Deconstructing corruption - Maria Shahid

Corruption remains endemic in the global construction industry. IBA Global Insight assesses international efforts to tackle deeply ingrained practices.

As coalition forces continue to target Libya, and Gaddafi stubbornly clings to power, very little seems certain in this unsettled part of the world. The country’s many infrastructure projects have for now come to a standstill. History would advocate that political instability and wars will invariably lead to years of reconstruction and rebuilding, with the construction sector playing a pivotal part. Corrupt practices inevitably follow, according to global anti-corruption agency, Transparency International (TI). The organisation’s latest Bribe Payer’s Index (BPI), from 2008, showed construction to be the sector most prone to corruption globally. Chandu Krishnan, the executive director of TI UK, suspects that little is likely to change in the forthcoming 2011 BPI, due to be published later this year.

Construction lawyer, Neill Stansbury, formerly a Project Director at Transparency International, dealing with construction and engineering, formed the Global Infrastructure Anti Corruption Centre in 2008, together with his wife, Catherine Stansbury. He explains much of the corruption in the sector arises from the complexity of the projects involved: ‘there are so many project phases, so many professionals and so much work is concealed. It creates an environment where corruption is quite easy’.

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On the organisation’s website he sets out numerous reasons for the prevalence of corruption, including:

  • the ‘complex contractual structure’ with ‘every contractual link [providing] the opportunity for someone to pay a bribe in return for an award of the relevant contract’;
  • the ‘uniqueness of the project’ where ‘the lack of comparison on projects makes it easier to inflate costs’;
  • a ‘lack of transparency’ with ‘commercial confidentiality’ taking precedence over ‘public interest’;
  • government involvement: the industry is heavily regulated with numerous permits being required. ‘Where there are insufficient controls on how government officials behave, their power – combined with the structural and financial complexity of the projects – makes it relatively easy for officials to extract bribes’;
  • and finally, and perhaps most importantly, ‘acceptance of the status quo’, where ‘bribery and deceptive practices seem to have become so ingrained in some parts of the sector and in some territories, that in many cases they have become accepted as the norm’.

It all adds up to a pretty grim picture, and so intrinsic to the culture of the industry, that it is difficult to imagine that things will change quickly.

Prone to bribery

In its December 2010 factsheet, the Organisation for Economic Co-operation and Development acknowledges that construction, infrastructure projects and property development are some of the areas that are ‘particularly prone to foreign bribery’. Part of the impetus for change is coming from the growing pressure on the 38 signatories to its Anti-Bribery Convention, dealing with the bribery of foreign officials, to comply with their Convention obligations.

Construction lawyer, John Starr, of Boyes Turner has just given a seminar to his clients on the forthcoming introduction of the Bribery Act in the UK, which is due to come into force in July, and brings the country into line with the OECD Convention, following initial delays with the accompanying guidance. Starr explains that for those involved in the construction sector the fear of prosecution under the Act is very real. The key offences in the Act relate to the bribery of another person; to that of being bribed, and, finally, the bribery of foreign officials. Given the complex subcontracting structures involved in construction projects, one of the sections of the new Act causing particular concern to the sector relates to the new corporate offence of failing to prevent bribery by intermediaries, contractors, joint venture partners and subsidiaries. Another relates to the criminalisation of ‘facilitation’ or ‘grease’ payments of relatively minor amounts to public officials to speed up certain activities: ‘Facilitation payments are a common practice in this industry,’ explains Norton Rose construction lawyer, Chris Hill. Confusion has surrounded the issue of what exactly would count as a facilitation payment. The latest guidance from the UK’s Ministry of Justice, together with the joint guidance published by the UK’s two prosecution bodies, the Serious Fraud Office (SFO) and the Crown Prosecution Service, goes some way to clarifying the issue: ‘You won’t be prosecuted for a one-off facilitation payment,’ explains Sam Eastwood, head of business ethics and anti-corruption at Norton Rose. ‘Even the TI recognises that zero-tolerance is not going to work in practice in countries such as Russia. What you must do is have a strategy in place for facilitation payments; you must account for them openly’.


‘There are so many project phases, so many professionals and so much work is concealed. It creates an environment where corruption is quite easy’
Neill Stansbury
Global Infrastructure Anti-Corruption Centre


 

The UK Act goes further than even the US equivalent, the Foreign Corrupt Practices Act, in many respects, in including provisions that could catch foreign companies with a listing on the UK Stock Exchange within its provisions. However, the UK is by no means alone in starting to initiate anti-corruption measures. In the 2008 BPI China, along with India, Mexico and Russia, was found to hold the dubious honour of being one of the countries most likely to engage in bribery when doing business abroad. It has since cracked down considerably on corruption with the introduction of measures to combat the bribery of foreign officials, which, according to legal commentators such as Eastwood, is likely to be enforced ‘rigorously’.

 

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Enforcement: so where's the stick?

While the Convention obligation to bring in laws to prevent overseas bribery is being taken increasingly seriously, enforcement remains disparate. A global Enforcement Report in 2010 by TRACE found that of 109 bribe recipient countries, only 48 had initiated an international bribery enforcement action of some kind. The same TRACE report went on to find that on an industry by industry basis, the largest percentage of enforcement activity existed in the ‘extractive industries’ (some 20 per cent), compared with a mere 10 per cent in the construction and engineering sector.

Eastwood believes that the real impetus towards enforcement will come from increasing political pressure. He points to a recent report by the OECD criticising Canada’s regime for enforcement of the Corruption of Foreign Public Officials Act. In it the organisation states that although the number of investigations had increased ‘Canada’s ability to successfully prosecute these investigations will be in jeopardy unless the Public Prosecution Service of Canada is given the resources it needs to prosecute the large volume of cases that may soon follow the investigations’.

In the UK at least, if history is anything to go by, prosecutions are only likely to follow whistleblowing, or where the contracts involved have a high monetary value, with prosecution bodies continuing to be reactive to events. Globally too, proactive, industry-wide probes are far from the norm. The possible exceptions being the construction, infrastructure, oil and gas probe carried out by the US Department of Justice (DOJ) in relation to the Panalpina investigation, following allegations of illegal payments being made to Nigerian officials through Panalpina, a Swiss shipping and logistics management company. In the UK there is no real evidence of a similar sectorspecific probe.

Nevertheless, Stansbury remains optimistic that ‘there has been a step change in enforcement in a lot of countries’. Discussing the Bribery Act, he maintains that one of its key messages is a ‘change in intent, with a government saying “we are going to prosecute”’.


‘Even Transparency International recognises that zero-tolerance is not going to work in practice in countries such as Russia.’
Sam Eastwood
Norton Rose


 

Globally, he points to the enforcement taken against German engineering company, Siemens AG, following its settlement with US and German authorities in 2008 totalling some US$1.6 billion. This included a four-year debarment of its Russian subsidiary, Siemens Russia, following a World Bank investigation into the Moscow Urban Transport Project, financed by the bank, and a voluntary two-year shut out from bidding on Bank business for Siemens, and all of its subsidiaries and affiliates. Hill agrees that the Siemens case ‘was a watershed for European companies’ in terms of taking note of the need for compliance measures in their organisations.

Gary DiBianco is in charge of corporate investigations at Skadden’s London office, and has been involved in numerous investigations under the US Foreign Corrupt Practices Act; he explains that DOJ and SEC investigations under the FCPA increased significantly in the mid-2000s, and that there were relatively few active FCPA probes before that time. One of the most notable cases in the construction and infrastructure sector was a US$579 million settlement by engineering and construction company, Halliburton, and its former subsidiary, KBR, in 2009. KBR admitted to bribing senior Nigerian officials between 1994 and 2004 to win contracts worth more than US$6 billion for a joint venture to build a liquefied natural gas plant in Nigeria. Under the terms of the settlement, both companies must retain an independent compliance monitor to review and report on the design and implementation of their compliance programmes.

Skadden’s Matthew Cowie, a former prosecutor at the SFO, believes that there has also been a step change in enforcement on this side of the Atlantic. He points to the first corruption conviction of a corporate in relation to engineering firm, Mabey & Johnson as being a prime example of this; a case in which he was involved as case controller while at the SFO. Following an investigation by the fraud prosecuting body, in September 2009 Mabey & Johnson was convicted of offences of overseas corruption and breaches of UN sanctions, and agreed to pay fines totalling £6.6m. More recently, in February 2011, two directors of the firm were found guilty of making illegal payments to the Iraqi Government, in breach of UN sanctions, in order to secure contracts to build steel bridges in the country.

 

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Compliance initiatives

Under the UK Bribery Act, one of the main defences available to corporations accused of failing to prevent bribery relates to having ‘adequate procedures’ in place, designed to prevent persons acting on their behalf from paying a bribe.

The guidance published alongside the Act sets out six guiding principles to being able to fulfil the criteria for the defence, and has been scrutinised in great detail both by corporates and their lawyers so as to ensure sufficient measures are in place to fall within the defence.

There is no similar guidance under the FCPA, the DOJ very recently being quoted as rejecting ‘some sort of formalistic solution from a script that says if you check the following six boxes you’re guaranteed this outcome’. Nonetheless, there is a clear culture of compliance already in place in the US, with the construction sector in particular seeing itself as targeted by the FCPA.

For Stansbury, compliance or ‘management control’ is a key part of his work: ‘The core of GIACC’s work is that we don’t point fingers. We accept that there is a problem, and that we tackle it at two levels. First, we work closely with engineers around the world to raise awareness that there can be change. We’ve signed alliances with quite a few professional engineering institutions globally. We say to them that you could become the ethical leaders of your country. If, alongside quality training, you require ethical training for all engineers registered with you, you can begin to change the practice of the country. Secondly, we are encouraging proper management procedures: anti-corruption should form part of these procedures as much as safety and control.’ GIACC’s Project Anti-Corruption System (PACS) recommends a number of measures to be integrated into the management of a project. These include the appointment of an independent assessor, the need for each party to a project to provide contractual ‘anti-corruption commitments’ and the appointment of a compliance manager.

He rejects the notion that his is a longer-term solution: ‘Things can happen a lot quicker than you think; there is currently a significant culture shift’. He points to the British Standards Institute’s anti-bribery standard (BS10500), which is due to come up for further public consultation imminently with a view to being brought into effect by the end of the year. ‘It’s all about making this a management control issue,’ he enthuses. ‘It will be an iconic measure of how a company is performing in this area.’

Stansbury remains resolutely optimistic about the shape of things to come: ‘I believe that we are making progress. We have a real chance of making a change.’ With a flurry of increased compliance initiatives being undertaken by global corporates, under the watchful eye of their lawyers, as well as a growing wariness of doing business with high risk jurisdictions, such as Libya, his optimism may not be that misplaced.

India focus

India is another country ranking low in the 2008 BPI. A 2005 TI report found that over 60% of the country had first-hand experience of paying a bribe or ‘using a contact to get a job done in public office’.

Many state-funded construction projects are carried out by ‘construction mafias’ consisting of groups of fraudulent public officials, materials’ suppliers, politicians and construction contractors. Bad construction, combined with the substitution of materials (such as mixing sand in cement while submitting expenses for cement) often leads to roads and highways being dangerous, with many being washed away during the monsoons.

A survey published by KPMG in 2011 backs these findings, showing that the perception of corruption is highest in the construction and real estate sector. The report notes that with a government planning on investing around USD 1 trillion in infrastructure between 2012 and 2017, the regulatory environment of the country does not seem to have kept pace with the disproportionate growth of the sector.

TI’s Krishnan explains that part of the problems stems from the inexperienced nature of the industry, which is often unaware of its compliance obligations. In addition, the volume of projects that companies are bidding on, often leads to unrealistic prices and deadlines being agreed, which are not met. Any delays and cost overruns are dealt with by paying bribes to the necessary authorities.

The country already has a number of initiatives in place to deal with corruption, including the Prevention of Corruption Act 1988, although this, along with the Central Vigilance Commission, are believed to be ineffective to deal with corruption in the private sector.

The country is a signatory to the United Nations Convention Against Corruption (UNAC), and at the 2010 G20 summit signed the anti-corruption action plan, requiring it to ratify and implement UNAC. The government is currently working on a law which will specifically target the private sector.

To view IBA filmed content on corruption go to: tinyurl.com/ibafilms

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Maria Shahid is a freelance journalist. She can be contacted at mariashahid@btinternet.com.


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