Fraud and Corruption in Development

By Duncan Smith, former senior investigator at the European Investment Bank, the World Bank and the UK's Serious Fraud Office

Duncan Smith retired as Deputy Head of the EIB’s Investigations team in 2023 and is currently Alternate Chair of Asian Development Bank’s Integrity Enforcement (sanctions) Committee.

He has had books and articles published including Promoting Integrity in the Work of International Organisations: Minimising Fraud and Corruption in Projects (Springer). He co-wrote the IACA Research Paper Building Trust Under Pressure: Integrity Systems in Humanitarian Organisations (with Andrea de Tommaso).

Fraud and corruption impacts developed and developing economies alike – apart from national criminal laws which vary by jurisdiction, preventing and restricting economic crime is not easy; seeking to ensure development funds are used for their intended purpose(s) is a major issue for Multilateral Development Banks (MDBs) such as the World Bank and the European Investment Bank.

Nevertheless, promoting integrity in development work is possible. Indeed, to ensure the projects financed by the MDBs and UN development agencies (to build schools, hospitals, power stations, water treatment plants and new transport links, for example) are implemented fully, a number of tools have been developed; this article will look at the current ones.

MDB Anti-Fraud & Corruption Tools

- Harmonised MDB definitions of fraud, corruption, collusion, coercion and obstruction by the MDBs so that misconduct in one project is recognized and treated as such by the others; [1]

- The World Bank uses Standard Bidding Documents which require, amongst other things, the disclosure of any fees paid to third parties (such as agents);

- Procurement rules seeking to ensure a competitive process which delivers value for money in the acquisition of goods and services. The EIB’s Guide to Procurement includes at Appendix C a model Covenant of Integrity which has to be completed by all bidders, not just to ensure that they are aware the fraud and corruption is outlawed but also that EIB’s investigators can, if needed, review the books and records for the implementation of the contract;

- Training of project staff can prevent later problems with complicated procurement processes and/or bidders looking for weaknesses to exploit and be awarded a contract;

- Red flags (or warning signs) of fraud and corruption in procurement processes can often be identified, such as strange bidding patterns, suspicious bidders, the rejection of viable bids, numerous awards to one company or overpricing;

- Investigations including undertaking Proactive Integrity Reviews – the MDBs will review and, if necessary, investigate allegations of fraud and corruption. In the last few years, the MDBs have increased their proactive work too, in order to identify gaps and weaknesses in the implementing framework of the project in order to prevent fraud or corruption in high-risk projects or identify it if it has already happened on a small scale but has not yet been reported;

- Sanctioning (of fraud and corruption investigated and evidenced in the projects) by an independent and objective Sanctions Committee for the MDB with decisions published and some subject to cross-debarment by other MDBs and recorded on their website (AMEDD); [2]

- Cooperation with National Law Enforcement seeking criminal investigation and, if appropriate, the prosecution of those engaging in criminal misconduct.

Analysis

These tools assist the MDBs and national implementing agencies to minimise fraud and corruption that often impacts large-scale, high-cost and/or high profile development projects. The annual reports of the investigation and integrity teams at MDBs [3] and other organisations demonstrate that proactive tools are used successfully to identify gaps/weaknesses, rectify problems and thereby improve implementation in projects.

There are numerous examples of economic crime in recent years (for example, non-development fraud cases such as 1MDB/Jho Low, Elizabeth Holmes & Bernie Madoff) and they also include sanctioned development cases (such as Siemens, leading to settlements with the World Bank and the EIB leading to the Siemens Integrity Initiative), Alstom Power (now part of GE), SNC Lavalin, Odebrecht, Wasim Tappuni and VW) [4].

Conclusion

These tools can be extremely useful in promoting integrity in international development projects but can only be truly effective depending on a number of factors including:

- the motivation of project staff and management;

- the borrowing country’s politicians and their desire to ensure effective implementation of the project and proper use of the funds;

- whether the bidders and contractors participate in the project through a collective action scheme that promotes integrity; and

- other national/international geo-political factors.

Such tools also provide the effect (direct or indirect) of increasing accountability and transparency; they also reflect compliance developments in recent years in the public and private sectors (such as improved KYC). However, criminals (especially organised crime groups) continue to operate and to develop complex structures (nationally and internationally) to undertake fraud and corruption, as well as to hide and launder the funds they obtain, so the tools must continue to develop (including using AI) if integrity is to be promoted and projects are to be implemented effectively in the future.

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[1] Pursuant to the IFI Anti-Corruption Task Force’s Uniform Framework Agreement 2006 https://www.eib.org/files/publications/general/uniform_framework_en.pdf

[2] The IFI’s Agreement for Mutual Enforcement of Debarment Decisions 2010 https://www.adb.org/who-we-are/integrity/cross-debarment

[3] For example, https://www.eib.org/en/publications/20250030-investigations-activity-report-2024 and https://www.eib.org/en/publications/20240054-investigations-activity-report-2023 ; https://www.worldbank.org/en/about/unit/integrity-vice-presidency/annual-reports

[4] For example, as can be seen from the EIB: https://www.eib.org/en/about/accountability/anti-fraud/exclusion/index and World Bank’s https://www.worldbank.org/en/about/unit/integrity-vice-presidency/sanctions-compliance websites.