ACCPA COMPLIANCE CONFERENCE

24 – 25 August 2017
Accra, Ghana

Integrity Due Diligence Challenges

in Fragile and Conflict State

Ceri Lawley
Chief Compliance Officer
1
 IFC: A MEMBER OF THE WORLD BANK GROUP

IBRD IDA IFC MIGA ICSID

International International International Multilateral International
Bank for Development Finance Investment Centre for
Reconstructio Association Corporation Guarantee Settlement of
n and Agency Investment
Development Disputes
Loans to Interest-free
Solutions Guarantees of Conciliation and
middle-income loans and
in FDI’s non- arbitration of
and credit- grants to
private commercial investment
worthy low- governments
sector risks disputes
income country of poorest
development And political involving
governments countries
risk insurance member
countries

2
 Providing Private Sector
Development Solutions
 A member of the World Bank
Group
 Provides investment, advice,
resource mobilization to private
sector
 Established 1956 by treaty – so
internally regulated
 Owned by 184 member countries
 AAA credit rating
 Offices in nearly 100 countries

IFC is the largest global development institution

focused exclusively
on the private sector in developing countries.

3
 More about IFC

 Invests ONLY in emerging market member countries (180+)

 Venture into the poorest and most strife-prone areas, create markets where
none exist, and help to close investment, regulatory, and other gaps impeding
development

 Dual mandate: to seek development impact along with financial

return/sustainability

4
 IFC – Preliminary Data for FY17

 Long - term investment - $18.7 billion (of which $6.8bn

was core mobilization from other investors)

 Loans - over 70% of total portfolio

 Equity and quasi-equity – over 20%

 Invested in 342 projects – about 24% in poorer countries

and about 8% in fragile states (e.g. Myanmar, Haiti,
Sierra Leone, DRC)

5

Integrated Solutions, Increased Impact
INVESTMENT
 Loans
 Equity
 Trade and Commodity
Finance
 Syndications
 Derivative and
Structured Finance
 Blended Finance
WHAT WE DO
IFC ASSET
ADVICE MANAGEMENT
COMPANY
 Innovative Solutions  Mobilizing and
Combining IFC’s Managing Capital for
Expertise and Tools Investment from
to: Institutional Investors
 Help Create New
Markets
 Unlock Investment
Opportunities
 Strengthen Clients’
Performance and
Impact
6
 Differences from commercial banks
and insurers

 Risk based approach but development outcome is key

 Focus on country context
 Importance of Integrity (KYC) –
To preserve reputation
Because Integrity is central to development
Because Integrity relates to financial return

7
 Background context
FCS – Essential for meeting WBG’s twin goals*
• Nearly 500 million people currently live in fragile and conflict situations (FCS).
• The share of global poor living in FCS was about 14% (2012).
• By 2030, the share of poor living in FCS is expected to reach 46% of the global poor.

Global poverty is concentrating in FCS:

Predicted Poverty ($1.9 a day)

2012 2030
14%

46%
54%

86%

Poor in FCS Poor in Non-FCS Poor in FCS Poor in Non-FCS

*Twin goals: eliminating extreme poverty by 2030 and boosting shared prosperity, measured as the income of the bottom 40 percent
in any given country

8
 A Selective Focus
IFC - PRIORITIZES (FCS) BASED ON POTENTIAL FOR PRIVATE
SECTOR ENGAGEMENT
COUNTRIES FOR FOCUSED IFC ENGAGEMENT

Overt conflict/ Reforms yet to be

Country type Microstates Investment climate Increasing investment
dangerous conditions implemented
needing improvement potential

Encourage reform on Increased Advisory-led Increased advisory-

Overseen by Pacific Engagement as
IFC Approach a limited engagement with investment engagement
reg.’l strategy conditions permit
/opportunistic basis limited investment WBG alignment
EXAMPLES EXAMPLES EXAMPLES EXAMPLES EXAMPLES
 Kiribati  Afghanistan  Eritrea  Comoros  Bosnia & Herz.
 Marshall Is.  C.A.R.  Sudan  Gambia  Côte d’Ivoire
 Micronesia  Iraq  Zimbabwe  DRC
 Libya  Haiti
 Somalia  Guinea
 Syria  Kosovo
 Yemen  Lebanon
 Liberia
Countries
 Madagascar
on FY16 list
 Malawi
 Mali
 Myanmar
 Nepal
 Sierra Leone
 Togo
 Timor-Leste
 West Bank & Gaza
 Iraq (KRG)

9
 IFC is Growing its FCS Footprint
SUB-SAHARA AFRICA LEADS IN VOLUME AND
ITS PORTFOLIO SHARE IS GROWING
 FCS has been a strategic
priority for IFC since 2012.

 IFC provides nearly 40% of

total IFIs investments to FCS.

 IFC is focused on
1520 delivering high impact
investments, mobilization of
third party funds, technical
advice and know-how to help
remove major constraints to
private sector growth and job
creation in FCS.

 Existing tools: FCS

coordination unit + Africa
dedicated managers + FCS
focal points; simplified legal
documentation & staff
incentives.
FCS TARGET

Portfolio FY15 Indicative Committed Portfolio (FY19)

3.5% 6%-8%

10
 IFC 3.0: New Strategic Approach for Challenging Markets
Building on its expertise, footprint and financial sustainability, IFC will focus on creating markets and
mobilizing the needed billions to trillions.

CREATE MARKETS MOBILIZE PRIVATE INVESTORS

 Correct for market failures, create  Develop instruments to mobilize

new markets or strengthen them
where needed.
 Adopt a “cascade” approach to maximize
mobilization of the private sector.
 Promote private sector development
and boost local capital market
development.
 Partner with sister organizations in
the WBG and others to develop
sector-specific development
strategies.
 Scale up Advisory Services at the firm
and market level.
 Leverage WB, IMF and others for
regulatory reforms.
funding from private investors,
particularly institutional ones.
 Utilize blended finance to de-risk and
mobilize more private capital.
 Bring standardization and wholesale
approaches to increase scale and
efficiencies.
 Harmonize approaches across Multilateral
Development Banks (MDBs) on the
cascade, blending and mobilization.
 Use IDA’s Private Sector Window to de-risk
investments and boost private.
 Sector investment in Low Income
Countries.

11
 Sub-Sahara Africa:
African Fragile and Conflict Situations

 Sub-Sahara Africa hosts 21 out

of 40 FCS

 The Sub-Sahara Africa FCS list

is growing

 Extreme Poverty is increasingly

concentrated in FCS

 FCS = UN Peacekeeping
Mission &/or WBG specific
indexes

 IFC’s definition of FCS extends

beyond WB’s definition

 The regional dimension of

conflict and fragility is not
properly captured so far

12
 NEW INITIATIVES FOR FCS

 New IFC strategy 3.0: increasing reliance on advisory services to create new
markets and strengthening cooperation with the World Bank to support sector
reforms.

 IDA 18 Private sector window - sets aside $2.5bn ($2bn for IFC and $500mn
for MIGA) for new financial mechanisms (guarantees, first-loss coverage, co-
investment, local currency hedging instruments, reinsurance, etc.)

 Enhanced Risk Envelope ($700m): signals appetite for high impact FCS deals
that may fall outside of IFC’s standard credit risk profile; simplified legal
documentation.

 Mobilization of new sources of risk capital and innovative instruments to

support high impact deals in FCS and fill gaps in key sectors such as
infrastructure; expansion of SME Ventures Fund.

 Increased recognition for staff13 contributions to FCS operations/portfolio

 Managing Integrity (KYC) risk in new projects

 Reputation is paramount

 Expect clients/partners to follow applicable laws/conduct business with integrity

 Our approach includes:

 conducting integrity due diligence on projects, partners, shareholders,

C-suite, beneficial owners

 instituting mitigation measures

 conducting supervision throughout the life of the project

 requiring reporting of suspected fraud/corruption (‘sanctionable practices’)

 contractual reps and covenants against sanctionable practices

14
 IDD CHALLENGES IN FCS
 Higher likelihood of involvement of political and military elite
 Security and governance issues and weak regulatory environment
 Limited rule of law
 Serious integrity issues – narcotics, money laundering, arm trading, smuggling
etc.
 Heightened international media to adverse events affecting FCS

 Limited access to impartial public information and non-

existence/poor quality of official records
 Partisan media or no media
 Lack of online databases
 Restricted access to project sites due to security concerns
 Limited ability to confirm beneficial ownership
 Significant attention by civil society organizations

INCREASED RISK AND LIKELY IMPACT OF

ADVERSE INTEGRITY ISSUES

15
 RISK PROFILING: IDD RISK RELATED TO COUNTRY
CONTEXT

 Prepare an overall market assessment from an IDD perspective

 WB Governance Indicators, other indexes
 Contextual analysis on country/sector
 Business/financial/political networks analysis through consultants
 Pre-evaluate political influence, reputational risk, PEPs, etc.

 Identify key potential risk events/processes relevant for a sector/country:

 controversial sector reform, privatizations
 regulatory framework, licenses allocations
 Irregular tender process i.e. sole sourcing
 PPPs

16
 RISK PROFILING: IDD OF THE SPONSOR
 Pre-screening of market players:
 Sponsor mapping - increased and more creative use of specialist consultant/vendor firms to:
 survey the market
 pre-screen potential clients
 Pre-emptive IDD (PIDD) conducted by investment teams, including teams in IFC field offices
 Draw on government and business networks in field

 Enhanced Due Diligence on identified sponsor:

 Enhanced scrutiny by CBR
 Obtain inputs from Regional and Country Managers
 Engage pre-vetted local auditors and external counsel
 Obtain external due diligence (EDD) report
 Reference checks
 Country Manager sign off

 Enhanced Board disclosure

EARLY IDENTIFICATION OF POTENTIAL IDD RISKS IS CRITICAL

17
HOW CAN WE ADAPT ?
ANY TOOLS ?

18
 PROJECTS IN PORTFOLIO

 Contractual remedies in legal agreements ---

 enhancements to existing integrity frameworks

 put options

 enforcement and ‘disengagement’

 Expect client to take immediate action (e.g. internal investigation

led by board or audit committee with external consultant)
 expect prompt notification

 expect transparency

 Sanctions system

19
 WHAT IS THE WBG SANCTIONS SYSTEM?

 Independent in-house investigative unit (“INT”)

 Obligation to notify INT if allegations of sanctionable practices in

project benefitting from WBG funds (from IFC or MIGA staff or
external parties)

 INT makes preliminary assessment and decides whether to

investigate

 If sufficient evidence, can result in sanction

20
 WHAT SANCTIONS MIGHT BE IMPOSED?

 Most common sanction - debarment with conditional release (i.e.,

not eligible for future WBG funding for period of years, subject to
compliance with specified remedial terms)

 During debarment, cannot be borrower, sponsor, investee

company in WBG funded project
 Other relationships; e.g., EPC contractor - case-by-case

 Ensure group/entity is not circumventing sanction

21
 IMPLICATIONS OF DEBARMENT

 Cross-debarment with other MDBs

 Debarment is public so can have wider ramifications

(e.g. event of default under other financings)

 Referrals, information-sharing and cooperation with national

regulatory authorities

22
THANK YOU

23