Overview In Asia and the Pacific, more than 264 million people live in extreme poverty. And yet, the region’s developing countries have estimated losses of about $18 billion a year from corruption in infrastructure projects, adversely affecting people’s lives, especially the poor and vulnerable, through poor public services, weak institutional capacity, and governance issues. In a region where 80% of the population is coping with widening inequality, the Asian Development Bank (ADB)—through the Office of Anticorruption and Integrity—promotes anti-fraud and anticorruption measures to ensure that projects are transparent, fair, and have proper accountability and controls. With development funds vulnerable to mismanagement and abuse, ADB conducts proactive integrity reviews to root out areas of vulnerability, noncompliance, and integrity risks in projects. The bank is a pioneer in the use of this mechanism as part of project monitoring. Lessons on Mitigating Integrity Risks Drawing on its proactive integrity reviews of over 100 ongoing ADB-financed or -administered projects, ADB released a series of Integrity Risks and Red Flags reports that shares lessons on mitigating integrity risks in projects in six sectors: agriculture, natural resources, and rural development; education; energy; health; transport; and water. The series highlights measures for executing and implementing agencies to mitigate identified integrity risks as early as possible in the project cycle for better risk management and implementation. It focuses on the processes of procurement, contract and asset management, and financial management. Procurement Clearly understand obligations under ADB’s Anticorruption Policy The Office of Anticorruption and Integrity identifies various red flags of integrity violations that undermine the fairness of the bidding process, involving one or a combination of collusion, fraud, corruption, and/or conflict of interest. Red flags of collusive practices include bids submitted with similar technical proposals, identical and/or similar line-item bid amounts, and sequential bid securities from the same bank. There are also instances where contracting parties fail to disclose close associations or conflict of interest with key government officials involved in awarding the contract. Executing and implementing agencies must be alert to red flags of integrity violations, be familiar with their obligations under ADB’s Anticorruption Policy to provide the necessary oversight, conduct appropriate due diligence, and report red flags to the Office of Anticorruption and Integrity to minimize the risk of integrity violations on development projects. Exercise due diligence in bid evaluations Concerns over bid evaluation often stem from executing and implementing agencies being remiss in identifying irregularities, inconsistencies, and potential misrepresentation in the submitted bids. They also often do not seek the needed clarification from bidders on questionable information submitted as part of the bids. Inadequate due diligence during bid evaluation and/or inconsistent application of bid evaluation criteria may lead to erroneous contract awards, which may eventually lead to project delays. Executing and implementing agencies should clarify bidding requirements and expectations to potential bidders during pre-bid meetings to minimize non-responsive bid submissions. During the procurement bid evaluation stage, the bid evaluation committee must exercise due diligence to effectively mitigate related integrity risks such as spotting red flags of integrity violations and verifying submitted information with corroborating information or third-party sources. Contract and Asset Management Obtain adequate insurance, advance payment, performance security Reviews of works and goods contracts have shown red flag instances where suppliers did not provide warranties for critical project assets or contractors submitting deficient bank guarantees or performance securities. These cases exposed projects to potential losses and/or reputational risk. Executing and implementing agencies should obtain adequate insurance and/or advance payment security from contractors and strictly enforce performance security requirements. Insurance coverage is crucial to have recourse in case project assets are damaged or lost. It is also useful when suppliers or contractors are remiss in fulfilling their performance or contractual obligations. An extended validity or an increased bank guarantee are added security measures. Executing and implementing agencies are also encouraged to include warranty provisions for project assets in contracts and strictly enforce the provisions. Engage a third-party firm for output monitoring Asset inspection across sectors reveal output defects, deviations from approved design and specifications, and use of substandard materials. This is partly attributable to insufficient project supervision, which often results in deficiencies, delays, inferior quality of work, and cost overruns. Executing and implementing agencies should discuss technical requirements with bidders, clarify project implementation roles and responsibilities, and enforce strict compliance with contract terms and conditions. They are also encouraged to engage third-party monitoring firms, especially for decentralized, complex, or high-risk projects. Output monitoring should include an escalation process, where critical issues are immediately reported to ADB. Financial Management Strengthen expenditure processing procedures Reviews have shown ineligible expenditures (e.g., payments made to beneficiaries and consultants that were unauthorized, inappropriately supported, or deviated from contract terms) are processed without adequate review of claims against contract provisions, which increases opportunities for fraud and exposes project funds to losses. Executing and implementing agencies must implement procedures authorizing payment claims only for completed works, services and goods that are clearly within contract terms. The Office of Anticorruption and Integrity recommends relevant project stakeholders to reference the checklist included in the Integrity Risks and Red Flags reports to avoid common errors and lapses in expenditure payment processing. Any suspected or identified integrity violations must immediately be reported to the Office of Anticorruption and Integrity. Implement strong financial reporting control Reviews of financial reporting noted vulnerabilities that include non-segregated project accounts and discrepancies between the financial records of the project and ADB. Inadequate and unreliable accounting systems increase the risk of undetected integrity violations and noncompliance, and negatively impact the project management’s ability to make sound decisions based on accurate financial information. To maintain reliable project accounting standards, executing and implementing agencies should perform periodic reconciliations between project accounts and ADB financial reports, and between project accounts and bank records to identify any unintended discrepancies. They should also keep separate project accounts for other non-ADB projects and activities to mitigate integrity risks. Resources Asian Development Bank. Anticorruption and Integrity: Proactive Integrity Review. ADB. Integrity Risks and Red Flags in Projects Series. ADB. 2021. Proactive Integrity Reviews: A Preventive Mechanism Against Corruption. Manila. C. Kenny. 2006. Measuring and Reducing the Impact of Corruption in Infrastructure. World Bank. Ask the Experts Jung Min Han Senior Integrity Specialist, Office of Anticorruption and Integrity, Asian Development Bank Jung Min Han leads the proactive integrity review team. She has worked in risk management advisory services, internal and external audit at various international financial institutions and the Big 4 accounting firms across the US, Singapore, Hong Kong, and the Republic of Korea. She holds an MBA in Finance from New York University, and a Bachelor’s degree in Commerce from University of Virginia. She is a US-certified public accountant, certified information systems auditor, certified internal auditor, and certified fraud examiner. Kristopher Marasigan Integrity Officer, Office of Anticorruption and Integrity, Asian Development Bank Kristopher Marasigan undertakes the proactive integrity reviews of ongoing ADB-financed and -administered projects to prevent and detect indicators of integrity violations. He has held various audit, risk, and compliance positions, and has extensive experience in conducting A-133 compliance audits for US Agency for International Development-funded projects in Africa and Central and West Asia. He holds Bachelor of Science degrees in Applied Economics and Accountancy from De La Salle University–Manila and is a certified public accountant and certified fraud examiner. Asian Development Bank (ADB) The Asian Development Bank is committed to achieving a prosperous, inclusive, resilient, and sustainable Asia and the Pacific, while sustaining its efforts to eradicate extreme poverty. Established in 1966, it is owned by 68 members—49 from the region. Its main instruments for helping its developing member countries are policy dialogue, loans, equity investments, guarantees, grants, and technical assistance. Follow Asian Development Bank (ADB) on Leave your question or comment in the section below: View the discussion thread.