The Role of a Preventive Services Unit in Combating Fraud and Corruption World Bank Group - Integrity Vice Presidency - Preventive Services Unit - September 2008

Strategy of the Preventive Services UnitC

om

p. A

dv. Investigations Forensics NetworkAdvice

Ser

vice

s

Advice

Ap

pro

ach

PartnershipsTrustedAdvisor

Tools

Schemes Red Flags Risk Mgt.Proc. & Acct.

Training Outreach

SolutionsOriented

Practical

Roads Water HealthPower

Our Key Challenges

Excess Demand

Interdisciplinary Nature

Political Sensitivity

Competing Objectives

Interdepartmental Work

PSU Has Advised 70+ Teams In Two Years

Cameroon

Congo, D.R.

Ethiopia

Kenya

Nigeria

Malawi

Mozambique

Rwanda

Zambia

Angola

Djibouti

West-Bank Gaza

Cambodia

Indonesia

Philippines

Thailand

Vietnam

Bangladesh

India

Pakistan

Kazakhstan

Russia

Tajikistan

Argentina

Colombia

Paraguay

Honduras

Examples of Work

Example 1 Distilling Weaknesses in Project Design

Fraud and corruption risks are underplayed… Key risk areas are not mentioned Articulation of risks is vague or presented at too high a level Past fraud and corruption experiences, incidents, etc. are not referenced

Risk assessment processes provide relatively weak assurances… Risk assessment is undertaken too late in the cycle and inadequately resourced No diagnostics undertaken in key risk areas Critical skills have not always been brought to the team

Mitigation measures (controls) lack specificity and robustness… Mitigation measures are not specific in terms of who does what when Government and donor accountabilities in risk mitigation not mentioned / explicit Mitigation measures are not necessarily linked to risks Supervision, prior review thresholds, etc. are not linked to specific threats

Monitoring framework and triggering actions are not clearly spelled out… Indicators are not clearly defined Triggered Bank action (misprocurement and other remedies) has not been adequately

defined and/or agreed with the Borrower

Example 2 Defining Reality

Crumbling Roof in New Health Clinic – Fraud or Shoddy Workmanship?

Above Cost Estimate

Firm A 28%

Firm B 31%

Firm C 32%

Firm D 33%

Firm E 34%

Firm F 35%

Evenly “spaced” cost Total Bid Prices

1,235,848,743.38

1,266,666,000.00

1,276,000,000.00

1,285,858,585.88

1,296,000,477.64

1,302,573,393.31

Δ Firm A

30.8m

40.2m

50.0m

60.2m

66.7m

Disqualified bidders

“Unnatural” numbers

“Rounded” figures

Example 3 Distilling Investigative Lessons

Do few companies dominate the market? Do companies take turn winning projects? Is the industry operated/strongly influenced by organized

crime? Are there high entry barriers?

Are shell companies submitting bids? Are there examples of bidders with cross-ownership? Are there allegations of bidders being coerced to join the cartel?

Prior allegations or cases related to procurement or corruption? Are Officials tied to bidders?

Sector

Bidders

Agency

Bids

Are bid prices significantly above or below earlier prices/the cost estimate/market prices or too close to the cost estimate?

Are bidders prices, unit rates or bills of quantities too identical? Are there odd numbers in the bid prices or bills of quantities? Are there examples of similar formats, spelling mistakes, etc.? Are bid securities sequential? Is most work subcontracted or substantial agent fees involved? Are loosing bids irrational or poorly formulated?

Does the winner back out because major sub-contractor declines workImplementation

Example 4 Communicating Red Flags

Third Party Monitoring

External Checks

Courts

Police

Audit

Attorney General

CompetitionAuthority

Parliament

Anti-CorruptionAgency

InternalControlsProc

FM

Supervision

Mgt.

Audit

World Bank

BilateralDonors

NGOs

CBOs

AssetsBusinessOrganizations

Beneficiaries

Others

Project Officials

Bidders

Influencers

Example 5 Interpreting Audit Findings

Example 6 Providing Tips for Better Supervision

1. Ensure your Team has the Skills needed to detect fraud and corruption during supervision

2. Undertake a Risk Assessment based on reliable information concisely assessing corruption risks

3. Develop a Supervision Plan detailing who is responsible for doing what, when and how

4. Explore ways to involve other donors in fraud and corruption-related supervision of the project

5. Be strategic and selective in your supervision but do include key control weaknesses

6. Sequence supervision such that it takes place during critical decision points

7. Ensure that the supervision tools, approaches and control functions are sufficiently robust

8. Seek independent verification, e.g., through walk-throughs and site inspections

9. Follow-up to ensure that contractual remedies are being exercised where relevant

10. Ensure that complaint handling is working Effectively

11. Report suspicions of fraud and corruption as part of your risk management strategy

Fraud and Corruption Threats Diversion of road construction and

maintenance funds to benefit certain constituencies

Pressure on BEC members to award contracts to favored bidders

Bribery to steer contracts to favored bidders

Collusion in the bidding of public works contracts

Scaled-back reports from consultants to fund kickbacks

Fraudulent misrepresentation of work by the contractors

Control Weaknesses Procurement process lacks integrity Assets are not properly registered and

protected Internal audits fail to identify

misstatements Technical audits provide “clean bill of

health” when they shouldn’t Independent Validation and

Verification Agents are bribed and/or extorted to sign-off on work

Performance bonds are not invoked when they clearly should

Complaint handling system is not in place / producing results

Debarment system is not in place, partially implemented and/or not complied with

Poor performers keep doing business with the government

Example 7 Identifying Risks

Risk Key Controls

Elevated bid prices

collusion due to

by local and int’l bidders in three highway contracts

Package contracts to attract int’l bidders Make bidding documents available for on

Internet Use post-bid qualifications

Deploy collusion detection software Hire International Procurement Assessor who

is independent (AusAID financed) and shares reports directly with the Bank

Improve quality of ECE

Enhance complaint line use Engage industry association Publish bid awards and trends Move procurement to national level

Example 8 Mitigating Risks

Risk Indicators

Elevated bid prices due to collusion by local and international bidders in three highway packages

Lowest bid price is significantly higher than the ECE Allegations of threat against bidders / cannot purchase bidding doc’s Similar names of key staff and owners; same address; executed

contracts jointly in the past; etc. Shell companies (outsourcing major work to local contractor)

Controls Indicators

Strengthened competition through ICB and removal of conflicting rules restricting sourcing to domestic contractors

Number of qualified bidders purchasing bid packages / submitting bids Number of notable companies not submitting bids National rules to restrict domestic sourcing removed

Deploy collusion detection software Installation, input of data and regular of software Number of red flags detected by software Follow-up on red flags

International Procurement Advisor monitors compliance with Bank Procurement Guidelines

International Advisor to the satisfaction of the Bank is hired Compliance issues identified Timely response to issues by the Borrower

World Bank’s Fraud and Corruption Hotline is included in bidding documents

Bidding documents include Bank hotline

Enhance complaint line use Number of stakeholders showing that they would complain Increase in complaints Redress of key impediments to complaints

Example 9 Linking Mitigation and Supervision

Example 10 Assessing NGO Related Risks

Diagnostics

SectorGovernance

NGOCapacity

GovernmentOversight

ComplaintHandling

Schemes Opportunity

Laws NGO Commission Audits / oversight Enforcement action

Code of Conduct HR Policy Accountants Project Mgt.

Accounting Due diligence Spot audits Inspection

Target NGO sector Generally effective

Fraud Corruption Political ties Poor performance

Weak checks Difficult to measure

Incentivize Audience

Communicate

Incentives

Disincentives

Awareness

Decision

Action

Process Complaint

Complain Register

Inquire

Address Complaint

Report

Review

Prioritize

Govern Complaint System

Administrative

Criminal

Example 11 Assessing Complaint Handling

1. Not aware that the act was an offense2. Did not have enough information3. Did not recognize the “red flag”4. Did not understand why it was important to file complaint5. Did not know how to file complaint6. Complaining runs counter to culture7. Complaint does not contain enough specifics about the event for follow-up

action to take8. Complainant did not provide means to get in contact with him/her9. Was not mandated to file complaint10. Anonymous complaints are not possible and/or are not addressed11. Could not overcome time or monetary hurdles to filing complaint12. Whistleblowers are not (adequately/effectively) protected13. Was never contacted to get additional information14. Did not trust the Government15. Past complaint never resulted in anything16. Feared retaliation from the government and/or subject of the complaint

Identifying Barriers to Filing ComplaintsC

om

mu

ni c

at i

on

sP

oli

cy

Go

v.

Assessing Effectiveness of Complaint Handling

Overlapping jurisdictions among mechanismsCases are sent back and forth between mechanismsReferrals among agencies are slow or do not take placeMechanisms sub-optimize their prioritization / don’t coordinateNo mechanism has critical mass of skills / resources

Complaints fail to get recordedThe prioritization process is weak or non-existent

Follow-up action take too long / is not professional / lacks integrityFollow-up action focuses on process rather than outcomes

Corruption hot spots / systemic issues are not identified

Prioritization and follow-up action is subject to undue influenceResources are wholly inadequate to address case loadMechanism have insufficient powers

Fra

gm

en

t ati

on

Int a

ke

Inq

ui r

yK

MP

oli

tic

al

Assessing Integrity Issues In Complaint Handling

Head of mechanism Has strong party / political affiliations Lacks complaint handling experience Can be terminated immediately by Government (with no other checks) May have term of office extended May take up other Government position upon leaving position Is forbidden to enter office building

Decision making Political level is involved in operational decisions about what to investigate / audit / review Only opposition figures appear to be investigated / audited / reviewed

Procedures Due process consideration are not enshrined in law and procedures No recourse for the subject of a complaint Complaints about the actions taken by the mechanism

Support Prosecutor does not / seldom initiates prosecution on the basis of cases presented Inadequate budget set aside for the functioning of the mechanism When police is engaged to conduct searches they turn up nothing Mechanism is criticized by the opposition