Large-scale infrastructure projects are a vital part of the World Bank's development agenda, but the World Bank and host countries alike have placed little emphasis on combating corruption attached to these projects. Investigation of ongoing corruption and punishment of offenders is an important end goal in itself,, and can be an important deterrent to future corruption. The World Bank and host countries face challenges in properly pursuing investigation and punishment, but the results certainly are worth the effort. This Note explores the importance of investigating and punishing corporate corruption on World Bank-funded large-scale infrastructure projects, and presents practical suggestions as to how investigation and punishment processes might be made more effective. Specifically, host countries and the World Bank should utilize a "trigger" mechanism, by which investigations by one party automatically trigger investigations by the other, in order to increase accountability. Other factors--including the willingness of third party states to assist in these efforts--also influence the outcome, but the triggering mechanism may be an important step forward. The outcome of the Lesotho Highlands Water Project corruption investigations provides a useful illustration of how such a cooperative triggering mechanism might work.
The World Bank has identified corruption as one of the "greatest obstacles to economic and social development." (1) In response, it has developed extensive, aggressive anti-corruption campaigns and offered financial support to good governance programs aimed at reducing corruption in loan-recipient countries. Yet corruption remains an obstacle even to the disbursement of Bank aid; Jeffrey Winters estimates that "[s]ince its founding, the World Bank has participated mostly passively in the corruption of roughly $100 billion of its loan funds intended for development." (2) These funds usually are transferred to developing countries via loans, which place the burden of repayment on future generations who will have to pay the entire principal and accrued interest despite having initially received only seventy cents on the dollar for these loans. (3)
These figures take into account all types of corruption, most notably the direct looting of loan monies by government officials. Winters cautions that corporate corruption--usually in the form of bribes to government officials in order to circumvent neutral bidding processes--makes up only a minor percentage of the estimate. (4) Yet these statistics mask the gravity of entrenched corporate corruption on large-scale infrastructure projects in developing countries. These projects have the potential to assist countries in meeting their development goals by increasing revenue and fulfilling the economic and social needs of their most impoverished communities, (5) but they also act as lightning rods for corruption, environmental degradation, and human rights violations against the communities that the projects are intended to benefit. (6) Corruption exacerbates the problems of environmental degradation and human rights violations. (7)
Dealing with these challenges is vital, as infrastructure projects have been important to the World Bank's development strategies, and likely will remain so in the future. In 2009, Robert Zoellick, President of the Bank, pledged to increase Bank lending to infrastructure to $45 billion over the next three years, citing such projects' ability to "create jobs as well as build a foundation for long-term economic growth." (5) This pledge will increase World Bank spending on infrastructure development by $15 billion when compared to the $30 billion it spent from 2006-2009. (9) The Joint International Financial Institutions/Development Finance Institutions Action Plan for Africa named "increasing lending to infrastructure projects" a primary objective for financial assistance to the region. (10) The World Bank seeks to increase aid flow to infrastructure projects despite the economic downturn, and considers infrastructure projects to be a crucial source of jobs in the short-term of the financial crisis and a means by which countries might recover. (11) Furthermore, the World Bank's influence over infrastructure development is compounded because even its minimal financial or technical support may signal to other potential financiers that the project is a legitimate and profitable investment. (12)
The ability of the World Bank, donor countries, and recipient countries to limit corruption on these projects will greatly influence the effectiveness of infrastructure spending. Although prevention programs are important, this Note argues that post-corruption investigation, prosecution, and punishment mechanisms are also critical to the successful deterrence of corrupt practices in Bank-funded procurement projects. The World Bank has developed investigation, prosecution, and punishment protocols, but has not utilized them effectively or consistently. The question remains whether the World Bank is capable of implementing them and willing to do so. In order to answer this question, this Note examines two hydroelectric dam projects: the Yacyreta Dam in Argentina and Paraguay and the Lesotho Highlands Water Project (LHWP) in Lesotho and South Africa. Both received World Bank funding, and both have been criticized for high levels of corruption. Yet while no corporation was prosecuted in relation to the Yacyreta Dam, the World Bank ultimately sanctioned two multinational corporations (MNCs) that received LHWP contracts after Lesotho successfully prosecuted the responsible government official and corporations.
The Lesotho example forms the basis for my central proposal as to how to improve the investigation and punishment of corporate corruption on World Bank projects. The World Bank has been greatly criticized for its initial refusal to investigate MNCs involved in the LHWP, (13) and commentators have thus far used the LHWP scandal to demonstrate the weaknesses in both the borrowing government and World Bank approaches to corruption punishment and deterrence. (14) While these points are valid, I argue that from this scandal may emerge a new "best practice" for investigating, prosecuting, and punishing firms guilty of bribery and fraud on Bank-funded infrastructure development projects.
Substantial changes must be made if the World Bank is to effectively combat corporate corruption and overcome institutional inertia in its infrastructure projects. In this Note, I offer a proposal for change that, if implemented, may improve the efficacy of corporate sanctioning processes in the World Bank and in domestic legal institutions. The proposed plan is three-pronged. First, I argue that the World Bank Sanctions Committee should introduce a trigger clause into its procedures. Under its terms, when either the borrower state or the Sanctions Committee opens a corruption investigation pertaining to the Bank-funded project, the other party must also open or re-open its own investigation into the alleged corruption. The Bank and the borrower state should either refuse to award contracts to corporations under investigation for bribery or fraud, or make awards contingent upon the corporation being found innocent of the charges. The second element of my proposal for change will require the borrower state and World Bank investigators to share information learned from the investigation. Third, the World Bank will establish a support fund for borrower governments that need monetary assistance to pursue corruption investigations and prosecutions.
These elements are aimed at lessening--if they cannot altogether alleviate--the problem of lack of will. A constant threat to this approach's success is global willingness to sanction corporate corruption; however, I argue that even assuming imperfect willingness, this combined approach is far more likely to decrease corporate corruption than an approach that utilizes only administrative sanctions or criminal prosecutions.
The Note proceeds in four parts. In Part I, I provide reasons why it is important to focus on corporate corruption. I also explore why investigation and punishment are crucial components of comprehensive anti-corruption strategies. In Part II, I compare the Yacyreta Dam with the LHWP and place them both in the context of other large-scale infrastructure development projects. I then review the details of the LHWP scandal and identify explanations as to why the World Bank took action against corporations involved in the LHWP but has not investigated the Yacyreta Hydroelectric Project corruption allegations. I ultimately conclude that the willingness of domestic jurisdictions to investigate and prosecute offending MNCs is the most important of these variables. In Part III, I review the merits and weaknesses of the domestic hard law approach to the issue, and the merits and weaknesses of the World Bank's administrative remedy approach. In Part IV, I examine the merits and weaknesses of using a combined approach, ultimately finding that this approach is superior to alternative processes.
INVESTIGATING CORPORATE CORRUPTION ON LARGE-SCALE INFRASTRUCTURE PROJECTS: PURPOSE AND IMPORTANCE
Targeting Corporate Corruption in Infrastructure Projects
In the mid-1990s, the World Bank adopted a comprehensive anticorruption strategy that consists of five pillars, the first of which is to "prevent fraud and corruption within World Bank projects." (15) The Bank continues to fall short of meeting this goal for three reasons. First, World Bank staffers often prioritize the organization's anti-corruption agenda below infrastructure project completion. (16) World Bank officers feel "a pressure to lend" in the World Bank's results-focused approach to aid. (17) As one senior official explained, "[w]e look more than anything else at what the project achieves ... We look, for instance, at whether...