United States: There's A New Sheriff In Town: Coverage For World Bank Investigations And Sanctions

Last Updated: October 26 2015
Article by Daniel Streim

Led primarily by the U.S. DOJ and SEC, global anti-corruption efforts have escalated markedly over the past decade. The increased number of investigations and high-dollar penalties associated with FCPA have caught the attention of the both insurers and insureds, even leading some companies to purchase standalone liability policies that cover FCPA-like violations. But while a number of significant international treaties promoting the fight against corruption were enacted beginning in the mid-1990s, member states beyond the U.S. have been somewhat slow to join the enforcement brigade. UK prosecutors have shown some desire to bring cases under the UK Bribery Act, but thus far their efforts have not nearly approached those of prosecutors in the U.S. But in the past few years, a completely new player has emerged: the World Bank.

The World Bank (and other multi-lateral development banks) has its own anti-corruption enforcement authority and framework through which it investigates, prosecutes, tries, and sanctions private-sector companies for misconduct (i.e., fraud, corruption, collusion, coercion, and/or obstruction) in relation to Bank-financed projects. Whenever a company signs a Bank-financed contract, such as a government contract to perform work on a development project financed by World Bank funds, it submits to this jurisdiction.

The World Bank is now showing that it's not shy about exercising this authority. In fiscal year 2015 alone, the Integrity Vice Presidency ("INT"), the World Bank's investigatory arm, opened 323 preliminary inquiries pertaining to 86 countries; selected 99 of those inquiries for full investigation; and found sufficient evidence to conclude in 60 of those investigations that it was more likely than not that sanctionable misconduct had occurred. (Unlike in criminal proceedings in U.S. courts, the World Bank can impose sanctions merely upon a finding that it is "more likely than not" that sanctionable misconduct occurred.)

The World Bank's aggressive enforcement efforts will have serious implications for many companies engaged in development work and other work in the developing world. First, sanctions can include restitution and, more critically, temporary or permanent "debarment". Debarment not only makes a company ineligible to participate in future Bank-funded projects, it can extend to affiliates, successors and assigns, can result in either formal or informal "cross-debarment" by other development banks, and results in publication of the company's name on a list of debarred entities. Moreover, as when facing a DOJ investigation into possible FCPA infractions, the cost of investigation and response to a World Bank inquiry itself can be very expensive. Given the relative novelty of World Bank anti-corruption enforcement, targets of investigation may not always consider whether their insurance covers these large expenses. But they should.

Interestingly, insurance policies designed to cover FCPA-like liabilities may not cover the very same liabilities if the World Bank—as opposed to the DOJ, SEC, or another governmental entity—undertakes enforcement. Thus, should a company find itself under investigation by the World Bank, it should be mindful to also consider whether any other policies in effect may provide coverage. For example, companies that purchase "Side C" D&O coverage insuring claims made against the company itself (and not simply against its directors or officers) may be able to secure defense coverage for a World Bank investigation. Whether they do will largely depend on the precise policy language and the course of the World Bank's inquiry.

D&O policies typically provide coverage for a "claim" against an insured resulting from an alleged "wrongful act." The definition of these pivotal terms, however, can vary substantially by policy and insurer. Some D&O policies define "claim" as occurring in a type of "proceeding," and others as a "demand for monetary or non-monetary [and sometimes injunctive] relief." But what constitutes a "claim" in the context of a World Bank investigation may not be clear. Oftentimes, a World Bank investigation begins with a letter or phone call from INT requesting an audit, or perhaps an instrument more akin to a subpoena or request for documents, which may provide no clear indication that the policyholder is even a target of the inquiry. INT may also issue a letter after an initial investigation that lays out specific allegations, in which case the policyholder may have a better argument that a "claim" has been made against it. Depending on whether the policy provides a broad definition of "wrongful act," or a narrow laundry-list of specific "wrongful acts," the World Bank inquiry may or may not be covered. And D&O policies may also define "loss" differently, such that defense and/or investigation costs may or may not be covered.

Certain exclusions may also present obstacles to coverage. Many policies exclude breach of contract claims. Thus, a threshold question is whether a World Bank investigation is for a breach of contract (as insurers likely would argue), or whether the policyholder only submitted contractually to the World Bank's jurisdiction, while the investigation is for the policyholder's underlying conduct. Many policies also exclude claims stemming from the insured's fraudulent or dishonest acts, and insurers likely would argue that much of the conduct at the center of an anti-corruption enforcement inquiry falls into that category. Many D&O policies nevertheless cover the cost of defending against such excluded claims pending a final, unappealable judgment by the deciding tribunal. In such cases, it may advisable to avoid such a final ruling and pursue a settlement instead. Defense counsel should assess the terms of any proposed settlement carefully and consider whether they adversely affect coverage.

Coverage for World Bank investigations lies in uncharted territory. When facing a World Bank investigation, carefully review your coverage and consult with counsel in determining what insurance may apply and how to navigate the sanctioning process to preserve and maximize your rights.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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