ADB case shows how to prevent and respond to IFI sanctions

By Wang Jihong and Xu Yibai, Zhong Lun Law Firm

According to data released by the Asian Development Bank (ADB), 2,989 companies and 1,143 individuals had been prohibited from participating in ADB-funded activities by 30 June 2022, of which 1,337 companies and 268 individuals have been reinstated, leaving 1,652 companies and 875 individuals banned.

In fact, all international financial institutions (IFIs) have high compliance requirements for the projects they finance and contractors involved, covering corruption, fraud, conspiracy and conflict of interest, with various sanctions imposed on non-compliant entities, of which the most severe is prohibition, i.e. the subject is prohibited from taking part in the projects they finance, manage or support.

Wang Jihong, Zhong Lun Law Firm
Wang Jihong
Zhong Lun Law Firm

Each IFI not only has its own internal compliance standards and sanctions procedures, but also communicates and co-operates with others to jointly enforce prohibitions against non-compliant entities.

In this article, we take the ADB as an example to discuss how Chinese enterprises can prevent and respond to sanctions investigations by IFIs.

First, it is important to know the compliance departments, compliance standards and sanctions procedures of the IFIs. The Office of Anticorruption and Integrity (OAI), the ADB’s internal unit responsible for investigating violations of the bank’s compliance policies, has issued the Integrity Principles and Guidelines, which is the basic guidance document on how the ADB investigates suspected violations of compliance, and how to discipline entities involved, such as project contractors.

The guidelines specify that all violations of the provisions of the Anti-corruption Policy are the subject of an investigation by the OAI. It is worth noting that although only anti-corruption is mentioned in the name of the Anti-corruption Policy, its content essentially encompasses seven categories of violations: corruption; fraud; coercion; conspiracy; abuse; conflict of interest; and obstruction.

However, the definitions and criteria for determining these violations are not entirely consistent with the local concepts and standards that Chinese enterprises are familiar with. A Chinese company that has complete and accurate understanding of the compliance requirements of IFIs and an internal compliance system in place can largely reduce the risk of non-compliance in IFI-supported projects.

Second, the critical step to obtaining an exemption or mitigation of sanctions is to respond quickly and truthfully to inquiries or investigations by IFIs, and to communicate with them actively.

Xu Yibai, Zhong Lun Law Firm
Xu Yibai
Zhong Lun Law Firm

Based on our extensive experience in handling international non-compliance cases, the following principles are generally applicable. The sanctioned entity:

    1. Immediately ceases the non-compliant behaviour;
    2. Promptly, thoroughly and truthfully discloses and admits the facts of the non-compliance;
    3. Actively communicates with the sanctioning authority; and
    4. Understands and strictly follows the sanctioning authority’s compliance requirements for the sanctioned entity. This approach will improve the understanding of the sanctioning authority and result in a relatively lighter sanction.

The guidelines follow a similar line of thinking in considering whether to exempt or mitigate sanctions. If the response is appropriate, the ADB may not adopt prohibition, the most stringent form of sanction, but rather a lighter sanction such as a warning, reprimand or suspension. Ideally, enterprises will be exempted from disciplinary action by proving that they did not violate requirements, or that their violations were minor.

Conversely, if a company reacts passively, ignores the sanctions, or even continues to knowingly commit violations, this could trigger longer and more severe sanctions, or even a joint prohibition by co-signatories to the Agreement on Mutual Enforcement of Debarment Decisions, including the Asian Development Bank, the European Bank for Reconstruction, the World Bank, the Inter-American Development Bank, and the African Development Bank.

The authors suggest that when Chinese enterprises receive enquiries or investigations from IFIs, they should pay great attention to active communication and follow up with them, setting up a special emergency response team or designating a special emergency unit as soon as possible so that they can thoroughly and truthfully respond to the enquiries or investigations, while simultaneously maintaining active communications before the decision on sanctions is made, which helps in learning more on specific requirements needed to meet exemptions or mitigation of sanctions.

Given that IFIs usually make internal compliance systems one of their core requirements, it is suggested that Chinese enterprises, even under investigation, should actively sort out internal compliance policies and management systems, and troubleshoot compliance loopholes at the same time, enabling compliance systems that meet the requirements of IFIs to be established, improved and operated effectively as soon as possible.

Third, the emphasis on training professional staff and deploying external experts is highly conducive for enterprises to respond to IFI investigations. IFI sanctions are not only imposed on non-compliant enterprise, but also on non-compliant individuals, in particular the principal officers of an enterprises, and supervisors who are actually responsible for an IFI-supported project.

Under the guidelines, the duration of disciplinary action against an individual may be longer than that for an enterprise – in serious cases indefinitely – as the attributes of an individual are unlikely to change. This largely reflects the international compliance and attribution philosophy that compliance in enterprises relies not only on internal systems on paper, but also heavily on the mindset and actual behaviour of professionals.

It is necessary for managers of Chinese enterprises to learn the compliance requirements of IFIs, and to train their internal compliance professionals so that they can on the one hand eliminate as many violations as possible through proactive management, and on the other hand be able to respond comfortably when facing inquiries or investigation.

The deployment of external experts is also crucial for Chinese enterprises, as their extensive experience in handling relevant cases can assist not only in training their personnel, but also in formulating a comprehensive response and compliance plan for enterprises promptly in the event of an emergency sanction investigation, seeking the best possible treatment by IFIs under the same conditions.

Wang Jihong is a partner and Xu Yibai is an associate at Zhong Lun Law Firm

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