Background Paper No. 11
                        IFC’s Perspective on GAC and the Governance Global
                        Practice

                        Rohil Hafeez and Stephanie Rogers (CRVIA)

Introduction

The Governance and Anti-Corruption agenda has provided a useful forum for exchanging ideas
relating to governance within the World Bank Group. Through the initiatives of the GAC
Secretariat, IFC has collaborated with its counterparts in IBRD, IDA, and MIGA to establish
principles relating to integrity, corporate governance, intermediate jurisdictions, and the
treatment of fraud and corruption in WBG engagements.

As the WBG considers further integration and develops a Governance Global Practice (GGP), it
is practical to determine the areas relating to governance and integrity that are ripe for cross-
harmonization. At the same time, it is critical to acknowledge governance and integrity-related
processes that should remain different among IBRD/IDA, IFC, and MIGA on account of their
different businesses.

IFC’s Governance and Integrity-Related Work

IFC promotes the WBG’s GAC agenda through: (1) planning projects aimed at improving the
integrity and governance practices of private sector companies; (2) implementing processes to
prevent IFC from working with companies that present integrity risks or poor corporate
governance; and (3) assisting its clients to improve their integrity and governance practices,
uphold transparent business practices, and strengthen their anti-money laundering/combating the
financing of terrorism (AML/CFT) policies and controls.

In regard to the first area, IFC has promoted business integrity in the private sector through the
development of the DFI Toolkit on Corporate Governance, Corporate Governance Advisory
Services projects implemented by Private Enterprise Partnerships, and the Small and Medium
Enterprise Integrity Toolkit.

The bulk of IFC’s work in the governance and integrity space relates to the second area:
prevention of integrity and governance issues in IFC’s projects and engagements. As part of
IFC’s business development and project supervision cycles, IFC staff uses an integrity due
diligence process to examine a project’s structure and country context, assess potential clients’
and partners’ reputations, make a business decision on whether to engage with those clients or
partners in light of any integrity risk, and address integrity-related events throughout the course
of an engagement. Furthermore, IFC has an AML/CFT due diligence process in place for
projects involving financial institutions and certain non-financial businesses to prevent the risk of
those activities occurring in IFC’s investments. In addition, IFC requires a corporate governance
analysis in all of its investment projects. In the past few years, these processes have been
strengthened by IFC’s Senior Management, and it has become mandatory for IFC’s project teams

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to involve the units that support these processes in their projects under defined circumstances.
IFC provides support to staff in evaluating and managing integrity risks and corporate
governance issues, respectively, through its Integrity Risk and AML/CFT (CRVIA) and
Corporate Governance (CG) Units.

IFC’s identification of integrity, AML/CFT, and corporate governance issues in potential
partners can lead to its work in the third area: working with clients on improving their corporate
structure to reflect good corporate governance and integrity practices, increasing the
transparency of clients’ business practices, and improving clients’ AML/CFT policies and
controls.

Areas for Collaboration

On the policy level, IFC’s governance and integrity processes, focused on the private sector,
implement principles established by the WBG.         Over the next few years, as the GGP is
operationalized, it would benefit the WBG to have a group such as the GAC Secretariat to act as
a focal point for the discussion of governance policy ideas and principles affecting cross-WBG
practices.

Some of the governance and integrity issues that relate to work across the WBG are:

   •   WBG-wide risk tolerances;

   •   Pre-privatization work with state-owned enterprises on management, corporate
       governance, and transparency;

   •   Minimization of public-sector rent seeking in public-private partnership engagements;

   •   Ethical compliance programs in private-sector firms;

   •   Approach to corporate integrity issues (e.g., FCPA compliance, standards for supply-
       chain management);

   •   WBG Sanctions;

   •   Coordination with the Integrity Vice Presidency on investigations and settlements;

   •   Treatment of tax avoidance, transfer pricing, and intermediate jurisdictions (i.e., use of
       offshore financial centers); and

   •   Principles for integrity processes (e.g., integrity due diligence and AML/CFT standards,
       use of external investigative firms, training of WBG staff on integrity and sanctions
       processes, and treatment of ex-WBG staff in private sector corporations with which the
       WBG does business).




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Risk Management Processes Should Remain Separate

While based on the same governance and integrity principles as the rest of the WBG , IFC’s
integrity risk and corporate governance processes do and should differ from of IBRD/IDA for the
following reasons:

   •   The choice to engage with a private sector business is fundamentally different from
       working with a member government as a client.

   •   IFC’s project approval processes differ from those of IBRD/IDA, and IFC’s integrity due
       diligence and corporate governance processes have been integrated into IFC’s project
       processing cycle accordingly.

   •   IFC’s credit considerations differ because IFC deals with private sector entities that pose
       credit risk that is qualitatively different from that posed by a member government to
       IBRD/IDA.

   •   From a legal standpoint, IFC’s investments are structured differently from IBRD/IDA
       legal agreements. IFC exercises different contractual remedies than are available to
       IBRD/IDA, and IFC’s contracts are usually subject to U.S. or U.K. commercial law,
       whereas remedies in IBRD/IDA agreements are governed by international law.

Because of these differences, integrity risk management and corporate governance processes
across the WBG need to be kept distinct at this time. As IFC and IBRD/IDA plan engagements
involving public and private sector aspects, it is important that IFC’s integrity due diligence,
AML/CFT, and corporate governance processes apply so that standards for private sector
engagements are consistent across the WBG.




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