One trillion dollars – that’s the amount lost each year from developing countries due to gaps in the international financial system that allow embezzlement, money laundering, tax evasion, bribery and other financial crimes to occur.
That figure comes from a September report from ONE Campaign, an international non-governmental organization (NGO) dedicated to ending poverty that is addressing the issue of financial crime as a barrier to equality. Through an analysis of the world’s developing economies, the report illustrates that revenues siphoned from these countries illicitly could help prevent 3.6 million deaths per year between 2015 and 2025 in low-income countries, if invested in health care systems, for example.
Infrastructure and other development projects in emerging economies are sometimes drained of funding through the infiltration of illicit actors, weak due diligence on companies involved, or slipshod lending agreements which are remiss in spelling out the proper transparency and ethics procedures. But such losses are not inevitable, according to Luis Lizarralde, an international attorney advising on development agreements.
While international aid programs have cracked down on abusive practices, including developing whistleblower protection policies and employee ethics training, experts in this area believe that more can be done to create a culture that reduces risk for fraud and corruption even before it starts.
One such example is the strategy employed by the Inter-American Development Bank (IDB). The leading source of development financing for Latin America and the Caribbean, the IDB values integrity, transparency and accountability in the projects it finances. Besides providing loans, the IDB has provided grants, technical assistance and research to companies or organizations in the region since 1959.
Many times, the IDB is the sole reason why some towns can build a new bridge, or how a farmer can receive a loan to increase crop production. The balance between being a facilitator for development and preventing financial crime is very delicate, however.
Lizarralde is an international lawyer who is providing advice to the IDB’s Office of Institutional Integrity to increase transparency in projects that it finances through additional provisions in the contract policies that would require more financial disclosures from every acting party before they are disbursed funds. ACFCS interviewed Mr. Lizarralde to understand why and how public procurement projects and lending banks are promoting more transparency in their projects.
Currently, the ability to combat fraud, corruption and other prohibited practices is largely based on cooperation received from others, and information provided by reporting parties and gathered through investigations of the Office of Institutional Integrity, according to the IDB. Learn more about the IDB procurement policies: http://www.iadb.org/en/about-us/general-operational-policies,6235.html
Luis Lizarralde on the topic of transparency and anti-risk mitigation in development financing (answers have been edited for clarity):
I have been in contact with the Office of Institutional Integrity (OII) at the Inter-American Bank Development Bank. I believe it is important that they contribute by placing certain requirements on the borrowers in a way that will promote transparency and reduce the risk of fraud in all their operations.
I am trying to connect the OII with a non-profit organization (NPO) that is part of the American Bar Association (ABA) called Rule of Law Initiative, because I know that they also promote transparency. We have a meeting pending to discuss how we can address contracts for both public and private entities to ensure, or at least minimize, the possibility of fraud. It’s about mitigating what could happen – which is in itself a whole spectrum.
On the range of risks in public procurement and loan projects:
There are some risks that, due to the type of activity, must be mitigated – some actors don’t want to mitigate them. Others want to transfer that risk, and others decide to live with it and mitigate it up to where they can. Others have no choice but to live with those risks.
I think it also depends on the size and type of loan. I worked with the InterAmerican Investment Corporation, which lends to small [and] medium-sized companies in Latin America. Of course, these are relatively large for Latin America. I think that the lending contracts should include covenants which require a risk evaluation for each company before they are disbursed funds. Again, this depends on the type of project and loan. You can’t cover all areas with this, but at least it’s important to focus on areas that could present problems.
On what companies can do to increase transparency and reduce risk:
A small company cannot incur costs that are too high to have access to loans. There has to be a level of required basic measures included in the contracts that would allow those companies to contribute to transparency and reduce fraud, creating a culture of best practices in Latin American small and medium-sized businesses. For example, if you’re talking about Grupo Santo Domingo in Colombia, the parameters are going to be different than they would be for a small company because they have a lot of capital.
There we would have to have a fraud risk evaluation with parameters much higher because they can have that type of analysis done. That’s why the size and type of project or loan are important because if they are small companies, you can’t tell them to do that kind of analysis – you would be limiting their access to credit. You can tighten requirements with each borrower as they grow in size and capability, but there should be basic measures everyone should comply with. As a company grows more sophisticated, you can add certain levels of compliance to certain aspects.
When I worked at the Inter-American Investment Corporation, anytime I had to conduct an analysis that was a bit costly, it generated some discomfort for the company. The loan is to help a small company that needs the money, so asking it to spend a lot of money on a risk study seems illogical.
It’s important not to discriminate between private or public entities, small or large companies. Each entity has to be conscious of a responsibility due to the public and its sector of business. The way businesses could be required to be more transparent is a covenant that could establish, at a minimum, having a code of ethics and a fraud risk evaluation in the areas that are the heart of each business.
Why it’s important:
My intention is to help them develop these provisions. This movement for transparency is garnering more attention because companies are realizing that they have to protect themselves and guarantee a financing plan. It also helps their reputation, because a culture of anti-fraud and anti-corruption gives people more confidence in the business. Furthermore, it should interest companies in a sense of development and corporate social responsibility.
About the expert:
Luis Lizarralde is an international lawyer and consultant based in Washington, D.C. with extensive experience in advising the private sector, focusing on project and corporate finance and infrastructure projects in Latin America and the Caribbean. He has provided advice on structuring, negotiations and supervising transactions and has experience with analyzing and making recommendations on legal and policy issues.
He has been involved with the palm oil industry in Colombia identifying potential investors in the US and different sources of funding for new projects as well as working close to bio-diesel projects in Colombia. He has worked in business development with investment banking firms in Colombia and the United States, identifying projects and funding sources for the projects. He has worked as of counsel of the law firm Lasa, Monroig & Veve LLP since 2003.