1. M ITIGATING THE R ISK OF F RAUD AND C ORRUPTION IN CDD O PERATIONS PREVENTIVE SERVICES UNIT Ι INTEGRITY VICE PRESIDENCY Ι 28 September 2011 Ι WASHINGTON, DC Integrity Clinic Series

2. Welcome and Introduction Galina Mikhlin-Oliver, Director INTSC Identifying and Assessing Integrity Risks in CDD Projects  Interactive exercise: Assess fraud and corruption risks in a CDD project  Lessons learned from an INT case in a CDD project Rima Al-Azar Managing Integrity Risks Interactive exercise: The key elements of a CDD Manual  Group exercise  Plenary discussion Rima Al-Azar Steve Burgess Janmejay Singh How to Manage a Project Affected by Allegations of Fraud or Corruption David Bernstein Wrap-up and Evaluation Bart Stevens AGENDA

3. 3 Part I: Identifying and Assessing Integrity Risks in CDD Projects

4. 4 Case Study: CDD project in the Republic of Mawza Questions for Discussion: 1. How would you go about assessing the key integrity risks in this project? In the sector? 2. What would be some typical red flags in this type of project? 3. What are some risk mitigation measures to be put in place at the project design, procurement, and implementation stages?

5. Risk Aversion

6. Outline  Objectives: Risk Management and Knowledge-Sharing  Forensic Audit Findings 1.Project Design 2.Participatory planning 3.Procurement 4.Financial Management 5.HR Issues 6.Monitoring and Supervision 7.Auditing 8.Access to Information 9.Social Accountability 10.Effective Grievance Redress Mechanism  Conclusion

7. Risk Management 7

8. Forensic Audit Findings CDD project audited by INT:  42% of expenditures were tainted:  29% of expenditures were suspected fraudulent  Another 13% were questionable  Fraudulent behaviors in all expense categories including fuel, vehicle repairs, training (capacity building), allowances and per diem, payroll, and noncurrent assets Similar findings in the CDD project audited by the Government

9. 1. Project Design  Institutional Issues (role of Community Development Community)  Technical design should be based on the communities’ capacities and not the other way round  Private vs. Public Goods (clear rules of the game)  Importance of Project Operational Manual  No “one-size-fits-all” (infrastructure, density, security, capacity, etc…)

10. Role of Community Development Committee (CDC) A community bakery was built on the land of the chairman of the CDC He and his family were the sole users of the bakery  Conflict of Interest (VFM)  Collusion with District Officials  Accountable CDCs  Clear role and responsibilities  Regular elections  Downward and upward accountability  Clear membership criteria  Is it needed?

11. The Community Contribution Well-explained, based on poverty level  The 30% community contribution is highly susceptible to fraud and manipulation Scheme Variation I Scheme Variation II Scheme Variation III Community cannot afford cash contribution but contributes in kind (i.e. labor); however, labor is minimal Community does not make any contribution; yet, the funds are released No community contribution is solicited; instead, a business fronts the 30% contribution; subsequently, funds released are shared between project officials and the business. A fictitious beneficiary list is produced

12. 2. Participatory planning and capacity building  A key objective of CDD projects; theory if done right, minimizes integrity risks  Requires capacity building, proactive engagement and facilitation at community level  Prone to manipulation (“facipulation”)  Fake participants, venue and even event: double impact  Duration, inclusion, staggering of training, clarifying “rules of the game”

13. 3. Procurement  Local Procurement  WB vs. government procedures  Simple, user-friendly templates  Unit cost database  In-kind community contribution calculation  Up-to-date rolling procurement plan  List of all signed contracts  Value for Money (VFM)  Specify eligibility/non-eligibility of land purchases; Voluntary Land Issues

14. Value for Money (VFM) A Toilet in community A Toilet in community B

15. 4. Financial Management  Fixed asset management (registry, branding)  Fleet management : vehicle maintenance and fuel issues  Better donor coordination and financial reporting  Double – dipping  Funds Flow  Value Added Tax  Financial reporting: linking physical progress with financial reporting

16. Project Fixed Assets  World Bank policy on asset management and disposal  Asset registry with unique product identifier (serial number) and branding  Part of the MIS  Procedures for project staff to hand over project assets  Undertake stock-taking before second phase

17. Fleet Management: Vehicle and Fuel Cars can get very expensive The issuesThe red flagsSome suggestions 1.Ineligible expenses from incomplete work tickets and log books 2.Insufficient details of the vehicle to which the expense is related 3.Repairs for cars that did not belong to the project 4.Quantities and prices on receipts not matching or being excessive What can go wrong?  Easy to create receipts for maintenance not received  Easy to manipulate receipts and inflate amounts paid  Maintenance for vehicles that do not belong to the project  Failure to follow government’s or other applicable repairs or maintenance guidelines  Lack of details of vehicles receiving repairs and maintenance on invoices  Use of unauthorized mechanics  Most repairs performed in the last quarter of fiscal year  Repeated repairs on same cars within a short timeframe  Purchase of tires when mileage suggests this is unnecessary  Replacement of expensive parts on the same vehicles  No logbooks, incomplete logbooks or missing logbooks  Look for the red flags  Analyze maintenance costs per kilometer  Detailed analysis of the usage of project vehicles (kms) with maintenance costs  Analyze if most repairs performed in the last quarter of fiscal year  Analyze if liters recorded as supplied to a vehicle is greater than the size of its fuel tank  Report issue

18. Training Per diem and allowances  Minimize imprests and cash use (e.g., in one district 35%)  Direct payment to hotel  Wire per diem and allowances to trainees’ bank account or  Explore the use of mobile money  Closed training participation  List of participants ready before training  List pre-approved, if feasible

19. Mitigating risks  Enhanced coordination  Branding  Geo-referencing linked to publicly available map Cheque details from two Bank projects Lack of coordination of community interventions between different donors and/or different projects increases the risk of double dipping

20. Funds Flow FMR expenditures highly concentrated in Q4 Risks:  Hasty spending  Mistakes  Unaccounted expenses  Paying before delivery  Value for Money issues  Weak control environment/Conditions enabling commission of fraud

21. Financial Reporting Not only eligible expenditures  Provide standard templates for financial reporting (excel with formula)  Restrict ability to edit and modify data  Link to FMR categories to avoid manual calculations  FMR should reflect output/results-based performance as well as eligible categories

22. 5. Human Resources issues CDD are human resource intensive!  District staff from the same region (to leverage language and local knowledge) but not from the same district  Limit tenure of District Coordinator (in project one Coordinator in same post for 11 years)  Recruitment to be done through private agent, if possible  HR policy and procedures developed for project  Include segregation of responsibilities  Procurement Officer should not be signing checks  Hiring/firing/rotations/salary increases to get the TTL “No Objection”  Must be a specific focus of project design, monitoring and supervision  Continuous induction due to high staff turnover

23. 6. Monitoring and Supervision  MIS  Use information to flag potential areas that need attention  Disbursement  Expenditures  Procurement plan vs. actual procurement  Different supervision model: Risk-based and focus on processes  Candid ISRs  Follow up on unimplemented mission recommendations  Tone from the top: Annual field visit with director level line minister to discuss governance issues

24. What are they Benefits  Continuous assessment of project implementation  Element of surprise  Random sampling  Bottom-up approach  Compliment annual audits  Timely vs. ex post facto  Regularly conducted  Independent  Enhance financial discipline, management, and accountability  Strengthen capacity building and training  Deterrent effect: Increase perception of detection 7. Audits & Rolling Audits CDD-specific audit TORs

25. 8. Access to Information at all levels Donors Central Government Decentralized Government Grassroots/Civil Society Publish what you fund Website Website/other (SMS, etc) SMS Publish what you receive Publish what you fund Publish what you receive Publish what you fund Publish what you receive Website What How/ Where Who

26. 9. Social Accountability Information is key  Assess and piggy back on other donors’ and NGOs initiatives  Third party monitoring to support project monitoring and supervision  Use of innovative ICT  Caveat access and by-in of users  Public disclosure  Website  Community boards, local radio, CDC briefings to community  Preferable that information on project and grievance redress mechanism be carried out by third party

27. Transparency “ Sunlight is the Best Disinfectant” T RANSPARENCY IS KEY Funds Flow Information GRM Information Information regarding INT Procurement Information Decision- making Meetings’ Minutes Sharing Disclosure of Project Staff & Position Billboard Displaying Micro-project Information Project Operation Manual Available on Website

28. 10. Effective Grievance Redress Mechanism Project Level  Establish one  Hotline and complaint boxes not enough!  Learn from other projects/donors’ experiences  Set up database of complaints and link it to the project MIS  Link Project GRM to existing local structures  Example: Human Rights Commission, Commission for Justice and Peace  Protect whistle blowers  Project staff who blew the whistle was fired

29. Effective Grievance Redress Mechanism National Level  Anti-corruption commission to conduct integrity training for PIU staff  Build capacity of national oversight agencies (link with PREM)  Follow up on referrals  Project staff should be aware of INT

30. Main Learning Points  Transparency, Accountability and Participation (TAP) in CDD projects needs to work at all levels All levels need to be transparent and accountable, and at least accept the premise that participation at the community level is vital to success. Degree of participation of national and subnational level entities will depend on the nature of the project.  Keep the project simple and appropriate. Don't overestimate or underestimate the beneficiaries. Keep in mind social, economic and logistical aspects. Test all materials and systems on a small scale through pilots before rolling out. Avoid the Christmas tree approach.  Keep fiduciary systems simple and appropriate. Get funds to the beneficiaries in a way that avoids unnecessary hurdles or bureaucracy. Ensure that any rules are reasonable and can be monitored at each level of the project. Do not neglect national or subnational level systems. Do not neglect the more mundane aspects such as inventory and accounting for expenses.

31. Main Learning Points  Ensure appropriate facilitation Have an appropriate system in place for mobilizing, training, paying, managing, monitoring, rewarding/sanctioning, demobilizing the facilitators. Make sure that this works and is not nepotistic.  Get the materials right Make sure that the project manuals, posters, booklets, etc., are clear and all promote the same principles. In particular, make sure that the rules and lines of reporting/accountability are spelled out clearly.  Implement a new supervision model Supervision should be carried out using a risk-based model and assess the processes as well as the physical outputs.  Keep tweaking ! Most projects are multi-year so keep improving the systems based on experience. Make sure there are events planned to allow for sharing of knowledge between levels. Revise manuals and (re)training, as appropriate. Assume you will need a budget and make time for these aspects.

32.  A question of “Who” not “How”  Incentives  Impunity C ONCLUSION : A QUESTION OF INTEGRITY - UTADU Thank you !

33. 33 Part II: Managing Integrity Risks

34. 34 Case Interactive Exercise The Key Elements of a CDD Manual Groups Exercise Plenary Discussion

35. MAWZA CDD OPERATIONAL MANUAL 35 Janmejay Singh Manuela Adl Paul Bance M. Rohil Hafeez Arun Manuja Leonard Newmark Kaori Oshima SangeetaPatel Steve Burgess Wolfgang Chadab Winston Dawes Karim Kamil Fahim Anna P. Hebert Karina Mostipan Miguel-Santiago da Silva Oliveira Enrique Pantoja David Bernstein Hugues Agossou Junxue Chu Bernard Harborne Renato Nardello Tom C. Tsui David Webber Melissa Williams Soukeyna Kane Project Design and PlanningImplementationOversight

36. 36 Part IV: Handling an Allegation of Fraud or Corruption

37. Bank Staff Duty (Staff Rule 8.01): Staff member has a duty to report suspected fraud & corruption in WBG-financed projects or in the administration of Bank Group business to direct manager or to INT. Manager has an obligation to report it to INT. Protocol for handling complaints and red flags (between INT and OPCS)*:  reporting of allegations of fraud and corruption related to procurement  INT investigative process - case intake and prioritization  review of requests for no-objection for procurement transactions where there has been an allegation of fraud and corruption (RPM)  follow-up with Borrowers *OPCS and INT Protocol, November 3, 2009 presently being updated 37

38. How to Move Forward With a Project Under Investigation 1.Operational decisions generally do not have to wait for the outcome of an investigation 2.Always consult with Regional Procurement Manager (RPM) on possible mitigation measures 3.Options depend on various factors, including:  stage of INT’s investigation  stage of the procurement process (i.e., before or after contract signing)  company under investigation in this or another project  potential impact on Borrower (e.g., 80% of contract implemented)  Sanctions are prospective not retroactive if work has begun 4.Not all INT investigations end up in sanctions 38

39. How to Deal with INT Investigation in a Successor Project 1.Closed INT case, publicly disclosed  relevant to the project (country and sector)  Refer to the case in the main text of the PAD and relevant annexes (address main findings) 2.Closed INT case that has not been disclosed to the public:  Discuss with INT whether to refer to the case in the PAD and agree on appropriate text  Refer to case in Memorandum of the President (MoP) after agreement with INT on appropriate text 3.Open INT case (“Volker Trigger”)  Refer to case in the MoP after agreement with INT on appropriate text  Be prepared to provide a technical briefing to the Board, if so requested  PAD should mention project/sector risks (without explicit reference to the INT case) and the risk mitigation measures to be put in place 39

40. 40 Handling Allegations of Fraud & Corruption Take-Away Messages  Take complaints seriously but do not panic and be ready to conduct deeper due diligence  There are no quick fixes and these processes can take time – adjust your expectations and program your work program accordingly  Work collaboratively with others (FM, RPM, etc.) to ensure that you comply with policies and manage the case in a smart manner  Be open and frank with the INT investigative team  Remember that not all complaints will end up as allegations and that not all allegations will turn into cases  Consider carefully when and how to alert your client For those allegations that do not end up as full cases, still opportunity for preventive measures working with INT’s Preventive Services Unit

41. 41 PSU Business Lines and Products Business LineProducts 1. Advisory Engagements  Advice on Project Design  Implementation Support Services (ISS)  Interim Advisory Notes (IANs) 2. Operational Reviews and Risk Assessments  Detailed Implementation Reviews (DIRs)  Integrity Assessments (IAs)  Support for IPRs, ORAFs, and other operational reviews and assessments  Follow up on recommendations emanating from INT work 3. Training  Monthly “ Integrity Clinics “ for Staff  Advanced Course on Management of Integrity Risks in Bank Operations (INT’s Integrity Academy) ( under preparation)  On-line Integrity Risk Management Course ( under preparation)  INT courses on fraud and corruption in procurement  Support for courses managed by other units 4. Technical Assistance  Capacity building for government staff  Capacity building for national oversight agencies, particularly in forensic audit  Clinics for Task Teams (during preparation or implementation) 5. Knowledge Products  Regional Portfolio Overview  Risk assessment tools 6. Corporate Work  Review of OC/OVP packages, sector strategies, policies, etc.  PSU’s participation in various efforts across the WB

42. Your PSU Partners Who to Contact for Advice in PSU 42 Anders Agerskov Wolfgang Koehling Rima Al-Azar David Bernstein AFR EAP MNASAR Galina Mikhlin-Oliver, Director INTSC ECA LCR Susan Hume Virginia Papanikolaou

43. 43 ANONYMITY. If you wish to remain anonymous, we encourage use of a free email service (such as Hotmail or Yahoo) to create a temporary email account using a pseudonym, so that we may correspond with you as necessary. This can be helpful in pursuing your allegation. E-mail: investigations_hotline @worldbank.org +1 (202) 458-7677 Fax: (202) 522-7140 How To Report an Allegation

44. 44 Part V: Topics for Future Clinics Wrap-up Evaluation

45. INVESTIGATIONS 45 Thank you ! Let’s stay in touch http://prevention

46. Resources To access the database containing the portfolio of CDD projects, follow the friendly URL (FURL): cdddbcdddb CDD Project Operations Manuals can be found on the CDD Sharepoint under the Theme “Project Design”, or by following the following link: http://connect.worldbank.org/explore/SDV/cdd/default.aspx [Click on “Theme: Project Design”] DFGG Publications and How-to-Notes Community Driven Development Community of Practice Group INT’s Preventive Services Unit intranet page [type psu in browser]

48. 48 Further Reading  Anti-Corruption Guidelines (Blue Book)Blue Book  Examples of GAACs in Indonesia: http://go.worldbank.org/D4IBGSWR11 Examples of GAACs in Indonesia: http://go.worldbank.org/D4IBGSWR11  Handling Suspected and Alleged Fraud and Corruption in Procurement – OPCS and INT Protocol, World Bank, 2009 Handling Suspected and Alleged Fraud and Corruption in Procurement – OPCS and INT Protocol  Self-Assessment of GAC Risks, World Bank, INT, 2009 Self-Assessment of GAC Risks  Fraud and Corruption Awareness Handbook, World Bank, INT, 2008 Fraud and Corruption Awareness Handbook  The Many Faces of Fraud and Corruption – Tracking Vulnerabilities at the Sector Level, World Bank, 2007  Business Anti-Corruption country profiles (www.business-anti-corruption.org)www.business-anti-corruption.org  Deterring Corruption and Improving Governance in Road Construction and Maintenance, sourcebook prepared by the Energy, Transport, and Water Department and Finance, Economics and Urban Department of the World Bank, 2009 Deterring Corruption and Improving Governance in Road Construction and Maintenance

49. Upcoming activities related to GAC in CDD  Online catalogue of red flags and GAC risks in CDD  GAC in CDD How-to-Note  CDD Core Course  GAC in CDD Course  Good practice notes on CDD Design  expected Feb 2012  expected March/April 2012  expected Jan 2012  expected June 2012