk areas
• Team does not have adequate skills to detect
  implementation related fraud and corruption

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Example of Risk Control Framework
Risk Indicator Control Evidence
Bidders collude to inflate prices in contracting for the construction of five highway segments Lowest bidder is not selected Selected bidder is more than 20 above ECE Some cost elements vary more than 50 among winning and loosing bidders Allegations of collusion / corruption are received Winning bidder subcontracts losing bidders Government
Bidders collude to inflate prices in contracting for the construction of five highway segments Lowest bidder is not selected Selected bidder is more than 20 above ECE Some cost elements vary more than 50 among winning and loosing bidders Allegations of collusion / corruption are received Winning bidder subcontracts losing bidders Advertise contracts in three national and two international newspapers six weeks prior to RFP deadline Newspaper clippings
Bidders collude to inflate prices in contracting for the construction of five highway segments Lowest bidder is not selected Selected bidder is more than 20 above ECE Some cost elements vary more than 50 among winning and loosing bidders Allegations of collusion / corruption are received Winning bidder subcontracts losing bidders Establish effective and transparent complaint handling mechanism Questionnaire after 12 months among stakeholders shows that 80 are aware of and 60 have confidence in the complaints handling mechanism No. of complaints registered / resolved Complaint statistics posted on web and submitted to MoF and donors
Bidders collude to inflate prices in contracting for the construction of five highway segments Lowest bidder is not selected Selected bidder is more than 20 above ECE Some cost elements vary more than 50 among winning and loosing bidders Allegations of collusion / corruption are received Winning bidder subcontracts losing bidders Bank
Bidders collude to inflate prices in contracting for the construction of five highway segments Lowest bidder is not selected Selected bidder is more than 20 above ECE Some cost elements vary more than 50 among winning and loosing bidders Allegations of collusion / corruption are received Winning bidder subcontracts losing bidders Review pre- and post-qualification criteria to avoid undue exclusion of bidders Bank No Objection issued to Government
Bidders collude to inflate prices in contracting for the construction of five highway segments Lowest bidder is not selected Selected bidder is more than 20 above ECE Some cost elements vary more than 50 among winning and loosing bidders Allegations of collusion / corruption are received Winning bidder subcontracts losing bidders Set aside additional time for review of winning and loosing bidders 40 hours work recorded by procurement staff in TRS
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High Impact/Probability Risks
Risk Impact Probability Score
8
8
64
Bidders collude to inflate prices in contracting
for the construction of five highway segments
Who does what when with which immediate impact?
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Risk Mitigation (1)

• When looking at mitigating risks, consider
• Strengthen Project Safeguards - internal control
  mechanisms, audits, transparency measures, etc.
• Deter Corrupt Actors - through additional
  government vigilance, prosecution and public
  information
• Strengthen Third Party Monitoring - press,
  parliament, NGOs and project beneficiaries

28
Risk Mitigation (2)

• Strengthen Bank/Donor Supervision - set aside
  additional resources for design, procurement and
  supervision phases
• Outsource - outsource government procurement and
  financial management to independent
  agencies/companies

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Learning and Outreach
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Target Groups

• Internal
• TTLs, staff in procurement, financial management,
  operations, network anchors, and senior
  management
• External
• other MDBs, anticorruption and law enforcement
  agencies in client countries, and specialized NGOs

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Specific Objectives

• Share information about FC schemes, patterns
  trends
• Provide skills development opportunities in
• FC risk assessment and risk mitigation
• FC detection
• How to handle potential cases of FC
• Create synergies with PREM, OPCS, WBI
• Partner with other MDBs and anticorruption
  agencies

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1st Priority Needs Assessment

• Objective
• Identify the fraud and corruption knowledge and
  skills needs of Bank staff
• Identify preferred knowledge sharing tools
• Execution
• Survey (online)
• Focus Groups
• Deliverable FY09 Work Plan

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Potential Products

• Outreach
• Intranet (incl. online discussion forum)
• Publications
• Presentations
• Learning
• E-learning modules
• Training/Workshops/BBLs
• Tools
• Spreadsheet to detect cartels
• Online searchable database of corruption schemes
  and red flags

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How Can PSU Assist FM?

• How to assess corruption related FM risks and
  mitigate these risks
• How to develop fraud and corruption specific
  audits and performance audits
• How to increase transparency and disclosure on
  project financial management
• How to come to an integrated approach of PR, FM
  and oversight

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To Contact Preventive Services

• Call or send an email to
• Juan Ronderos (Head PSU)
• 34172 jronderos_at_worldbank.org
• Anders Agerskov (Operational Advice)
• 34979 aagerskov_at_worldbank.org
• Bart Stevens (Learning and Outreach)
• 82563 bstevens_at_worldbank.org

36
To Contact Preventive Services

• Call or send an email to
• Juan Ronderos (Head PSU)
• 1 202 473 4172 jronderos_at_worldbank.org
• Anders Agerskov (Operational Advice)
• 1 202 473 4979 aagerskov_at_worldbank.org
• Bart Stevens (Learning and Outreach)
• 1 202 458 2563 bstevens_at_worldbank.org

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Your Ideas, Suggestions, andComments?
Preventive Services Unit

• Thank you