1. Red Flags in Procurement BIMILACI 10 & 11 May 2007 IADB – DEV/PRM & PRE/OII

2. Scope of the Project  A joint study by: The Project Procurement Division (DEV/PRM); The Office of Institutional Integrity (OII).  Analysis of some of the most common corrupt and fraudulent practices in project procurement  Development of a mechanism to help identify and prevent such practices.

3. Red Flags Program What?: What?: Identification of practices that are or could be a source of fraud and corruption in Bank financed activities; Why?: Why?: * Increased capacity to prevent fraud and corruption; * Integrity in the procurement process.

4. Source of Information Based on a sample of : 52 substantiated cases of fraud and corruption investigated by OII between 2004 and 2006

5. Methodology 1. Classify cases according to the different stages of the procurement; 2. Identify the types of corrupt practices (deviations) in each stage of the process; 3. Analyze and compare existing red flags systems in international organizations and best practices (WB, UN, ADB, etc.); 4. Provide new red flags matrix for the IDB.

6. The Procurement Process 1. The Preparation Phase * Assessing procurement needs; * Preparing corresponding bidding documents and procurement notices; * Publicizing the procurement notices and issuing the bidding documents or requests for proposals 2. The Bid/Proposal Submission Phase * Bidders submit the bidding documents to the Executing Agency * Bidding documents will ground the Evaluation Committee’s decision to award the contract 3. The Bid/Proposal Evaluation Phase * Determine their responsiveness and decide on the award of the contract * Objective application of the evaluation criteria detailed in the bidding document or request for proposal 4. The Execution Phase * Goods and Works: Borrower must carry out the contract with diligence and efficacy and must provide the works and the goods in the conditions agreed to in the contract * Consulting services: Consulting firm must provide the Bank with the agreed service with diligence and efficiency

7. Preliminary Findings Phases of the PP at which the Violations Occurred 2% of the deviations occur during the PREPARATION PHASE 39% of the deviations occur during the BID/PROPOSAL SUBMISSION PHASE 18% of the deviations occur during the BID/PROPOSAL EVALUATION PHASE 41% of the deviations occur during the EXECUTION PHASE

8. What are the most common deviations? Submission of falsified documents Submission of falsified documents Manipulation of the procurement process Manipulation of the procurement process Misuse of Bank’s funds Misuse of Bank’s funds Conflict of interests Conflict of interests Fraudulent requests for reimbursement Fraudulent requests for reimbursement Misrepresentation Misrepresentation Breach of confidentiality Breach of confidentiality

9. How to mitigate these problems ? Training Training IT use for database of Red Flags IT use for database of Red Flags Dissemination of Technical Materials Dissemination of Technical Materials Innovative course piloted by OII and DEV/PRM based on current and up-dated information on fraud and corruption compiled in technical documents. Raise awareness among parties discharging procurement duties or participating in the procurement process. (i.e. Executing Agency…). Centralization of information on the violations that occurred, and cross- referencing between OII, DEV/PRM and other institutions such as OAS… Drafted by OII and DEV/PRM, under the form of a report or semi-annual report, containing relevant information illustrating the Bank’s capacity to detect, investigate and sanction fraud and corruption (staff, Executing Agencies…)

10. How to mitigate these problems? Monitoring the Red Flags Program Monitoring the Red Flags Program Disclosure of sanctions and increased awareness Disclosure of sanctions and increased awareness Annual / semi-annual retrospective analysis to identify behaviors that could be a source of fraud and corruption in Bank financed operations. New sanctions procedure makes the List of Sanctions available to the public to increase deterrence effect. OII’s Annual Report provides information on prevention of corruption List of Sanctions - www.iadb.org/oii List of Sanctions - www.iadb.org/oii OII Annual Report

11. Questions

12. Contacts Sabine Engelhard Senior Procurement Specialist Chief A.I. Project Procurement Division Inter-American Development Bank Washington, DC Email: sabinee@iadb.org Roberto de Michele Senior Policy Advisor Office of Institutional Integrity Inter-American Development Bank Washington, DC Email: robertodem@iadb.org