People’s Republic of China

Shandong Flue Gas Desulfurization 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.




                                                 1
Background

The Shandong Flue Gas Desulphurization Project (the Project) in China aimed to reduce sulfur
dioxide emissions (SO2) in the heat and power sector and enhance the capacity of regulatory
authorities in monitoring and enforcing compliance with their SO2 emissions reduction program.
The Project was financed by the International Bank for Reconstruction and Development (IBRD).1
The Project became effective in October 2008 and closed in June 2012.

In 2008, Company A was awarded a contract under the Project (the Contract), and signed the
Contract with a beneficiary in charge of procuring and implementing the Contract (Agency A).

Allegations

The World Bank Group Integrity Vice Presidency (INT) received allegations that (i) Agency A
and Company A used the Contract funds to pay for work which had already been performed by
Company A under another previous contract; and (ii) Agency A employees offered World Bank
staff improper gifts on three separate occasions in relation to the Contract.

Methodology

INT’s investigation consisted of, among other steps, a review of the Project documents, as well as
documents and statements obtained from representatives of Company A and Agency A.

Findings

1. Evidence indicates that Agency A and Company A used the Contract funds to pay for
   work previously performed by Company A under another contract.

Evidence indicates that approximately 22 months before the Contract signing, Company A signed
another contract, not financed by the IBRD, with Agency A (the Previous Contract), for the supply
of equipment and works identical to those that were to be supplied under the Contract. Evidence
indicates that Company A stopped its work under the Previous Contract because Agency A ran out
of funds. Company A was owed money under the Previous Contract when it stopped working on
that contract. Evidence indicates that Agency A told Company A that it would be able to pay the
balance owed to Company A under the Previous Contract once the Contract was signed.
Specifically, evidence indicates that Agency A told Company A that if another company was
awarded the Contract, Agency A would require that company to pay Company A the amount owed
for Company A’s prior work under the Previous Contract, and if Company A was awarded the
Contract, it would be paid for that prior work directly under the Contract.

Evidence indicates that Company A had completed a substantial amount of the work under the
Previous Contract, including the design, fabrication, and installation of two buildings, prior to the
signing of the Contract. Evidence indicates that Agency A’s affiliate hired by Company A as a

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.


                                                      3
subcontractor had completed the foundation work for both of the two buildings prior to the signing
of the Contract. The foundation and the construction of these two buildings were part of the work
program covered in Company A’s bid for the Contract. Specifically, INT obtained documents
dated prior to the signing of the Contract, which indicated that the civil works for one of the two
buildings were completed and the civil works for the second building were in process under the
Previous Contract.

In addition, a third-party supervision company told INT that it had visited the site no later than
three months after the signing of the Contract, and had noticed that most of the civil works were
already completed.

An employee of Agency A told INT that the scope of the Contract included work that had already
been performed under the Previous Contract with Company A, and that Agency A intended to use
funds from the Project to pay for that work.

Evidence indicates that at the direction of Agency A, Company A had endorsed invoices prepared
by Agency A with false dates for its prior work under the Previous Contract in order to get paid
for that work under the Contract.

INT’s investigation revealed documents indicating that Company A had entered into sub-contracts
with five contractors for work related to the Contract prior to the signing of the Contract. The
work performed by these five sub-contractors, including design, fabrication, and installation of the
above-mentioned two buildings, was part of the scope of the Contract. Evidence indicates that
Company A had actually paid three of those sub-contractors before the Contract was signed.

2. Evidence indicates that Agency A required Company A to sign subcontracts and make
   payments to Agency A affiliates under the Contract to redirect funds from the Project to
   those affiliates.

Evidence indicates that Agency A required Company A to sign subcontracts with three Agency A
affiliates –Affiliate 1, Affiliate 2, and Affiliate 3. Evidence indicates that subsequent to the signing
of the Contract, Company A signed a sub-contract with the three Agency A affiliates.

Evidence indicates that some of the work under Company A’s sub-contracts with the three Agency
A affiliates under the Contract had been at least partially performed prior to the Contract signing.

Evidence indicates that the work of these three Agency A affiliates under the Contract was
managed by Agency A, not by Company A. Evidences indicates that Agency A required Company
A to make several payments to the three affiliates, despite the fact that Company A only received
one invoice from Affiliate 1, and Affiliate 3 never provided any invoices to Company A in relation
to their sub-contracts under the Contract.

Evidence indicates that approximately 95 percent of the funds that Company A received from
Agency A under the Contract was paid back to the three Agency A affiliates. Specifically,
evidence indicates that Agency A paid Company A under the Contract, and Company A paid the
three Agency A affiliates under their respective sub-contracts.



                                                   4
3. Evidence indicates that Agency A officials offered World Bank staff gifts on three
   separate occasions in relation to the Contract during the World Bank staff’s inquiry
   concerning the altered invoices.

Evidence indicates that during a routine financial management supervision visit of Agency A, a
World Bank staff discovered a withdrawal application which appeared to be supported by false
invoices. Subsequently, evidence indicates that an Agency A employee came twice to the World
Bank office to request the return of the withdrawal application that allegedly contained false
information. Evidence indicates that on the second such visit, the Agency A employee offered
gifts to a World Bank staff member, including what appeared to be a card wrapped in paper, and
told the World Bank staff that it could be used to buy something. Evidence indicates that the
World Bank staff refused the gift.

Subsequent to this incident, the World Bank team visited Agency A and met with relevant
government employees and Agency A employees. Evidence indicates that after an afternoon of
discussions, the World Bank team returned to their vehicle and found it filled with present which
appeared to be cooking utensils/silverware. Evidence indicates that the World Bank team
members refused the gifts and asked that the presents be removed from their vehicle.

Subsequently, evidence indicates that two Agency A officials came to the World Bank office to
deliver copies of financial documents that the World Bank staff had requested. Evidence indicates
that the Agency A officials brought gifts (small bags filled with what appeared to be tea mugs) for
the World Bank team members. Evidence indicates that the World Bank team again refused the
gifts.

Follow Up Action by the World Bank

The World Bank Group imposed a sanction of debarment with conditional release on Company A.
The ineligibility extends to any legal entity directly or indirectly controlled by Company A.




                                                5