Be­ware: In­ter­na­tional De­vel­op­ment Banks and Their "Au­dits"

In­ter­na­tional De­vel­op­ment Banks and Their "Au­dits"

Trillions - - Contents -

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.

Im­age by ra2s­tu­dio

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