99059 JULY 2015 ABOUT THE AUTHOR SOPHIA DREWNOWSKI Findings from the World Bank Due Diligence is a Senior Partnership Specialist in IBRD’s Trust Funds and Partnerships Department, where Pilot on Private Sector TF and EFO Donors for the last 11 years she has advised on partnership design, It is widely acknowledged that the World Bank Group will need to partner in a donor due diligence, and risk management. Previously she was variety of innovative ways with the private sector to achieve the Sustainable Counsel in IFC’s Legal Depart- ment and a lawyer in private Development Goals (SDGs). Among other things, nontraditional donors are practice working on public- private partnerships. expected to play an important role in leveraging the World Bank’s capacity to deliver development finance solutions to client countries. But partnering APPROVING MANAGER David Kuijper, Adviser, with such donors can raise complex issues that need to be identified through Development Partner Relations, Development Finance Vice Presidency a process of due diligence. Such issues do not just involve donor integrity—a Unit. long-standing concern—but also how to attain “partnership fit” and how to identify and manage the risks arising from the interface of private and public funding modalities. The World Bank’s due diligence pilot produced seven interesting findings, which are summarized below. BACKGROUND Due Diligence Pilot While both IFC and MIGA have well- A Changing Donor Landscape: In re- established due diligence processes sup- cent years, private sector partners have porting their engagement with non- shown an increasing interest in working traditional partners, the World Bank’s with the World Bank through TFs and approach had been less formal. To test EFOs. From 2007 to 2011, the total vol- a new approach, in fiscal year 2013, a ume of Official Development Assistance timely due diligence pilot was launched (ODA) through multi-bilateral aid grew from $11 billion to almost $20 billion; by the Development Finance vice presi- 22 percent of ODA flowed through the dency unit (DFi) through its Partnerships Bank Group in the form of TFs. By FY13, and Trust Funds Department (DFPTF). Its therefore, TFs were perceived as an im- goal was to conduct due diligence on portant World Bank business line, pool- new for-profit and nonprofit donors to ing donor funding in support of global, trust funds (TFs) and externally fund- regional, and country-level partnerships. ed outputs (EFOs) by applying criteria In addition, for those donors interested agreed in a set of due diligence tem- in making contributions below $1 mil- plates.1 lion, the EFO was developed to channel individual donor funding contributions 1 The pilot was implemented by DFPTF, with collaboration to the Bank’s budget. Accordingly, a from the Legal Department (LEG) and the Controller’s Trust Fund Accounting Clearance Team (TACT). As part wide range of corporations, corporate of the pilot, DFPTF also shared information about due diligence on TF donors with IFC. The expertise of the foundations, trade associations, inter- World Bank Group’s Integrity Office (INT) was called on national and country-based nonprofits, in cases that related specifically to good governance and anti-fraud and corruption practices. academic institutions, and even high SMARTLESSONS — JULY 2015 1 net worth (HNW) individuals began to present them- • Identification and Management of Risk: selves to the Bank as potential TF and EFO donors. While many were well known, some had little his- Confirming that partnership engagement would tory of prior engagement with the Bank, or had been be structured in ways that do not pose risks to recently established. Others had specific business the Bank, such as conflict of interest or unfair ad- agendas of their own, raising questions about strate- vantage, or that raise any insurmountable policy gic alignment and overall partnership fit. In light of concerns. these developments, a more organized approach to Due Diligence Process: The new due diligence pro- due diligence was seen as imperative. cess had two principal components: Due Diligence Criteria: In designing due diligence • Data Gathered and Assessed by World Bank criteria, DFPTF noted best practices in the financial Units. The task team leaders (TTLs) and resource sector, including the importance of adequate con- management staff in Bank-sponsoring units trols and procedures applied by commercial banks continued to meet with prospective donors and and other financial institutions. These best practices obtain from them the necessary disclosures and are acknowledged by the World Bank Group’s Integ- other pertinent information. Directors of spon- rity Office (INT) in its guidance. Specifically, INT refers soring units were accountable for weighing the to “know your customer” obligations, which require risks and rewards of engaging with proposed properly documented, risk-based due diligence to donors and approving the partnership engage- be performed on “business partners.” After internal ment. consultations, therefore, DFPTF prepared a set of pri- vate sector due diligence templates requiring the fol- • A Centralized Risk Review. DFPTF’s role was to lowing: clear and to offer advice about the scope of the due diligence itself and the proper identification • Verification of Partner Eligibility: of risks based on the facts disclosed. DFPTF also made recommendations, as needed. For exam- Absence of engagement in activities that are ple, where the risk identified had wide institu- prohibited under the IFC/World Bank Exclusion tional implications, or where there were poten- List; tial conflicts of interest, DFPTF’s advice to TTLs No sanctionable misconduct (fraud, corruption, was to elevate approval from director to vice coercion, collusion, or obstruction); president (now senior director) level. LEG’s input was on the policy compliance side. Moreover, No suspension or debarment from working with any risk management plan had to obtain not the Bank Group; only director approval but also the concurrence of LEG. Once the process was complete, DFPTF No violation of UN Sanctions; provided a “no objection” to the issuance of a Vetting of “Politically Exposed Persons” (foreign, donor code by TACT (Controller’s Office). domestic, or international), as defined by the Donors Screened in FY13–FY15: During FY13– Financial Action Task Force Recommendations. FY15, a total of 74 first-time private sector donors to (See Guidance on Politically Exposed Persons.) the World Bank Group were screened under the due • Checking Business Practices, Record of Achieve- diligence pilot. Of these, 30 were cleared to contrib- ment, and Reputation: ute to TFs (including some to IFC TFs), and 40 were cleared as donors to EFOs. Four donor code applica- No red flags with regard to applicable industry tions were withdrawn. Cleared donors fell into two sector, leadership, corporate governance, regu- groups: 45 nonprofit donors (including corporate latory compliance, social accountability, and en- foundations), and 25 for-profit donors. These first- vironmental stewardship. time contributions were made across a wide array of sectors and practice areas, including agriculture, Adherence to UN Global Compact Principles. health, education, environment & climate change, 2 SMARTLESSONS — JULY 2015 finance & private sector development, trade & com- cies and MDBs, it is noteworthy that many UN agen- petitiveness, urban, rural, and social development. cies have due diligence service providers to overcome institutional capacity constraints,2 as well as policies DUE DILIGENCE FINDINGS in place that mandate continuous risk monitoring on Finding 1: A World Bank directive and procedure donors and partners. Thus it seems fair to conclude should underpin due diligence. that a professional due diligence service provider could also greatly assist the Bank with generating a As required under the Policy and Procedures Frame- more consistent standard of assurance. Cost savings work, the existing due diligence now needs to be could also likely be achieved by adopting this ap- retrofitted into a World Bank directive and proce- proach. dure. These documents would apply to staff in the donor/partner due diligence process and specify the Finding 3: Due diligence should precede nego- following: 1) the scope of due diligence; 2) how due tiations with donors. diligence applies to different types of donors and Early screening of donors to rule out eligibility prob- partners; 3) applicable principles; 4) ways of assessing lems is essential. Obtaining a good sense of the busi- optimal partnership fit along strategic, operational, ness practices, record of achievement, and reputation financial, and values-based parameters; 5) where ac- of donors would also strengthen the Bank’s position countabilities lie for purposes of the Bank’s Account- in any partnership negotiation. Yet the pilot showed ability Decision Making Framework; and 6) partner- that Bank staff begin in-depth discussions and even ship risks and related management strategies. As part negotiations with private sector donors before un- of the due diligence pilot, DFPTF reached out to col- dertaking even the most basic due diligence. Specifi- leagues at UN organizations such as UNDP, UNEP, and cally, DFPTF encountered examples where partnership UNICEF. In addition, the Multilateral Development launch dates were agreed without much knowledge Bank (MDB) Roundtable hosted at IFC in November of donor intentions. Failure to conduct necessary due 2014 had a session on due diligence, in which DFPTF diligence caused negotiations to break down in at was able to gather information about progress made least one high-profile case. The resulting damage to in this area by MDBs. We found that UNDP has a poli- the Bank’s reputation could have been avoided. cy as well as a 12-page risk-screening tool that tailors the scope of due diligence to different types of part- Finding 4: Donations from HNW individuals nership engagement. UNEP also has a relevant policy should be carefully considered. in place. EBRD is in the process of preparing one, and ADB is preparing guidelines for acceptance of fund- During the due diligence pilot, TTLs have sometimes ing from nontraditional partners. informed DFPTF that HNW individuals are personal friends or business acquaintances of prominent phi- Finding 2: World Bank due diligence should be lanthropists or former colleagues of Bank Group professionalized. senior management and, on that basis, should be accepted as donors and partners to TFs or EFOs. How- Experience with the due diligence pilot indicates that ever, neither the Bank nor IFC has accepted HNW the capacity of Bank units to undertake due diligence contributions to date because of the difficulty of on TF and EFO donors varies greatly from unit to unit. monitoring such individuals and the associated risk Staff are generally not trained to gather and inter- exposure. Instead, the practice has been to encour- pret this type of information. Specialized skills will be age contributions via existing foundations, assuming needed as the range of private sector partners con- the latter have been cleared through a process of due tinues to grow and the complexity of private sector diligence. While some UN agencies do accept contri- instruments interfacing with TFs and EFOs increases. butions from HNW individuals through their fund- Moreover, best practice and prudent risk manage- raising arms, a very limited donor profile and scope ment call for the monitoring and regular updating of of engagement is offered in return for the provision partner risk profiles, including all donors to TFs and EFOs. While DFi’s due diligence pilot is in broad align- 2 UN organizations rely on an external due diligence service provider. In 2014, the UN Global Compact facilitated joint due diligence service provider ment with the due diligence approaches of UN agen- arrangements for UN organizations, resulting in substantial cost savings. SMARTLESSONS — JULY 2015 3 of such funds. Any risks to UN agencies are, therefore, highly diluted. To date, neither EBRD nor ADB accepts Box 1: For Discussion—Examples of Risks contributions from HNW individuals. Encountered and Their Management • Fraud and Financial Risk. A long-standing corporate Finding 5: Operating by waiver of World Bank donor to an existing IBRD TF wanted to transfer its con- policies is not sustainable. tractual obligations to its parent company under a no- vation agreement. Since the parent company did not The goals and organizational cultures of the World have a donor code, due diligence was conducted. In Bank and its for-profit/nonprofit donors must checking internal databases, the program manager found that the parent company was being investigated be somewhat compatible if partnerships funded for fraud by INT. A fraud investigation renders a com- through donor contributions are to succeed. In some pany ineligible to partner with the World Bank Group. cases, however, donors find Bank TF and EFO policies The program manager, whose program was dependent to be burdensome—perhaps with some justification. on continuing contributions to the underlying IBRD TF, On occasion, the Bank has been asked to waive its informed the corporate donor that its parent company could not become a donor to the IBRD TF. What lessons own policies. While the Bank’s flexibility may be ap- can be learned here about the need to conduct and preciated by individual donors, providing waivers on update due diligence on the beneficial owners of do- an ongoing basis is not sustainable from a risk man- nor entities? agement standpoint. If such waivers are pursued, the • Tax Evasion and Criminal Investigations. Due dili- Bank’s reputation will suffer, since its TF and EFO busi- gence on a corporate foundation, a potential TF donor, ness lines will be perceived as not on a level playing indicated that there was very little separation between field. It is preferable to pursue donors’ concerns with it and the corporation. Notably, its officers were also Bank policies through a wider policy-harmonization those of the corporation. Some of the officers had been extradited to the United States on tax-evasion agenda than in the ad hoc way encountered in the charges. The corporation was also the subject of crimi- pilot. nal investigations in several jurisdictions. The Bank asked the corporate foundation to make a contribution Finding 6: Risks need to be better identified and to another charitable organization with an existing do- managed. nor code. In turn, that charitable organization would make a TF contribution. Does this recommendation sufficiently protect the Bank’s reputation? Should the The due diligence pilot identified and documented Bank seek to harmonize due diligence standards among in a transparent manner examples of various types its partners so as to promote a public good? of risks involved in engaging with private sector do- nors. Risk management solutions were developed • Financial Risk. A corporate donor signed an EFO agreement to pay its funding contribution to the Bank in the course of the pilot, pursuant to consultations in several tranches. After paying one tranche, the do- with LEG and sometimes INT. Some of these cases nor has not responded to the Bank’s requests for fur- should be discussed more widely to facilitate future ther payment. What steps should be taken to protect risk identification and management and to develop the Bank besides canceling the donor code? institutional best practices. In particular, those risks to • Conflict of Interest. A director who was previously do with conflict of interest3 were frequently encoun- associated with a prospective TF donor recused himself tered and require institutional attention. While con- from approving due diligence on that donor in order to flict of interest is a recognized risk in the Bank’s Risk manage a potential conflict of interest. A then vice president approved the donor and the terms of the Taxonomy, the due diligence pilot seems to indicate partnership engagement. How should productive busi- that staff could benefit from wider dissemination of ness synergies be distinguished from conflicts of inter- guidance on conflict of interest management in the est? partnership area. (See Box 1.) • Conflict of Interest. Staff on leave from the World Bank accepted an appointment with a corporation and proposed to approve an EFO to support a work pro- gram in their former department at the Bank. Staff in- 3 A conflict of interest can occur when a person’s ability to exercise tended to return to that department and to seek a pro- judgment in one role is impaired by his obligations in another role or by the motion. The EFO was deemed unacceptable, and the existence of an interest. An “interest” can be loyalty, concern, emotion, or influence that has the power to sway a person’s judgment in the partnership conflict of interest risk was avoided. Should a formal context. Financial or career interests, family connections, friendship, and rule cover this type of situation? enmity are some of the “subjective” tugs on judgment. See Guidance Note on Partnership Conflict of Interest, Sophia Drewnowski, CFPTO 2007. 4 SMARTLESSONS — JULY 2015 objectives. In a significant number of Box 1 (continued...) cases, the due diligence pilot served to • Conflict of Interest and Unfair Ad- open a constructive conversation with vantage. A number of private sector donors about “good partnership fit” consulting firms offered to provide EFOs along strategic, operational, financial, for outputs related to programs they and value-based dimensions. In a few were managing on behalf of sovereign cases, TTLs withdrew donor code appli- government agencies. At the same time, the firms wanted to bid on Bank cations, having decided, after consult- projects. To avoid the appearance of ing with DFPTF, LEG, and management, conflict of interest and unfair advan- that the proposed donors were not ap- tage, the consulting firms were asked to propriate partners, or at the very least respect the “cooling-off” provisions ap- should not be engaged in that particu- plicable to EFOs. How should this cool- ing-off period be monitored and en- lar context. forced in individual cases? CONCLUSION • No Value-Based Fit. A corporation of- fered a small EFO to prepare a paper on It is hoped that these findings can in- marine pollution in connection with a form the future establishment of a for- newly established partnership. The cor- mal, Bank-wide due diligence directive poration had a poor environmental re- cord, with repeated violations of envi- and procedure. This will help the Bank ronmental laws. The funding was identify the right donors and partner- turned down, because the narrow busi- ship arrangements, which in turn will ness interests of the prospective donor contribute to the success of Bank initia- were not reconcilable with the Bank’s tives supporting the SDGs. own development goals and values. Are there other ways to engage this type of entity while protecting the Bank’s repu- tation? Finding 7: Due diligence can clarify partnership fit and donor-added value. When performing due diligence, staff should seek to understand the diverse incentives that drive donors to provide funding to TFs and EFOs and to partner with the World Bank. While in the past the Bank engaged with corporations DISCLAIMER mainly through their corporate founda- SmartLessons is an awards program to share lessons learned tions that were focused on corporate in development-oriented social responsibility, the current think- advisory services and investment operations. The findings, ing is that the core business expertise of interpretations, and conclusions corporations should be harnessed in sup- expressed in this paper are those of the author(s) and do not port of SDGs. However, there needs to be necessarily reflect the views of careful examination of what this entails IFC or its partner organizations, the Executive Directors of The with regard to legal and financial struc- World Bank or the governments tures. Staff should ask what measurable they represent. IFC does not assume any responsibility for the added value will be provided to the SDGs completeness or accuracy of the information contained in this besides the funding contribution itself, document. Please see the terms and whether the private sector modali- and conditions at www.ifc.org/ smartlessons or contact the ties that interface with TFs and EFOs sup- program at smartlessons@ifc.org. port or detract from the Bank’s strategic SMARTLESSONS — JULY 2015 5