Understanding integrity compliance
Associated almost exclusively with multilateral development banks (MDBs), integrity compliance covers a range of misconduct issues beyond bribery and corruption, including fraud, theft, collusion, coercion and obstructive practices as defined by the Joint International Financial Institution (IFI) Anti-Corruption Task Force.
It is a term that has emerged over the last twenty years as MDBs have invested considerably in implementing systems and controls that will protect their financing projects from corruption risks as well as project and reputation-damaging misconduct.
MDBs were established in the aftermath of the second World War with the aim of re-building war-torn nations in order to help stabilise the global financial system. Unlike commercial banks, they do not seek to maximise profits for shareholders. Instead, their focus is on development goals such as ending extreme poverty or reducing economic inequality. Consequently, they lend at relatively low interest to fund projects in infrastructure, energy, education and other areas that promote development.
Inevitably, much of this lending is into high-risk parts of the world where governance systems are often weak and state institutions poorly functioning. Perhaps inevitably, scandals involving MDB-funded projects hit the headlines leading to much criticism of the institutions and their ability to manage their investments effectively.
MDBs are funded by states and other multilateral institutions who understandably require assurances that the funds they provide are used reputably and to a high standard of ethical conduct.
In recognition of this, integrity compliance has emerged as the framework that sets the standards of behaviour expected. It applies to companies in receipt of debt funding, equity investments or those participating in tenders, and equally to the officers managing the funds and their counter-parties (clients, suppliers, etc.).
Good practice to prevent corruption is built into MDB projects. Where policy or procedural failures are identified, many MDBs will work closely with partner organisations to improve practices and raise standards, perceiving this to be part of their overall development role. GoodCorporation works with a number of companies on who are in receipt of MDB funding, using our Integrity Compliance Framework to embed good practice and raise standards.
However, where cases of malpractice are found the penalties can be severe. MDBs have multi-national powers of investigation and the ability to sanction. There is a cross-debarment agreement between the leading MDBs which means those in breach face sanction across the entire group. Sanctions can include disgorgement of profits from illicit activities, being banned from tenders and requirements to appoint a monitor.
Such penalties have a material and direct financial impact on those companies found in breach of integrity standards. In addition, the indirect financial impact can be catastrophic as there is public notification of the unethical behaviour that led to the sanction.
In many ways, the initiatives being undertaken by the MDBs can be regarded as analogous to the anti-bribery laws that have been enacted by states internationally over the past 10 years (and longer for the FCPA). The commitment is clear – participation in corrupt practices is incompatible with a commercial and financial system operating with integrity. Integrity and economic development are seen as symbiotic.
What is clear is that providers of development capital, and increasingly of private capital, prize the creation of long-term value through the provision good quality products and services at a fair, competitive price above the short-term gains made through unethical practices that distort objective economic and commercial decision making. Such practices fundamentally undermine the sustainable performance not just of companies, but also emerging economies and are rightly being called out by investors as well as society at large.