By Wu Wei, Zhu Yuanyuan King & Wood Mallesons’ Dispute Resolution group

The Asian Infrastructure Investment Bank (AIIB) is a multilateral financial institution that aims to bring financial support to infrastructure building in Asia. Certainly, AIIB will play an important role in the Belt and Road related projects.

Since its founding on December 25th, 2015, the AIIB has approved nine financing projects with a total commitment of $1.7 billion. The AIIB will continue to expand its operations by  additional investments in the near future. 

To ensure that the funds are used for their intended purposes, the AIIB strictly polices misconduct such as fraud and corruption. The AIIB reflects the values of the World Bank in regards to inappropriate behavior, investigatory measures, and sanction policies. The AIIB also actively participates in cross-debarment by voluntarily adopting the list of sanctioned firms and individuals under the Agreement for Mutual Enforcement of Debarment Decisions (AMEDD) which was actioned by the World Bank and four other multilateral development banks.

AIIB’s definitions of seven prohibited practices

In December 2016, the AIIB published the Policy on Prohibited Practices (the Policy), restricting entities[1]involved in the AIIB projects from engaging in corrupt; fraudulent, collusive, obstructive, and coercive practices. The publication also outlined rules regarding theft, the misuse of resources, and stipulated corresponding investigation and sanction procedures.

For corrupt practices, the AIIB adopts the same framework provided by the World Bank, defining corrupt practices as “the offering, giving, receiving or soliciting, directly or indirectly, of anything of value to influence improperly the actions of another party.”

In delineating corrupt and fraudulent practices, the definitions adopted by AIIB cover a wider range of actions than those prohibited under the Criminal Law of the PRC. The AIIB states that anything of value can be used for corrupt practices, regardless of whether such things hold monetary value.

On the contrary, according to the Criminal Law of the PRC, “the property in commercial briberies shall include not only money and property in kind, but also property benefits, the value of which can be measured in money.” Therefore, practices that are not readily measurable in cash, such as sexual bribery and job offering, do not constitute crimes under the Criminal Law of the PRC; however, such practices may violate the AIIB and  World Bank policies.

In protecting the AIIB’s rights to investigate suspicious behaviour, the Bank prohibits practices that are obstructive to the investigation process. It is worth noting that obstructive practices subject to sanctions not only include both  actions such as deliberately falsifying evidence  and making false statements but also include inactions of “failing to comply with requests to provide information, documents or records”.

Affiliated sanctions: domestic companies are sanctioned for overseas branch violations

The AIIB adopts similar sanction procedures used by other international financial institutions. There are five possible sanctions:

  • Reprimand: a written censure of a sanctioned party’s behavior
  • Debarment: a judgment that a sanctioned party is ineligible, either permanently or for a stated period of time, to participate in any AIIB-funded project.
  • Conditional Non-Debarment: a sanctioned party is required to comply with certain remedial, preventative or other measures as a condition to avoid debarment. Failing to comply with such measures in the allocated time period will result in automatic debarment.
  • Debarment with Conditional Release: a sanctioned party will be released from a debarment decision if they comply with certain conditions.
  • Other Sanctions: other sanctions include, but are not limited to, the restitution of funds and the imposition of fines that reimburse the costs associated with investigations and proceedings.

In terms of the scope of sanctions, the AIIB will notify the entity involved in prohibited practices of its decision.Moreover, it will also sanction affiliated entities of the target enterprise, including its parent companies, subsidiaries, and sister companies, regardless of whether such affiliated enterprises have been found to engage in inappropriate practices. 

This rule of affiliated sanction is not solely applied by the AIIB; in fact, it is a common practice adopted by major multilateral development banks. For instance, in 2011, the Insigma Group and its subsidiary company, Insigma Wangxin Technology (a publicly listed company on the Shanghai Stock Exchange) were jointly sanctioned by the World Bank as affiliated entities. [2]The project was actually implemented by Insigma Mechanical and Electrical Engineering (Insigma Wangxin Technology’s subsidiary); however, the parent company and the ultimate parent company were also blacklisted by the World Bank due to the rule of affiliated sanction.

Affiliate sanction is one of the characteristics that distinguish international anti-corruption rules and Chinese law. In Chinese law, affiliated entities usually will not be sanctioned as they are treated as independent legal entities, unless such entities are actively engaged in the prohibited practices. To navigate around this, companies usually set up overseas corporations to participate in projects funded by the multinational development bank; therefore, sanctioning only the managing companies does not eradicate corruption or prevent the tainted parent companies from creating new overseas branches for other projects.

Chinese enterprises, especially SOEs with large numbers of overseas branches, should pay special attention to the cross-debarment policies adopted by international financial institutions. With this in mind, they should closely manage overseas branches to prevent them from breaching compliance rules.

Affiliated sanction: 59 Chinese companies already debarred

Alongside making independent sanction decisions on prohibited practices, the AIIB has also taken another step in solidifying its anti-corruption stance by actively participating in the cross-debarment campaigns initiated by other multilateral development banks. In 2010, the World Bank Group, Asian Development Bank, African Development Bank, European Bank for Reconstruction and Development, and Inter-American Development Bank signed the Agreement for Mutual Enforcement of Debarment Decisions, reaching a consensus in mutual recognition of debarment decisions being made by any of the signatories. The AIIB has announced it will enforce the agreement unilaterally, and it is actively engaging with these banks in an effort to join them as a signatory to AMEDD.

As reported, 59 Chinese enterprises are black-listed under the AMEDD, some of which are subsidiaries of large SOEs. These companies will not be eligible for any OBOR projects funded by the AIIB, the World Bank or any other signatory to the AMEDD. At the same time, the AIIB will not notify the firms and individuals affected under the AMEDD that they are also debarred by AIIB. In other words, these 59 Chinese enterprises are now shocked as they have been already kicked out of the game before doing anything.

Protecting interests by applying international rules

Though the multilateral development banks have strict rules on prohibited practices, entities that have been sanctioned are encouraged to rectify their practices. Before making sanction decisions, the AIIB and the World Bank often require the entities to establish internal compliance rules to manage or prevent misconduct such as corruption. Upon compliance with the requirements, the related entity may not be blacklisted or disbarment may be terminated early.

Helping clients avoid being blacklisted or assisting a release from debarment are arduous technical tasks for lawyers. KWM’s compliance team will elaborate on such topics in the coming B&R series articles.

KWM is one of the first Chinese law firms that has set up an anti-corruption team. Our team, consisting of former senior procurators, former police officers, and experienced criminal barristers has advised many Fortune 500 companies on their day-to-day operations, internal and external investigations, establishment of risk-control regimes, and management of  administrative and criminal litigation. Apart from anti-corruption, the KWM compliance team provides one-stop services covering a broad range of matters, including but not limited to anti-trust, environmental compliance, tax procedures, customs and labor issues.

[1]The parties include borrowers, sponsors, fund recipients, beneficiaries of technical cooperation, bidders, suppliers, contractors, subcontractors, consultants, sub-consultants, service providers, applicants, concessionaires, intermediaries, guaranteed parties, and investee companies.