The risk of cross debarment by multilateral development banks

Wrongdoers can be cut off from vital funding or contracts for MDB projects and a system of cross debarment operates which means the debarment decisions by one MDB are recognised and applied by other MDBs if certain conditions are met. It is therefore important that businesses reliant on work from MDB-funded projects familiarise themselves with how cross debarment works and understand what they can do to avoid it.

What is cross debarment?

Cross debarment is the process by which certain MDBs mutually recognise debarment decisions. The process is governed by the Agreement for Mutual Enforcement of Debarment Decisions (AMEDD) (18-page / 1.93MB PDF). Five MDBs are signatories to the AMEDD. They are:

• African Development Bank Group
• Asian Development Bank Group
• European Bank for Reconstruction and Development
• Inter-American Development Bank Group
• World Bank Group

These MDBs are collectively referred to as the ‘participating institutions’. Under the terms of the AMEDD, if one participating institution debars an entity for a sanctionable practice, and if certain preconditions are met, the debarment will be enforced on the same terms by the other participating institutions.

The purpose of cross debarment is to ensure harmonisation of debarment decisions across the participating institutions and to avoid a scenario in which an entity debarred by one participating institution can continue to bid for projects funded by other participating institutions. Cross debarment therefore acts to deter and prevent entities from engaging in corporate misconduct.

What are sanctionable practices?

The participating institutions have agreed to adopt common definitions for what they consider to be sanctionable practices. The four sanctionable practices that can trigger cross debarment are:

• Fraudulent practice – any act or omission, including a misrepresentation, that knowingly or recklessly misleads, or attempts to mislead, a party to obtain a financial or other benefit or to avoid an obligation;
• Corrupt practice – the offering, giving, receiving, or soliciting, directly or indirectly, anything of value to influence improperly the actions of another party;
• Coercive practice – impairing or harming, or threatening to impair or harm, directly or indirectly, any party or the property of the party to influence improperly the actions of a party;
• Collusive practice – an arrangement between two or more parties designed to achieve an improper purpose, including influencing improperly the actions of another party.

When is cross debarment triggered?

A debarment decision issued by one participating institution will trigger cross debarment by the other participating institutions if the following preconditions are met:

• The debarment is based, in whole or in part, on a sanctionable practices finding of fraud, corruption, coercion or collusion;
• The debarment decision is made public;
• The debarment is for an initial period of more than one year;
• The debarment was made after the AMEDD entered into force;
• The debarment was made within 10 years of the date of the commission of the sanctionable practice;
• The debarment was not made in recognition of a decision made in a national or other international forum.

Where these preconditions apply, the participating institution issuing the debarment will send a notice to the other participating institutions specifying the name of the entity sanctioned, the sanctionable practice(s) found to have been committed and the terms of the debarment.

Unless cross debarment would be inconsistent with a participating institution’s “legal or other institutional considerations”, it will recognise the debarment decision by debarring the entity on the same terms. It may also choose to pursue independent debarment proceedings for any separate sanctionable practices committed by the same entity, which could result in concurrent, consecutive or subsequent periods of debarment.

Who should be worried about cross debarment?

Cross debarment under the AMEDD framework is not uncommon. Over the past five fiscal years, the World Bank Group has recognised 342 cross debarments and issued 216 debarments that were eligible for recognition:

When a company is debarred, it will be blocked from being appointed as a contractor on a project funded by the MDB imposing the sanction. Typically, it will also be prevented from receiving or benefiting from any funding from that MDB as well, meaning that the debarment cannot be circumvented by appointing the debarred entity as a subcontractor. These consequences can be particularly damaging for contractors whose main business is engineering and construction work on MDB-funded energy and infrastructure projects.

While debarment by one participating institution is often extremely challenging for companies to manage, both financially and reputationally, cross debarment – perhaps for a period of several years – can have severe and far-reaching financial consequences, including potential illiquidity and staff retrenchment. The position can be made worse by the fact that some MDBs beyond the participating institutions have internal rules that will lead them to enforce the debarment decisions of the World Bank Group and other participating institutions too. This means that a company that is debarred and/or cross debarred may be unable to win work that it depends on for its survival.

Normally, the central factor in determining whether cross debarment will be triggered is the initial debarment period. As noted above, if that period is a year or less, cross debarment will not be triggered even if the other preconditions for cross debarment are met. It is therefore vital that businesses faced with MDB investigations or proceedings engage experienced experts at an early stage who can advise on the prospects of cross debarment and make effective representations on their behalf.

Co-written by Jonathan Flynn of Pinsent Masons.