Clarify the Bank's "zero tolerance" stance on corruption and improve operational controls by: - Developing a harmonized approach to reviewing and managing systems-level fiduciary and GAC risks across instrumentsand not simply transaction-level risks in investment projects. The approach should provide for due diligence on operations with specialized risks. - Providing guidance to operational teams on the appropriate use of different Bank financial instruments in different governance settings, consistent with the institution's overall risk appetite. - Consistently defining risk tolerances for the levels and composition of lending as well as the use of country systems in different settings (for example, through lending scenarios) so that expectations of governance performance are clearly understood by country stakeholders and the Bank's shareholders.
Original Response: Partially agreed. Management has a clear position vis a vis 'zero tolerance' and will make efforts to ensure it is widely understood. In summary, Management's position is that while we have no appetite for corruption, we have an ex-ante tolerance for risk (in that it is recognized that such efforts in developing countries are more likely to encounter such challenges which the Bank seeks to manage to as close to zero as possible), combined with an ex-post zero tolerance when it is shown that fraud, corruption or other malfeasance has occurred. In such circumstances the Bank will always and everywhere take action to address the problem. Management also agrees that the attention to systemic risk be increased while continuing to pay attention to 'transactions' risk. However, Management notes that a 'harmonized approach' to assessing and managing risk should not mean that responses must always and everywhere be the same. Country context matters fundamentally and explicit decisions must be based on the specifics of country circumstances. What is missing from IEG's recommendation is the concept of reward versus risk. Management analyzes risk against expected operational development outcomes and has already differentiated across country contexts in this regard by setting a target of 70 percent Marginal Satisfactory (MS) or better average IEG ratings for operations in Fragile States (where risks are, of course, high but the returns to successful operations tend to be especially high), 75 percent or better in other IDA countries, and 80 percent in IDA countries.
Clarify its position on ï¾zero tolerance,ï¾ explaining again to staff that development support is a risky business and there is no way, other than not lending at all, to guarantee the absence of fraud and corruption in Bank-supported operations; the Bank supports borrowers in providing reasonable assurance that funds are used as intended; but the Bank has zero tolerance once fraud or corruption is found. Management will set out its internal communications plan, involving the World Bank Groupï¾s Chief Risk Officer, in the context of the GACII discussions.
Review the experience with ORAF after two years (notably its use as intended in differentiating the management of operations by risk) and make adjustments as needed.
Continue to develop its comprehensive approach to risk management related to operational support to client countries, reporting progress regularly to the Board, via the Audit Committee, on the ongoing efforts to define risk appetites and the tolerances via which Management uses to ensure that risk is kept within permitted levels, and through the annual Integrated Risk Monitoring Report from the World Bank Groupï¾s Chief Risk Officer.
The latest update in respect of agreed actions is as follows:
(i) Clarify position on zero tolerance: It is well acknowledged that the senior management has consistently communicated the World Bank's zero tolerance policy to staff. The Bank's stated zero tolerance ex post the identification of corrupt practices in its operations is not new. It has been at the center of its policy framework for decades. The IEG GAC evaluation had rather recommended that the Bank clarify its risk stance ex ante - that is, prior to approving country programs and associated loans in different country settings. In IEG's view, explicit ex ante definition of risk appetites is essential to managing the varied expectations of borrower, the Bank's shareholders, and civil society. IEG had recommended that the Bank set risk appetites in different countries through a reliance on lending scenarios using GAC benchmarks in country assistance/partnership programs. This measure would not only make the Bank's risk tolerance explicit but also better manage reputational risks vis-a-vis various country actors and shareholders. The internal communications plan on zero tolerance, involving the World Bank Group Chief Risk Officer, has not yet been prepared.
(ii) Review the experience with ORAF after two years and make adjustments as needed: Two ORAF Reviews were completed by IAD in 2012 and 2014. Based on this, a new Framework for Management of Risk in Operations has been adopted to improve and make consistent risk assessment and management for results across all World Bank programs and operations. ORAF has been replaced by the Systematic Operations Risk-Rating Tool (SORT), rolled out for all IBRD/IDA operations and country partnership frameworks starting October 1, 2014. The SORT tool has helped to address the Bank's risk stance at the project level. However, the GAC evaluation had called for a harmonized approach to reviewing and managing systems-level fiduciary and GAC risks across instrumentsand not simply transaction-level risks in projects. It is not clear that this has happened yet.
(iii) Continue to develop its comprehensive approach to risk management: There have been advances in the work of INT in producing country risk analysis. This has been an important step forward in establishing consistency in recognizing corruption risks across Bank instruments. A Rapid Assessment Tool for identifying country exposure to risks of Illicit Financial Flows is planned which would help assess governance risks across instruments. Volcker triggers have been introduced in the Operations Portal started in FY17 which would help increase consistency in the treatment of GAC risks across the portfolio. Volcker triggers can be found in the Guidance Note on Bank's Anti Corruption Policy and Working with INT at http://intranet.worldbank.org/WBSITE/INTRANET/INTCOUNTRIES/INTEASTASIAP…. In addition, OPCS has created a forum for regular meetings of INT and regional GAC focal points, which would further improve coordination across the Bank. Together, these efforts contribute to developing a comprehensive approach to risk management. The management should use the comprehensive information emanating from this approach to keep the risk within permitted levels.
Senor Management has consistently communicated the World Bank's zero tolerance policy to staff. President Kim has repeatedly emphasized the critical role of our zero tolerance policy in the World Bank's overall response to corruption. As per the 2015 Management comments, the introduction of the SORT tool has increased the consistency of the Bank's risk stance at the project level. Advances in the work of INT on producing country risk analysis has been an important step forward in establishing consistency in recognizing corruption risks across Bank instruments. The planned Rapid Assessment Tool for identifying country exposure to risks of Illicit Financial Flows is another significant step in creating a pro-active and consistent approach to governance risks across instruments. The introduction of Volcker triggers in the Operations Portal started in FY'17 increases consistency across the Bank in regard to the treatment of GAC risks across the portfolio, as does the creation by OPCS of a forum for regular meetings of INT and regional GAC focal points.
The SORT tool helps to address the Bank's risk stance at the project level. The clarifying of institutional relationships among Bank units is said to improve risk responsiveness and better use of information on risk. However, the GAC evaluation called for a harmonized approach to reviewing and managing systems-level fiduciary and GAC risks across instrumentsand not simply transaction-level risks in projects. It is not clear that this has happened yet.
The roll-out of the SORT tool has been successful and has enhanced consistency and coherence in addressing corruption risks at the project level. The elaboration of a set of Working Arrangements specify the roles of INT, OPCS, and the GPs relating to corruption risks identified by INT has strengthened Bank responsiveness to risk at the same time that it has supported better use of information on risk in the design of programs. Additional work by INT using past cases and complaints to pro-actively communicate risks at sector, project and transaction level has enabled a more dynamic and systematic response to governance-associated risks.
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Theinternal communications plan on zero tolerance has not yet been prepared.
Two ORAF Reviewswere completed by IAD in 2012 and 2014. Based on this,a new Framework for Management of Risk in Operations has been adopted to improve and make consistent risk assessment and management for results across all World Bank programs and operations.The framework has three pillars: standard systems and tools, institutions and policies that support proactive risk management, and a culture of informed risk-taking. Under the tools pillar, the ORAF has been replaced by the Systematic Operations Risk-Rating Tool , rolled out for all IBRD/IDA operations and country partnership frameworks starting October 1, 2014.This tool should help to consistently rate operational risks, to focus management attention on particular risks, and to identify the appropriate level of corporate review.The new approach to risk rating will also be phased into existing operations, through integration with simplified ISRs.
The new risk rating system is expected to generate reports and analysis on risk trends by Global Practices and regions, and establish links between risks and results. These data analyses and reporting, it is hoped,will allow staff and management to make informed decisions and proactively manage risks at the portfolio level. Comprehensive risk management reporting to the Board Audit Committee, including an annual integrated risk monitoring report, is expected to begin in early FY16, when all Bank projects will have transitioned to the new risk rating system, and there is a good database that can be the basis for reporting back.
The new SORT Tool holds promise and appears to be already gaining traction, however it is too soon to assesswhether it will provide a harmonized approach to reviewing and managing systems-level fiduciary and GAC risks across instruments, or help with defining risk tolerance or contain risk to acceptable levels.
At both the corporate and VPU level, the Bank has devoted considerable effort to strengthening its approach to risk in ways that will encourage greater innovation and informed risk taking on the part of TTLs while ensuring that Bank operations adhere to the highest standards of fiscal probity. The initial phase of this work, which involved the development and roll-out of ORAF, achieved some important objectives.Actual results for ORAF adaptation were 52 percent of new projects in FY12; 84 percent in FY13; and 89 percentin FY14. However, there were also important lessons learned. Some of the lessons included the perceived high reporting demands from staff as well as the delay in utilizing the instrument for portfolio management. In addition, and in conjunction with other ongoing reforms, there has been a demand for having one corporate rating system that covers all instruments. Work on that is underway. ORAFunderwent a set of reforms intended to focus it more narrowly upon key risk areas, including governance risk, and to develop a more dynamic tool. As a result, it has been replaced by the new SORT exercise.
The Bank'sstated zero tolerance ex post the identification of corrupt practices in its operationsis not new. It has beenat thecenter of its policy frameworkfordecades. The IEG GAC evaluation rather recommendedthat the Bank clarify its risk stance ex ante -- that is, prior to approving country programs and associated loans in different country settings. In IEG's view, as with other financial institutions, explicit ex ante definition of risk appetites is essential to managing the varied and at times competing expectations of borrower, the Bank's shareholders, and civil society.The measures identified in the Management Response including the review of ORAF and efforts to continue to develop a comprehensive approach to risk are useful. Yet they do not addressthe three core issues necessary for the risk framework to "ensure consistency of treatment" across countries, while fully exploiting opportunities for achieving development results. These are:
(1) Harmonization of the risk framework across DPLs, P4Rs, and ILs -- Far from using a one-size-fits-all approach, IEG has recommended that the Bank adopt a systems-based approach for across its different instruments. For large lumpy investments in ILs, a transactions-based review can also be added, based on the risk profile of the operation.This systems based approach would be rooted in an analysis of country systems,aligned with the evolution ofILs (i.e., their use of report based disbursements),and the recent development of PforRs. Management'sreview of the ORAF is focused only on ILs and does not address the issue of harmonization. Absent a rethinking of INT's approach to systems based reviews, the currently fragmented approach across DPLs and ILs will likely remain.
(2) Evidence based guidance on instrument choice issues -- Consistent with efforts to expand the instrument array, the Bank should begin to advise task teams on which instruments are better suited to achieve certain development objectives. Such guidance is not part of the Bank's stated plans even though they would be essential to a comprehensive approach to "informed risk-taking."
(3) Setting risk appetites -- IEG has recommended thatthe Bank set risk appetites in different countries through a reliance on lending scenarios "light" using qualitative as well as some quantitative GAC benchmarks in country assistance/partnership programs.This measure would not only make the Bank's risk tolerance explicit but also better manage reputational risks vis-a-vis various country actors and shareholders. However, there is no mention of this in the Management's response.
The ongoing efforts to develop anew risk comprehensive risk framework under the Change Agenda are potentially encouraging. To be operational and actionable from a GAC perspective, IEG would look for progress in the three areas mentioned above.
Update on Action 0087-01:The Bank is fundamentally rethinking its approach to risk in the context of the corporate change management process, and a change management group has been established to directly address this agenda. Its recommendations will be a part of the broader reform process, which are to be endorsed by the Board of Governors at the Bankï¾s annual meeting in October 2013. The specific decisions and modalities remain to be worked out, but it is possible that the GAC Council will play a role in implementing the risk groupï¾s recommendations. [LOA: medium]
Update on Action 0087-02:[to be updated]
Update on Action 0087-03: [to be updated]