Managing Fraud and Corruption Risks in Development Projects

1. Managing Fraud and Corruption Risks in Development Projects Department of Institutional Integrity World Bank

2. INT’s 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 (F&C) 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 F&C in WBG operations • Devise proactive efforts to identify and eliminate F&C INT Terms of Reference (Approved by Board July, 2004)

3. INT - What We Do • Investigateallegations 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 • Contributeto 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 Bank’s governance and anti-corruption (GAC) strategy • To review INT’s 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 adviceto operational colleagues based on the advantages • Become a positive agent of changeof attitude towards issues of fraud and corruptionin 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

16. 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 Team’s accountability in the supervision phase has been clarified up-front • Risk control framework can be adjusted in light of events and INT’s experience in Region and Sector

19. 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

23. 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

24. 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 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

25. Example of Risk Control Framework

26. Bidders collude to inflate prices in contracting for the construction of five highway segments 4 8 32 Accountants or Senior PMU officials embezzle project funds by falsifying receipts when paying administrative expenses Accountants or Senior PMU officials embezzle project funds by falsifying receipts when paying administrative expenses Transportation Minister or Jr. Minister divert project funds to non-critical roads by including such work in the project design Transportation Minister or Jr. Minister divert project funds to non-critical roads by including such work in the project design 5 3 15 High Impact/Probability Risks 8 8 64 Bidders collude to inflate prices in contracting for the construction of five highway segments Who does whatwhenwith which immediate impact?

27. 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

29. Learning and Outreach

30. 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

31. Specific Objectives • Share information about F&C schemes, patterns & trends • Provide skills development opportunities in: • F&C risk assessment and risk mitigation • F&C detection • How to handle potential cases of F&C • Create synergies with PREM, OPCS, WBI • Partner with other MDBs and anticorruption agencies

32. 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

33. 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

34. 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

35. To Contact Preventive Services Call or send an email to: • Juan Ronderos (Head PSU) 34172 – jronderos@worldbank.org • Anders Agerskov (Operational Advice) 34979 – aagerskov@worldbank.org • Bart Stevens (Learning and Outreach) 82563 – bstevens@worldbank.org

36. To Contact Preventive Services Call or send an email to: • Juan Ronderos (Head PSU) + 1 202 473 4172 – jronderos@worldbank.org • Anders Agerskov (Operational Advice) + 1 202 473 4979 – aagerskov@worldbank.org • Bart Stevens (Learning and Outreach) + 1 202 458 2563 – bstevens@worldbank.org

37. Preventive Services Unit Your Ideas, Suggestions, andComments? Thank you