managing fraud and corruption risks in development projects

Preventive Services UnitPreventive Services Unit

Managing Managing Fraud and Corruption Risks Fraud and Corruption Risks

in Development Projectsin Development Projects

Department of Institutional IntegrityDepartment of Institutional Integrity

World BankWorld Bank


INT’s MandateINT’s Mandate

INT is to play a key role in ensuring that Bank Group INT is to play a key role in ensuring that Bank Group and and

Donor funds are used for their intended purposes. Donor funds are used for their intended purposes.

To this end, INT is tasked to:To this end, INT is tasked to: Investigate allegations of fraud and corruption (F&C) in Investigate allegations of fraud and corruption (F&C) in

Bank Group operations + allegations staff misconduct Bank Group operations + allegations staff misconduct Use its expertise & lessons learned from its findings to Use its expertise & lessons learned from its findings to

recommend measures to prevent misuse of these funds recommend measures to prevent misuse of these funds Train staff to prevent/detect F&C in WBG operationsTrain staff to prevent/detect F&C in WBG operations Devise proactive efforts to identify and eliminate F&C Devise proactive efforts to identify and eliminate F&C

INT Terms of Reference (Approved by Board July, 2004)INT Terms of Reference (Approved by Board July, 2004)


INT - What We DoINT - What We Do InvestigateInvestigate allegations of fraud, corruption, collusion allegations of fraud, corruption, collusion Assess RiskAssess Risk in Bank projects and programs and in Bank projects and programs and

mainstream information into future operationsmainstream information into future operations Advise Advise staff early in the project design stage on staff early in the project design stage on

measures that can protect projects from fraud and measures that can protect projects from fraud and corruptioncorruption

TrainTrain Bank staff and clients on fraud and corruption Bank staff and clients on fraud and corruption DeterDeter malfeasance through education, proactivity, and malfeasance through education, proactivity, and

publication of sanctionspublication of sanctions PromotePromote an environment whereby staff can report an environment whereby staff can report

allegations without fear of retaliationallegations without fear of retaliation ContributeContribute to the international fight against corruptionto the international fight against corruption


GAC and INTGAC and INT INT has a role within the broader governance and anti-INT has a role within the broader governance and anti-

corruption agenda together with other Bank entitiescorruption agenda together with other Bank entities

Strengthening Governance and Anticorruption Strengthening Governance and Anticorruption

StrategyStrategy::

Need for “feedback” loop to incorporate lessons learned Need for “feedback” loop to incorporate lessons learned from INT investigations into future project designs and from INT investigations into future project designs and sector and system reformssector and system reforms

GAC Implementation PlanGAC Implementation Plan: :

INT has role in preventing corruption at all phases of the INT has role in preventing corruption at all phases of the project cycleproject cycle


Volcker Panel ReviewVolcker Panel Review Independent panel (Feb. 2007) chaired by Paul Independent panel (Feb. 2007) chaired by Paul

VolckerVolcker As part of strengthening the Bank’s governance As part of strengthening the Bank’s governance

and anti-corruption (GAC) strategyand anti-corruption (GAC) strategy To review INT’s role, responsibilities and To review INT’s role, responsibilities and

working relationships in and outside the Bankworking relationships in and outside the Bank Input from Bank staff, other MDBs, Governments Input from Bank staff, other MDBs, Governments

and Civil Societyand Civil Society Final Report – September 13, 2007Final Report – September 13, 2007


Volcker ImplementationVolcker Implementation

Working Group established in September 2007Working Group established in September 2007

Staff views and public comments incorporatedStaff views and public comments incorporated

Report was published in January 2008Report was published in January 2008

All recommendations were acceptedAll recommendations were accepted

Ensured that implementation strengthens GAC Ensured that implementation strengthens GAC

strategystrategy


Preventive Services Unit (PSU)Preventive Services Unit (PSU)

Created in response to Recommendation 3 – Created in response to Recommendation 3 – The Need for an INT Consulting UnitThe Need for an INT Consulting Unit

• PSU has NO clearance functionPSU has NO clearance function

• Identified need for rotation of investigative and Identified need for rotation of investigative and

operational staff into PSUoperational staff into PSU• Responds to Volcker recommendation for Responds to Volcker recommendation for

greater integrationgreater integration of INT with Operations of INT with Operations


INT and the Project CycleINT and the Project Cycle

Pro-active (Preventative) Focus:Pro-active (Preventative) Focus:Risk-specific advice andRisk-specific advice andtraining in parallel with the training in parallel with the Project CycleProject Cycle

Classic (Reactive) Focus:Classic (Reactive) Focus:Complaint-triggered investigationsComplaint-triggered investigationsduring and after implementationduring and after implementation

Country Assistance

Strategy

IdentificationEvaluation

Implementationand

Completion

Implementationand

Supervision

Negotiationsand BoardApproval

Appraisal

Preparation

OperationalOperationalAdviceAdvice

TrainingTraining

InvestigationsInvestigationsVDP, DIRsVDP, DIRs


Key Business Lines PSUKey Business Lines PSU

Fraud and corruption risk assessment and Fraud and corruption risk assessment and

mitigation advice to operational staffmitigation advice to operational staff

Training of both WBG staff and client Training of both WBG staff and client

stakeholdersstakeholders

Research to distill lessons learned and Research to distill lessons learned and

promulgate best practicespromulgate best practices

Support to client anticorruption functionsSupport to client anticorruption functions


PSU ResourcesPSU Resources

Seven staff members (1 GH, 1 GG, Seven staff members (1 GH, 1 GG,

2 GF, 2 GE, and 1 GC)2 GF, 2 GE, and 1 GC)

Expertise in Bank operations, PR, FM, training, Expertise in Bank operations, PR, FM, training,

research, outreach and DB managementresearch, outreach and DB management

Staffing budget: $1,300,000Staffing budget: $1,300,000

Work budget: $500,000Work budget: $500,000


ChallengesChallenges

EstablishingEstablishing a knowledge database a knowledge database PrioritizingPrioritizing the many competing demands the many competing demands RecruitingRecruiting new staff new staff ClarifyingClarifying working modalities vis-à-vis the working modalities vis-à-vis the

Investigations UnitInvestigations Unit PositioningPositioning the PSU as a constructive partner the PSU as a constructive partner

among internal clientsamong internal clients


OpportunitiesOpportunities Become a preferred partner for adviceBecome a preferred partner for advice to to

operational colleagues based on the advantagesoperational colleagues based on the advantages Become a positive agent of changeBecome a positive agent of change of attitude of attitude

towards issues of fraud and corruptiontowards issues of fraud and corruption in Bank in Bank projects by operational staffprojects by operational staff

Foster an environmentFoster an environment in which managers in which managers encourage staff to be alert of and report encourage staff to be alert of and report indicators of fraud or anticorruption in Bank indicators of fraud or anticorruption in Bank Group operationsGroup operations


Value Added by PSUValue Added by PSU

Center of knowledge of fraud and corruptionCenter of knowledge of fraud and corruption

Expertise in on-the-ground governance issuesExpertise in on-the-ground governance issues

Diverse background of INT staffDiverse background of INT staff

Findings in different sectors/regions/countriesFindings in different sectors/regions/countries


PSU Knowledge DatabasePSU Knowledge Database

Engine of the Preventive Services UnitEngine of the Preventive Services Unit

Organization of Findings and Recommendations Organization of Findings and Recommendations from:from:• INT Investigative ReportsINT Investigative Reports• Detailed Implementation Reviews (DIRs)Detailed Implementation Reviews (DIRs)• Voluntary Disclosure Program (VDP) Voluntary Disclosure Program (VDP)

DisclosuresDisclosures


The Two Pillars of PSUThe Two Pillars of PSU

PSUKnowledge Database

Operational Advice(internal)

Learning and Outreach(internal and external)


Operational AdviceOperational Advice

Fraud and Corruption Risk Fraud and Corruption Risk Assessment and Mitigation AdviceAssessment and Mitigation Advice

wb203534


ObjectiveObjective

Present a structured approach to staff in Present a structured approach to staff in

operations to help prevent fraud and operations to help prevent fraud and

corruption throughout the project cyclecorruption throughout the project cycle


Benefits of PSU AdviceBenefits of PSU Advice

Mitigation measures have been considered on a Mitigation measures have been considered on a rationalrational, cost-benefit basis, cost-benefit basis

Task Team’s Task Team’s accountabilityaccountability in the supervision in the supervision phase has been clarified up-frontphase has been clarified up-front

Risk control Risk control frameworkframework can be adjusted in light can be adjusted in light of events and INT’s experience in Region and of events and INT’s experience in Region and SectorSector


Some Common Pitfalls (1)Some Common Pitfalls (1)

Fraud and corruption risks not mentioned, even Fraud and corruption risks not mentioned, even where relevantwhere relevant

Risks are described at too high a levelRisks are described at too high a level Mitigation measures are not specific in terms of Mitigation measures are not specific in terms of

who does what whenwho does what when Government and donor roles in risk mitigation Government and donor roles in risk mitigation

not mentioned / explicitnot mentioned / explicit


Some Common Pitfalls (2)Some Common Pitfalls (2)

Capacity building efforts seen as synonymous Capacity building efforts seen as synonymous with risk mitigationwith risk mitigation

Supervision, prior review thresholds, Supervision, prior review thresholds, etc.etc. are not are not linked to specific threatslinked to specific threats

Monitoring framework not clearly spelled outMonitoring framework not clearly spelled out No integration of fraud & corruption risks in No integration of fraud & corruption risks in

overall risk mitigation and reporting planoverall risk mitigation and reporting plan


Building BlocksBuilding Blocks

Task Teams / Regional teams are the most Task Teams / Regional teams are the most

valuable resource for identifying risksvaluable resource for identifying risks

Past project audit reports, ICRs, Past project audit reports, ICRs, etc.etc.

Knowledge of donors, government officials and Knowledge of donors, government officials and

trusted third partiestrusted third parties

Lessons learned from INT investigations, DIRs Lessons learned from INT investigations, DIRs

and VDP disclosuresand VDP disclosures


Risk AssessmentRisk Assessment

Identifying and Prioritizing RisksIdentifying and Prioritizing Risks

Identify Fraud and Corruption Identify Fraud and Corruption ThreatsThreats Identify Critical Identify Critical Decision MakersDecision Makers Identify Critical Project Identify Critical Project AssetsAssets Identify Identify Control WeaknessesControl Weaknesses Determine Possible Determine Possible ImpactImpact Rank Rank RisksRisks


Identify Fraud & Corruption ThreatsIdentify Fraud & Corruption Threats

Identification Design Procurement Implementation

Project benefits decision makers constituency

Project benefits particular company / few companies

Specifications tailored to particular company

Bidders collude to seek higher prices

Officials steer contracts to favored bidders

Invoices are over-paid

Invoices are over-paid

Officials demand facilitation payments

Goods not delivered according to specification

Officials exclude eligible beneficiaries

Beneficiary payment for free services

Officials embezzle project funds

Ineligible beneficiaries misrepresent their status

Higher Medium Lower

Identify Control WeaknessesIdentify 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

Bank’s 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

Example of Risk Control FrameworkExample of Risk Control FrameworkRiskRisk IndicatorIndicator ControlControl EvidenceEvidenceBidders Bidders collude to collude to inflate prices in inflate prices in contracting for contracting for the the construction of construction of five highway five highway segmentssegments

Lowest bidder is not Lowest bidder is not selectedselected

Selected bidder is Selected bidder is more than 20% more than 20% above ECEabove ECE

Some cost elements Some cost elements vary more than 50% vary more than 50% among winning and among winning and loosing biddersloosing bidders

Allegations of Allegations of collusion / corruption collusion / corruption are receivedare received

Winning bidder Winning bidder subcontracts losing subcontracts losing biddersbidders

GovernmentGovernment

Advertise contracts in three Advertise contracts in three national and two national and two international newspapers six international newspapers six weeks prior to RFP deadlineweeks prior to RFP deadline

Newspaper clippingsNewspaper clippings

Establish effective and Establish effective and transparent complaint transparent complaint handling mechanismhandling mechanism

Questionnaire after 12 months among Questionnaire after 12 months among stakeholders shows that 80% are stakeholders shows that 80% are aware of and 60% have confidence in aware of and 60% have confidence in the complaints handling mechanismthe complaints handling mechanism

No. of complaints registered / resolvedNo. of complaints registered / resolved Complaint statistics posted on web and Complaint statistics posted on web and

submitted to MoF and donorssubmitted to MoF and donors

BankBank

Review pre- and post-Review pre- and post-qualification criteria to avoid qualification criteria to avoid undue exclusion of biddersundue exclusion of bidders

Bank No Objection issued to Bank No Objection issued to GovernmentGovernment

Set aside additional time for Set aside additional time for review of winning and review of winning and loosing biddersloosing bidders

40 hours’ work recorded by 40 hours’ work recorded by procurement staff in TRSprocurement staff in TRS

High Impact/Probability RisksHigh Impact/Probability Risks

RiskRisk ImpactImpact ProbabilityProbability ScoreScore

Bidders collude to inflate prices in contracting for the construction of five highway segments 8 8 64

Transportation Minister or Jr. Minister divert project funds to non-critical roads by including such work in the project design 5 3 15

Accountants or Senior PMU officials embezzle project funds by falsifying receipts when paying administrative expenses 4 8 32

Who does what when with which immediate impact?

Bidders collude to inflate prices in contracting for the construction of five highway segments

Transportation Minister or Jr. Minister divert project funds to non-critical roads by including such work in the project design

Accountants or Senior PMU officials embezzle project funds by falsifying receipts when paying administrative expenses


Risk Mitigation (1)Risk Mitigation (1)

When looking at mitigating risks, consider:When looking at mitigating risks, consider:

Strengthen Project SafeguardsStrengthen Project Safeguards - internal - internal control mechanisms, audits, transparency control mechanisms, audits, transparency measures, etc.measures, etc.

Deter Corrupt ActorsDeter Corrupt Actors -- through additional through additional government vigilance, prosecution and public government vigilance, prosecution and public informationinformation

Strengthen Third Party MonitoringStrengthen Third Party Monitoring - press, - press, parliament, NGOs and project beneficiariesparliament, NGOs and project beneficiaries


Risk Mitigation (2)Risk Mitigation (2)

Strengthen Bank/Donor SupervisionStrengthen Bank/Donor Supervision -- set set aside additional resources for design, aside additional resources for design, procurement and supervision phasesprocurement and supervision phases

OutsourceOutsource - outsource government - outsource government procurement and financial management to procurement and financial management to independent agencies/companiesindependent agencies/companies


Learning and OutreachLearning and Outreach


Target GroupsTarget Groups

InternalInternal::• TTLs, staff in procurement, financial TTLs, staff in procurement, financial

management, operations, network anchors, management, operations, network anchors, and senior managementand senior management

ExternalExternal::• other MDBs, anticorruption and law other MDBs, anticorruption and law

enforcement agencies in client countries, and enforcement agencies in client countries, and specialized NGOsspecialized NGOs


Specific ObjectivesSpecific Objectives

Share information about F&C schemes, patterns Share information about F&C schemes, patterns & trends & trends

Provide skills development opportunities in:Provide skills development opportunities in:

• F&C risk assessment and risk mitigationF&C risk assessment and risk mitigation

• F&C detectionF&C detection

• How to handle potential cases of F&CHow to handle potential cases of F&C Create synergies with PREM, OPCS, WBICreate synergies with PREM, OPCS, WBI

Partner with other MDBs and anticorruption Partner with other MDBs and anticorruption agenciesagencies


11stst Priority: Needs Assessment Priority: Needs Assessment ObjectiveObjective: :

• Identify the fraud and corruption knowledge Identify the fraud and corruption knowledge and skills needs of Bank staffand skills needs of Bank staff

• Identify preferred knowledge sharing tools Identify preferred knowledge sharing tools ExecutionExecution::

• Survey (online)Survey (online)• Focus GroupsFocus Groups

DeliverableDeliverable: FY09 Work Plan: FY09 Work Plan


Potential ProductsPotential Products OutreachOutreach: :

• Intranet (incl. online discussion forum)Intranet (incl. online discussion forum)• PublicationsPublications• PresentationsPresentations

LearningLearning: : • E-learning modulesE-learning modules• Training/Workshops/BBLsTraining/Workshops/BBLs

ToolsTools: : • Spreadsheet to detect cartelsSpreadsheet to detect cartels• Online searchable database of corruption Online searchable database of corruption

schemes and red flagsschemes and red flags


How Can PSU Assist FM?How Can PSU Assist FM?

How to assess corruption related FM risks and How to assess corruption related FM risks and mitigate these risks mitigate these risks

How to develop fraud and corruption specific How to develop fraud and corruption specific audits and performance audits audits and performance audits

How to increase transparency and disclosure on How to increase transparency and disclosure on project financial managementproject financial management

How to come to an integrated approach of PR, How to come to an integrated approach of PR, FM and oversightFM and oversight


To Contact Preventive ServicesTo Contact Preventive Services

Call or send an email to:Call or send an email to:

Juan Ronderos (Head PSU)Juan Ronderos (Head PSU)

34172 – [email protected] – [email protected]

Anders Agerskov (Operational Advice)Anders Agerskov (Operational Advice)


Bart Stevens (Learning and Outreach)Bart Stevens (Learning and Outreach)



To Contact Preventive ServicesTo Contact Preventive Services

Call or send an email to:Call or send an email to:

Juan Ronderos (Head PSU)Juan Ronderos (Head PSU)

+ 1 202 473 4172 – [email protected]+ 1 202 473 4172 – [email protected]

Anders Agerskov (Operational Advice)Anders Agerskov (Operational Advice)


Bart Stevens (Learning and Outreach)Bart Stevens (Learning and Outreach)



Your Ideas, Your Ideas, Suggestions, andSuggestions, and

Comments?Comments?

Thank youThank you


managing fraud and corruption risks in development projects

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