Russian Federation

Hydrometerological System Modernization Project


                            Redacted Report




                                        March 2018
                                Statement of Use and Limitations

This Report was prepared by the World Bank Group (the WBG) Integrity Vice Presidency (INT).
It provides the findings of an INT administrative inquiry (the Investigation) into allegations of
corrupt, fraudulent, collusive, and/or coercive practices, as defined by the WBG for purposes of
its own policies, rules and procedures (the WBG’s Framework regarding Anti-corruption), in
relation to the WBG-supported activities. The purpose of the Investigation was to allow the WBG
to determine if the WBG’s Framework regarding Anti-corruption has been violated.

This Report is being shared to ensure that its recipients are aware of the results of the INT
Investigation. However, in view of the specific and limited purpose of the Investigation underlying
this Report, this Report should not be used as the sole basis for initiating any administrative,
criminal, or civil proceedings. Moreover, this Report should not be cited or otherwise referred to
in the course of any investigation, in any investigation reports, or in any administrative, civil, or
criminal proceedings.

This Report is provided without prejudice to the privileges and immunities conferred on the
institutions comprising the WBG and their officers and employees by their respective constituent
documents and any other applicable sources of law. The WBG reserves the right to invoke its
privileges and immunities, including at any time during the course of an investigation or a
subsequent judicial, administrative or other proceeding pursued in connection with this matter.
The WBG’s privileges and immunities cannot be waived without the prior express written
authorization of the WBG.




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Background

In August 2005, the Russian Federation (the Borrower) and the International Bank for
Reconstruction and Development (IBRD)1 entered into a Loan Agreement to finance the
Hydrometerological System Modernization Project (the Project). The Project closed in May 2013.

In 2008, Company A submitted a proposal for a Project contract (the Contract), and was
subsequently awarded that Contract.

Allegations

The World Bank Group Integrity Vice Presidency (INT) received an allegation that, during the
selection process and execution of the Contract, Company A had a conflict of interest with an
employee of the Project Implementing Unit (the PIU Employee). Specifically, the allegation was
that: (i) the PIU Employee was a Director on the Board of Directors (BOD) of Company A’s parent
company, Company B; and (ii) the PIU Employee was at the same time involved in the preparation
of the Terms of Reference (TOR) of the Contract, the selection process for the Contract, and the
supervision of the Contract.

Methodology

INT’s investigation consisted of, among other steps, a review of Project documents, as well as
documents and statements obtained from relevant parties.

Findings

        Evidence indicates that Company A and Company B omitted to disclose Company
        A’s conflict of interest.

Evidence indicates that, while separate legal entities, the operations of Company B’s subsidiaries,
including their participation in tenders, are centrally coordinated with each subsidiary operating
within one of Company B’s business units. Evidence indicates that the financial statements of all
companies are reported in a consolidated manner. Evidence also indicates that the BOD of
Company B directs the overall business strategy for its subsidiaries.

Evidence indicates that, throughout the selection and execution process for the Contract, the PIU
Employee was a member of the BOD of Company B, Company A’s parent company and also a
member of Company B’s Audit and Compliance Committee and Compensations Committee.
Although s/he was not paid a salary for the work, the PIU Employee was remunerated in the form
of options on Company B’s shares, but did not obtain any shares. Evidence indicates that at the
same time the PIU Employee served as a Director of Company B, s/he was also employed by the
PIU. The PIU was specifically responsible for the preparation of the tender documentation,
organizing tenders, negotiations and contracts, for the procurement of goods, works and services.

1
  The IBRD is one of the five institutions comprising the World Bank Group. The International Development
Association (IDA) and the IBRD constitute the World Bank. The IBRD and the World Bank are used interchangeably
throughout this Report.

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Specifically, evidence indicates that during the Tender and the execution of the Contract, the PIU
Employee was responsible for all the PIU’s project activities and for managing the relations with
the World Bank, government agencies and ministries. Evidence further indicates that the PIU
Employee supervised several departments of the PIU.

The preparation and implementation of the Project fell within the ultimate responsibility of the
Project Management Committee (PMC) for the Project, which was composed of representatives
from the PIU and senior officials of the Borrower. The PIU Employee also was a member of the
PMC. Alongside the approval of the budget for the Project, the mandate of the PMC covered
large-value contracts and the creation of working groups, which were responsible for the:
(i) evaluation and approval of terms of reference; (ii) review and approval of individual contracts;
(iii) appointment of individual members of bid evaluation committees (BECs); and (iv) approval
of bid evaluation reports (BERs).

Evidence indicates that the PIU Employee was directly involved in approving the TOR of the
Contract as a member of the PMC and was directly engaged in the selection process for the
Contract. Specifically, evidence indicates that PIU Employee: (i) reviewed and approved the
short-list of consultants, which included Company A; (ii) signed the cover letter of the Request for
Proposals (RFP), which was sent out to the short-listed consultants, including to Company A;
(iii) reviewed and approved the combined technical and financial evaluation report for the
Contract; (iv) sent a letter to an employee of Company A (Company A Employee) to notify him
that Company A was awarded the Contract. Evidence further indicates that the PIU Employee
was directly involved in the supervision of the Contract.

Company A’s proposal did not contain any mention of Company A’s business relationship with
the PIU Employee, nor did Company A disclose this relationship throughout the selection process
or its execution of the Contract.

Evidence indicates that Company A was aware of the conflict of interest. Correspondence between
the Company A Employee and the PIU Employee indicates that it would have been clear to
Company A Employee that the PIU Employee was working for the PIU. Furthermore, the PIU
Employee’s engagement as a Director of the BOD, while being employed by the PIU, was noted
in Company B’s 2007 Annual Report, in which Company A was also listed as a 100% subsidiary.

Company A is wholly owned by Company B. Evidence indicates that one of Company B’s
departments was responsible for the decision whether any of the subsidiaries would participate in
tenders. This indicates that, although Company A is a separate legal entity, its participation in
tenders is coordinated by Company B.

Furthermore, evidence indicates that Company B knew about Company A’s conflict of interest
and the obligation to disclose it. As presented above, the PIU Employee was a member of the
BOD of Company B while being employed by the PIU. Evidence indicates that the PIU Employee
signed the letter of invitation for the RFP, which was addressed to Company A Employee, whom
s/he knew personally. The PIU Employee stated that s/he raised the issue of a conflict of interest
during the Contract’s selection process before the award of the Contract to Company A, to

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Company B. The PIU Employee also stated that, once s/he had raised the conflict of interest with
Company B, Company B told the PIU Employee that they would not object to the PIU Employee’s
resignation. However, by the time the PIU Employee submitted a resignation, Company A had
already secured the Contract. Moreover, evidence indicates that the PIU Employee participated in
at least one further meeting of the BOD after the resignation.

Follow Up Action by the World Bank

The World Bank Group imposed sanctions on Company A and Company B.




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