Since it began operations in 2016, the Asian Infrastructure Investment Bank (AIIB) has grown to 103 members from all continents and committed over $11 billion in financing to over 100 projects in member countries, with a focus on energy, financial institutions, and transportation projects in Asia. In that time, AIIB's sanctions system has similarly developed, though it has received relatively little attention. AIIB recently announced its first debarments and expects that, as it continues to grow, its sanctions system will assume an increasingly important role. AIIB's emergence as a player in the global fight against fraud and corruption makes understanding its procedures and priorities critical.
The AIIB's sanctions system
Alleged violations of the AIIB's Policy on Prohibited Practices (PPP), which applies to Bank-financed projects, are handled by the Complaints-resolution, Evaluation and Integrity Unit (CEIU). CEIU is headed by managing director Hamid Sharif, who previously worked as the country director for China at the Asia Development Bank. CEIU’s responsibilities are spelled out in its name: (1) to serve as the focal point for external requests or complaints regarding compliance with AIIB’s environmental and socialpPolicy; (2) to assess the quality and results of the Bank’s investment portfolio; and (3) to investigate project-related fraud and corruption cases under the PPP. The integrity function within CEIU is run by Jean-Marc Lafreniere, an internal audit professional, who also spent nearly a decade at the Asia Development Bank. CEIU's managing director reports directly to the Bank's board of directors, making the unit independent from management.
CEIU is a small group with only six dedicated staff members, supplemented by consultants as required. However, the size of team is appropriate for the current amount of work, explained Lafreniere in an interview with Hogan Lovells. This is a reflection of the fact that AIIB is still relatively new and has so far only disbursed a fraction of the funds of peer institutions like the World Bank, he added.
"We are young in terms of volume of work, but not in terms of procedures," Lafreniere said. "We have all the tools set up and the infrastructure to deal with [investigations]."
That infrastructure includes a sanctions officer, Sir Danny Alexander, who is also AIIB's vice president and corporate secretary, and a newly-appointed Sanctions Panel. AIIB's two-tier sanctions system mirrors that of the World Bank: the sanctions officer reviews charges brought by CEIU investigators and may sanction the respondent. The respondent may then appeal the sanction officer's decision to the Sanctions Panel. AIIB generally follows the General Principles and Guidelines for Sanctions, which set a baseline sanction of three years' debarment and lay out aggravating and mitigating factors to be considered when assessing the length of debarment.
Last year, CEIU completed its first investigation, which led to the debarment of six Chinese firms and one individual for fraud and collusion in the procurement process. The debarments – ranging from three to six years – were imposed by the sanctions officer and not appealed. CEIU has screened several complaints of alleged violations over the years, but this was the first case that resulted in an investigation and, ultimately, sanctions. Although AIIB publicised the names of the parties subject to the debarments, details about the conduct at issue are not publicly available.
AIIB’s unique sanctionable practices
Although the Bank's rules generally align with the policies on sanctionable practices of the World Bank and other major multilateral development banks (MDBs), there are notable differences. Perhaps the most significant is the inclusion of two additional prohibited practices to the typical five (fraud, corruption, collusion, coercion, and obstruction) recognised by major MDBs: (1) misuse of resources (“improper use of the Bank’s resources, carried out either intentionally or through reckless disregard”); and (2) theft (“the misappropriation of property belonging to another party”).
According to Lafreniere, AIIB included these prohibited practices because, when it was developing its rules, it sought to build on what other MDBs were doing.
Firms and individuals involved in Bank-financed projects should, of course, be aware of these additional prohibited practices. But those involved in the increasing number of co-financed projects may also be affected. AIIB has co-financing framework agreements with the World Bank and the Asian Development Bank and several co-financed projects with both. In its supplemental directive on the PPP, AIIB makes clear that all project and financing documents related to co-financed projects must include AIIB's additional prohibited practices and include a provision to allow CEIU to conduct joint or parallel investigations. This suggests that allegations of misuse of resources or theft will be pursued.
AIIB open to cross-debarment agreement
Although it is not a signatory, AIIB debars firms and individuals that are debarred by the MDB signatories to the Agreement for the Mutual Enforcement of Debarment Decisions. This decision has been critical to AIIB's sanctions regime because it has resulted in the Bank cross-debarring over 1,000 entities to date. AIIB is committed to eventually sign on to the cross-debarment agreement because banks are "stronger when [they] work together," said Lafreniere. He added that CEIU works "very closely" with the investigation arms of the signatory MDBs and attends their meetings. However, there is as of now no set timeline for AIIB to sign on.
Focus on prevention
Looking ahead, Lafreniere explained that prevention of fraud and corruption is the Bank’s "number one priority." The Bank is considering undertaking proactive reviews of Bank-financed projects to determine their susceptibility to fraud or corruption. It is also particularly focused on risk awareness training both within the Bank and externally. CEIU has provided training for the representatives of over 100 Chinese companies. Within the Bank, CEIU recently circulated updated advisories to staff and revised its e-learning programme on the PPP to address the risks associated with procurement stemming from covid-19 operations. Lafreniere added that all loan agreements made in response to the covid-19 pandemic (under the Bank's Crisis Recovery Facility) are reviewed by CEIU to ensure the applicability of the PPP and CEIU's audit rights.
Conclusion
With its first debarments now behind it, AIIB has demonstrated that its sanctions system has the policies in place to tackle corruption related to Bank-financed projects and the willingness to do so. Given its size, geographic reach, and growing membership, AIIB has the potential to markedly influence MDBs' sanctions regimes. AIIB’s expanded list of sanctionable practices may influence the development and definition of sanctionable practices at other MDBs. Moreover, the Bank's decision to already give effect to the cross-debarment agreement and its plans to become a signatory in the future further enhance the deterrent effect of cross-debarment. All entities operating in the development space should therefore be aware of AIIB's sanctions system and monitor its enforcement activities going forward.
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This article was published on GIR | The Global Investigation Review on 18 March 2021, and is available under the following link:
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