Beware: International Development Banks and Their "Audits"
International Development Banks and Their "Audits"
The rise of multilateral development banks (MDBS) has brought with it the opportunity for construction companies to take on international bids they never could have touched before. The money seems easier and bigger. The jobs appear more glamorous and profitable. But when those MDBS come after you to look into your books, beware. You could end up losing your company.
The Traditional Audit
For those with companies that have been audited by federal tax, state tax or provincial tax authorities, it is mostly a necessary evil to deal with. The banks or venture capitalists who may have provided funding also ask for audits.
In each of these cases, most of what is being done is a simple fiduciary oversight requirement. This means the audit of the books is mostly just to validate that all has been properly recorded and that billings match deliverables appropriately. In the case of tax authorities, although the process is not always pleasant, the financial review may at worst result in some reversal of deductions.
And for those that loaned the money, it is more a matter of making sure the money being loaned is going where it is supposed to be going and that the project work being done for receiving that money is at the stage it was represented to be. With tax audits, the worst that can usually happen is a hold on the work while an audit issue gets resolved, assuming, of course, that the company being audited is working honorably and effectively in the completion of the contracted work.
Venture capitalists can be a bit more shark-like, sometimes seizing more equity in the company they have helped bankroll and sometimes dumping the founders who created the whole business.
But, in general, even if something goes wrong during these audits, insurance and/or bonds can help a company get back on track quickly. There is little to worry about for most enterprises.
Here Come the Multilateral Development Banks
In the world of MDBS, however, the whole concept of an audit is, in effect, fiduciary oversight “on steroids.”the reason for this involves the very nature of these banks. They include small enterprises like the African Development Bank, which operates more like a government-owned bank on a mission than anything
else. They also include much larger financial entities, like the World Bank, the European Bank for Reconstruction and Development and the Asian Infrastructure Investment Bank. They are similar to traditional banks in that they make it possible to provide financing for some of the biggest projects in the world and are then able to bring together countries and companies to work on projects that would not be possible by any other means.
They are also like more traditional banks in that they are looking for collateral, control and their own brand of risk management to protect themselves from losses. But that is where the similarities end.
One of their big differences lies in the sheer size of what these banks can finance. Because they operate very much outside the laws of any individual country, they can operate on their own set of rules with respect to required loan-to-assets risk ratios and how they put together deals. This puts them in the position of operating almost like a stand-alone government. Their deals and self-made rules define their economic models with little oversight from anyone outside their walls.
For an international contractor, they provide a unique way to finance some of the biggest deals in the world. Major dam and hydroelectric power construction, international roadways built to connect third-world countries, and megaprojects such as new international airports often receive funding from these financial entities.
With their size and power, they can cut through some of the most intricate red tape in the world. Few countries have their size and stature, so when one of these MDBS enters a deal, one can be sure the nations coming to them to help fund their newest infrastructure projects have far less say in a deal than a normal contracting agency might have in the rest of the world. So that seems like a good thing.
These MDBS can also help a contractor take its first big leap into the world of big international construction business or leverage money and other resources to extend an already-big international construction firm’s reach. This happens through a combination of their relatively easy access to big money and the size of the banks.
All of this means that when things go right, these financial entities are exactly what the world needs to allow these big deals to go forward. But things don't always go right, nor are they always intended to go right.
When Things Go Wrong
What has made the headlines of late about these MDBS is what is often referred to as the enforcement side of their operations.
Most of these MDBS that the world hears about are the biggest ones, the ones involving gross fraud and corruption. These include items such as Brazil’s giant construction conglomerate Odebrecht S.A. getting caught having bribed others for its contracts and incurring fines of more than $3.4 billion.
Most of these, on the other hand, are actually far more devastating in their impact even though they affect much smaller enterprises.
These other situations start with something that may sound somewhat benign. They begin with a company receiving a letter from the “integrity office” of one of these MDBS. They say, somewhat simply, that they are conducting an “audit” of a project.
For construction or other business firms used to other kinds of audits, this might at first feel completely reasonable. It is just financial oversight and should be routine. But the firms thinking this way could not be more wrong.
This “audit” is far more akin to the Swat-like operations when the FBI descends on a company in a criminal manner than it is like a traditional tax or progress audit by a government agency. In short order, that first letter can include demands forall of your financial records
all of your emails on any of the company’s computers, personal or otherwise
• interviews with your employees
The “auditors” involved will often come in without announcement or warning of any kind. They will misrepresent what they are looking for, or even outright lie, with much the same justification as when police detectives lie in the interests of securing evidence or soliciting confessions. They will also take anything you say as part of that evidence.
All that matters to be a part of this is that the company being investigated is funded by one or more of the MDBS. And even if you are a third-tier subcontractor working on an Mdb-funded project, you are still subject to the rules requiring that you allow the investigation to take place, regardless of whether or not you are paid directly by the MDB.
Unlike with federal, state or provincial auditing groups, or even with VCS and traditional banks, for that matter, with the MDBS few protections exist for those the MDBS may decide to investigate. And, even worse, the MDBS and their investigators often have special privileges a U.S. government auditor could ordinarily only dream of having.
Consider how different it is with the MDBS going after a company:
• The company has no right to discovery.
• The company has no right to interview witnesses.
• The MDB does not have to tell the company what it is being accused of.
• The MDB investigators themselves, being legal residents of other countries, generally have diplomatic immunity.
Worse still, if the MDB decides that a company is guilty of something, the penalties can range from simple fines to rendering the company involved ineligible for future contracts. That ineligibility, referred to as debarment, has an unusually powerful multiplication power, since if any one of the MDBS debars a company for a period of more than a year, the other MDBS in that group will also automatically debar that company. And, even worse still, if an MDB puts the hammer down to block further contracts from it, not only will the other MDBS also join in on the disbarment but a number of governments, including the European Union and India, for example, will ban contracts from them to the company also.
A lack of contracts on so many levels could drive a company all the way from “flying high” a few years earlier, with all new business, to virtual bankruptcy because no government agency will work with them.
Beyond that, despite it being common that a fine being assessed by an individual court for the issue under investigation can be “credited” towards a second country or bank’s fine for the same topic, with MDBS, they do not care. They will fine again on top of what any other court or national entity has levied against the company being investigated.
The ultimate insult in these situations is the final one, that MDBS are, in general, considered so much above the law that there is no way to challenge them in court if a company feels it was unfairly fined or subject to debarment. This is partly because of the diplomatic-immunity situation for the investigators. It is also because there are no arrangements at the government levels to allow for such a challenge.
What Can You Do?
The best advice is to never have to fight the issue after something has happened because by then it will already be far too late.
Instead, companies doing business with MDBS and their clients would be well-served to secure outside legal counsel in advance of signing those contracts. That legal counsel should include someone with detailed knowledge of international law. It should also include someone with a thorough understanding of the way MDBS work.
Other recommendations include the following:
• Learn as much as you can about the MDBS’ procurement, consultant and anti-corruption guidelines.
• Update your risk-management methods to track potential areas where your company and the MDBS might potentially clash with each other.
• Never allow employees to talk with investigators without legal counsel present.
• Never allow investigators direct access to the records they are asking for.
The MDBS have some very powerful positives to them. But by operating so far outside of and above the law, they can also pose a risk to a business that’s so serious the company will not survive even the first such investigation or “audit” for the MDBS’ “integrity offices.”
Of course, some contractors are so well connected politically that they seem to be immune from such 'audits', can get away with murder (literally), commit massive fraud and continue to be handed extremely lucrative contracts. One such company is Bechtel, which has been sucking at the MDB teat for more than 60 years despite one corruption scandal after another.
Bechtel has one of the busiest revolving doors between its executive offices and Washington and has long operated as an extension of the CIA.