This section examines how corruption can occur on infrastructure projects.
Corruption can occur:
- during project identification
- in the financing of the project
- during the planning and design phases
- during the pre-qualification and tendering phases
- during the project execution phase
- during the operation and maintenance phase.
Corruption in these phases can involve any one or more of the government, project owner, funders, contractors, consulting engineers, sub-contractors, suppliers, joint venture partners, agents, and these parties’ associated and subsidiary companies. Each of these parties will be represented by individuals (i.e. their personnel).
Corruption takes place in a wide variety of ways, which are normally concealed. The purpose of such corruption may be for the personal benefit of the individual or for the benefit of her/his organisation.
The following paragraphs summarise some forms of corrupt practice which can take place during the different phases of an infrastructure project, and examine how this corruption can be concealed.
As explained in What is Corruption, GIACC uses the term “corruption” in the wider sense to include bribery, extortion, fraud, cartels, abuse of power, embezzlement, and money laundering. Consequently, the discussion in this section applies to all such criminal activity.
Corrupt practices in project identification
The parties involved in project identification may include the relevant government official responsible for approving the project, and potential project owners, funders and contractors who may also play a part in the construction and operation processes. Corruption can occur where one or more of these parties seeks to choose a project primarily for their own illicit profit or benefit.
Corruption may occur, for example, where:
- A road project is selected because it will pass by a government official’s house or home town.
- An airport project is commissioned, which is far in excess of the country’s requirements and ability to fund, because the government minister responsible for approving the project has been bribed by the intended contractor.
- A power project is approved which will impose tariffs far in excess of the population’s ability to pay because the government minister responsible for approving the project and those responsible for operating the finished power station will benefit from the arrangement.
Corrupt practices in project financing
The parties to project financing transactions include the project owner who is seeking funding for the project (who could be public or private sector), prospective funders (e.g. equity investors or banks), and consultants advising those parties in relation to, for example, the viability of the project. Corruption can occur where one or more of these parties corruptly secures and/or manages a financing arrangement for the project, by way of bribery or fraud or both.
The following are examples of corrupt practices during the provision and management of financing for a project:
- A bank may pay a bribe to a senior official of the project owner (possibly through an agent) in return for the bank being awarded the contract to finance the construction of a project at enhanced interest rates.
- A representative of the funder may be entitled to a performance bonus if a funding transaction is completed. In order to ensure that she/he receives the bonus, she/he may conceal adverse project data which would have prevented the funder’s board from approving the contract, or she/he may agree with a representative of the project owner to share the bonus with the representative in the event that the contract is awarded to the funder.
- A representative of the funder may, as a result of inside information in relation to a project, secretly buy land which is needed for the project construction, and then sell or lease it to the project owner at a profit, or secretly buy shares in the project owner, or in a company which will benefit from the project.
- The project owner may pay a bribe to the funder’s representative to ensure that the funder approves the financing, or awards it on unduly favourable terms to the project owner.
- The project owner may pay a bribe to the funder’s consulting engineer to issue an engineering report which conceals adverse site, social or environmental data in relation to the project. The funder may then make a decision on the viability of the project on the basis of false advice.
- The project owner may defraud the funder. The fraud may be designed to misappropriate money provided by the funder to the project by submitting false invoices claiming payment for work which has not been done, or submitting false invoices claiming inflated payment for work which has been done.
- The investors in a private sector project may give free or cheap equity to a relative of a government minister in return for project approval.
- A company which is both an investor in a private sector project owner and undertaking construction work in relation to the project, may inflate the cost of its construction contract to include the cost of its equity investment. The other funders may then wrongly believe that the contractor is using its own funds to purchase equity, and that its contract price is a fair market price.
Corrupt practices during the planning and design phases
The parties involved in the planning and design phases include the project owner, government departments responsible for issuing planning permission and other approvals, the architect or engineer, and design consultants.
The following are examples of corrupt practices during the planning and design phase of a project:
- The project owner may bribe a government or local authority official in order to obtain planning permission for the project, or to obtain approval for a design which does not meet relevant building regulations.
- A government official may extort bribes as a condition of her/his approval of the project. For example, she/he may require: cash payment; shares in the project owner; a share in the profits of the project owner; a share in the profits of construction from the contractor; or the use of her/his own companies to provide construction services or supplies to the project owner.
- A bidder may bribe a representative of the project owner or consulting engineer to specify a design which improperly favours that bidder over the others. For example, a certain technology which is only possessed by one of the bidders may be specified, even though other technologies may be preferable or cheaper. This would normally result in those bidders who do not possess the specified technology being kept off the pre-qualification list, or being rejected as non-compliant at tender stage. In some cases, the project owner’s representative may be complicit in the corrupt design. In other cases, the project owner may not be aware of the corrupt design (for example, where the project owner has appointed an architect or engineering consultant to undertake the design).
Corrupt practices during the pre-qualification and tendering phases
The contractual structure will vary for different projects. The project owner may contract directly with a main construction contractor and with consulting engineers. Alternatively, the project owner may let the whole project to a managing contractor. Alternatively, the project owner may contract with several different contractors for different packages. Corruption can occur in relation to any of these contracts. The parties involved in the pre-qualification and tendering phases include the project owner, the bidders, and consultants involved in bid evaluation.
The following are examples of the circumstances in which bribes could be paid during the pre-qualification and tendering phases of a project:
- A bidder which is properly qualified may be rejected at pre-qualification stage as a result of a bribe paid to a representative of the project owner or consulting engineer by another bidder. The reasons given for rejection would be artificial. Alternatively, no reasons may be given. The rejection of several potential winners could result in the corruptly favoured bidder being given an unfair advantage at tender stage.
- Confidential details may be leaked by a representative of the project owner or consulting engineer to the favoured bidder in return for a bribe, thereby giving it an unfair advantage.
- The tenders received by the project owner may be opened privately (not at a public opening). In this case, only those present at the opening would be aware of the bidders’ prices and other critical tender components. This secrecy would enable, for example, a representative of the project owner, in return for a bribe, to provide confidential information to the favoured bidder. The bidder could then amend its tender (for example by dropping its price) so as to secure a winning position. The tenders could then be publicised, and the favoured bidder announced as the winner.
- A tenderer may pay a bribe to a government official, in return for which the official ensures that the bribing tenderer wins the contract: For example:
- The official may ensure that the results of the tender are kept secret, so that no-one knows that the bribing tenderer was not the most competitive. Or
- The official may manipulate the tender evaluation (for example, the points given on the technical evaluation) with the result that the bribing tenderer wins. Or
- The official may ensure that there is no competitive tender. The official may announce false reasons for a direct award to the tenderer to be made (e.g. special technology possessed only by the tenderer, emergency, or national security).
- A tenderer may make a donation to the ruling political party, in return for which a party official ensures that the tenderer wins a contract, or obtains preferential treatment.
- A government official may secretly own, or be a director of, a tenderer, and may wrongly make a decision in favour of the tenderer (either as a result of deliberate corruption, or because the conflict of interest affects his impartial judgment).
- The tender process may be corrupted by international pressure. For example, during an allegedly competitive tender process, the government of a developed country may influence the government of a developing country to make sure that a company from the developed country is awarded a project, even if it is not the cheapest or best option. Such pressure can take many forms, including the offer of aid, arms deals or agreements to support a government’s application to join an international organisation. Great lengths are taken to conceal this pressure in some cases. In other cases, it is remarkably overt.
The examples of bribery given above will normally be accompanied by acts of fraud. The following are examples of fraudulent practices (without bribery) during the pre-qualification and tendering phase.
- Bidders may secretly collude with each other to share the market (a cartel). This normally entails the bidders agreeing that each one of them will win a certain number of projects, or a certain amount of turnover, in a particular sector. In respect of each project, a winning bidder will be pre-selected secretly by all the bidders, and the other bidders will put in tenders at a price which is higher than that of the pre-selected bidder.
- Bidders may agree on a “losers’ fee” arrangement. This normally entails the bidders agreeing that they will bid in full competition with each other (i.e. no price fixing agreement, or pre-selection of the winner). However, they also agree that they will each include in their price a fixed sum representing the estimated aggregate bid costs of all the bidders. The winner will then divide this fixed sum equally between the losers. The primary reason for this arrangement is compensation for the irrecoverable bidding costs of the losing bidders. The project owner then unknowingly bears the bid costs, which is normally contrary to the terms of tender.
- A group of suppliers of materials may collude to fix the minimum price of the materials they supply. Even when there is competitive tendering, prices will be kept higher than would be the case with genuine competition.
Beneath the contracts at project owner level, there will be sub-contracts and sub-sub-contracts. Corruption can occur in the pre-qualification and tender phases at each of these levels in similar ways to those listed above.
Corrupt practices during the project execution phase
The parties involved in project execution include the project owner, the architect, consulting engineers, contractors, suppliers, and their respective sub-contractors.
The following are examples of the circumstances in which bribes could be paid during the project execution phase:
- A bidder may have bribed the project owner’s representative to persuade her/him to award the contract to the bidder. These two parties may also have agreed that the cost of the bribe would not be included in the tender price, but would be fraudulently included in the cost claimed for a large variation during execution of the project. Deferring recovery of the cost of a bribe until after the appointment of the contractor can be an effective means of concealment, since there is normally no competitive tender for variations, and post-contract award variations attract much less scrutiny and publicity than competitive tenders.
- A contractor may bribe the project owner’s representative to persuade her/him to issue an unnecessary variation which materially increases the contractor’s scope of work and which has an inflated price.
- A contractor may bribe the architect/engineer to persuade her/him to issue a payment certificate or an extension of time to the contractor, which is not properly due.
- A contractor may bribe the project owner’s quantity surveyor to persuade her/him to approve the contractor’s work schedules and time sheets.
- A contractor may bribe the project owner’s works inspector to persuade him to approve defective or non-existent work.
- A project owner may bribe the architect/engineer to persuade her/him to refrain from issuing a payment certificate or an extension of time to which the contractor is entitled, or to issue a certificate entitling the deduction of liquidated damages from the contractor which are not due.
- A project owner’s representative may refuse to issue a certificate or payment which is due to a contractor unless the contractor pays her/him a bribe.
- A government official may demand payment of a bribe in order to issue an import permit required by a contractor to bring equipment into the country in which the project is being constructed.
The examples of bribery given above may be accompanied by acts of fraud. The following are examples of fraudulent practices (without bribery) during the project execution phase:
- A contractor may submit a claim for payment for a variation to the project owner, where the contractor knows that, or is reckless as to whether, the amount claimed is greater than the amount to which the contractor is properly entitled.
- A contractor may make a claim against the project owner for an extension of time stating that the delay was caused by a matter for which the project owner is responsible, when the contractor knows that or is reckless as to whether the delay was in fact due to a cause for which the contractor is responsible.
- A contractor may make a claim against the project owner for an extension of time, when the contractor knows that, or is reckless as to whether, the claim is for a period greater than the actual delay caused to the contractor by the event on which the claim is based.
- A contractor may submit a loss and expense claim to the project owner which the contractor knows or suspects is false or exaggerated.
- A contractor may submit a loss and expense claim to the project owner which falsely alleges that the project owner is responsible for a particular event and conceals from the project owner records which would prejudice the contractor’s claim (e.g. letters from the contractor to a sub-contractor which attribute blame for the claimed event to the sub-contractor rather than to the project owner).
- A contractor may submit falsified records to support a claim (e.g. false programmes, invoices, timesheets etc.).
- An architect/engineer may know that a variation should properly be issued to a contractor, yet refuse to issue the variation, as it fears that issuing the variation could expose the architect/engineer to a claim by the project owner for breach of contract or negligence (e.g. design error).
- An architect/engineer may know that an extension of time should properly be granted to a contractor, yet refuse the extension of time as a result of pressure from the project owner not to grant it, or in the hope of gaining future work from the project owner.
- A project owner may submit false or exaggerated claims against the contractor alleging that the contractor has delayed the project, or that the contractor’s works are defective. In many cases, the project owner will use these false or exaggerated claims as a pretext to draw down on the contractor’s performance bond, deduct liquidated damages, or withhold the retention.
- A project owner may dishonestly delay payment to a contractor.
- A joint venture partner of the project owner may falsely claim that its project expenses are higher than they actually are.
- A scaffolding sub-contractor may exaggerate the amount of scaffolding on site, or the number of men used to put it in place.
- An earth-works sub-contractor may falsify the amount of earth removed.
- A claimant may add a significant amount of false extra cost to a contract claim as a “negotiation margin”. The claimant’s logic in including this margin may be that it believes that the opponent will attempt to reduce the claim, and so a sufficient margin must be added to enable negotiations to arrive at the correct figure.
- Employees, consultants or independent experts may give evidence in a court or arbitration hearing which they do not believe to be true in order to support their employer’s false claim.
- Lawyers and other professional advisors working on a contract dispute may dishonestly allocate too many staff to work on a claim, charge for too many hours of work, or give their client over-optimistic advice as to the likelihood of a claim’s success so that the client continues with the case.
Corrupt practices during the operation and maintenance phase
The following are examples of corrupt practices during the operation and maintenance phase:
- Bribes can be paid to win operation and maintenance contracts, and fraudulent practices can lead to inflated operation and maintenance costs, in just the same way as during the tender and project execution phases referred to above. In many projects, the cost of operation and maintenance will exceed the actual capital cost of constructing the project. As a result, the opportunities for bribery and fraud may be greater.
- Sometimes the same contractors that built the project will also operate and maintain it, and so a bribe paid to win the construction contract may also cover operation and maintenance. In other cases, a separate bribe may be paid to cover the operation and maintenance phase.
- Public/private projects, where a private consortium builds, owns and operates a project and then supplies the government or local utility with the end product (for example, electricity), provide substantial opportunities for bribery and fraud in relation to agreeing the price that will be paid for the end product.
- In high technology projects, the contractor that built the project may be the only company capable of maintaining it. As a result, it will have a monopoly of supply during the operation and maintenance period. This monopoly makes it difficult to compare costs and increases the opportunities for concealing bribes and inflating claims.
For further more detailed examples of corruption, see Corruption Examples.
Corruption is normally concealed. For those parties involved, there are two reasons for concealing their corrupt activity. The first reason is to try to avoid detection and prosecution. The second is to ensure that the corrupt activity achieves the intended benefit. For example:
- A bribe paid to win a contract must remain secret otherwise the contract award will be set aside.
- A bribe paid to have an inflated contract claim approved must remain secret otherwise the contract claim will be rejected.
- A bribe paid to secure planning permission must remain secret otherwise the planning approval will be set aside.
The following are some of the ways in which corruption is concealed:
- use of intermediaries
- use of false documentation
- making of false statements
- physical concealment
These cases are examined below.
Use of intermediaries
The payment of a bribe may be made direct by the payer to the ultimate recipient who is to carry out the dishonest act. However, it is common for a bribe to be paid through intermediaries. This is done so as to make it more difficult to detect that a bribe has been paid. The following are some common methods of concealing a bribe by the use of intermediaries:
- Agents. The most common form of intermediary is the agent. A company bidding for a contract which wishes to hide the payment of a bribe may appoint an agent who has contacts with a representative of the project owner or with the government of the country concerned. The company will enter into an agency agreement with the agent which purports to be an agreement for legitimate services. However, the scope of those services will often be false or exaggerated and the size of the payment due under the agreement will often be significantly in excess of the value of the legitimate services specified in the agreement. The payment may sometimes be expressed as a percentage of the contract price. The agent will normally receive the payment when the company is awarded the contract. The agent may then pass the whole or part of the payment to the representative of the project owner or government who has dishonestly ensured that the company would win the contract. The payment is often made in foreign currency into an offshore bank account.
- Joint ventures. An international joint venture, comprising joint venture partners from several countries, may arrange for an agency agreement (which conceals a bribe arrangement as described in “agents” above) to be entered into by the joint venture partner who is resident in the country which is least likely to discover or punish the bribery. Alternatively, a joint venture partner may be owned by a relative of a representative of the project owner, or by a government minister. In this case, the bribe may be paid by allocating to that joint venture partner a bigger share of the profit than that partner should legitimately have received.
- Subsidiaries or other group companies. Where a company is part of a multinational group, arrangements may be made by the group for a corrupt agency agreement to be entered into, or for a corrupt payment to be made, by a subsidiary or other group company which is located in a country where the bribe is less likely to be detected or punished. The subsidiary or other group company will then be repaid by the company through inter-company charges for false services or services of inflated value.
- Sub-contractors: A company may channel a bribe through a corrupt sub-contract arrangement. For example, a sub-contract may falsely provide that certain services are to be provided to the company by the sub-contractor in return for a certain payment. In reality, the sub-contractor will not provide these services or will provide services of a much lower value than the price agreed. The balance of the payment will then be passed on by the sub-contractor to the relevant party as a bribe.
In each of the above cases, the bribe may have been deliberately paid with full knowledge of all relevant parties. Alternatively, a bribe may be paid in situations where a related party is unaware of the bribe. For example:
- A company appointing an agent may be unaware that an agent intends to use part of the agency fee to pay a bribe.
- A joint venture partner may be unaware that a fellow joint venture partner has paid a bribe in order for the joint venture to win the contract.
- A company may be unaware that a subsidiary in another country is paying bribes to win a contract.
- A company may be unaware that a sub-contractor paid a bribe to a representative of the project owner to ensure that the company won the tender.
In situations such as the above, a party may be genuinely unaware that these practices are occurring. However, in many cases, the party may have been wilfully blind to the circumstances. In other words, it may have suspected that there was a likelihood of corruption but refrained from making enquiries or taking preventive action. Such wilful blindness would be treated as culpable in most jurisdictions.
Use of false documentation
Bribery or fraud will normally be implemented or concealed by the use of false documentation. For example:
- An agency agreement will normally be used to conceal the payment of a bribe through an agent. It will purport to represent accurately the terms of the agency. However, it will only specify the legitimate services that are to be carried out, and will not specify those services whereby the agent is to use the agency fee to pay a bribe. It will also usually specify an agency fee which is considerably in excess of the value of the (legitimate) services specified in the agreement. The bribe will normally be paid out of this excessive fee.
- A fraudulent contract claim for a variation or extension of time will normally itself be false in that it will state that sums or extensions of time are due for the reasons given when in fact this is not the case. In addition, it will usually be supported by falsified programmes, time sheets and/or work records.
- Defective works or materials will normally be concealed by false certificates of approval or testing.
Making of false statements
Bribery or fraud will normally require the making of false claims or statements. For example:
- Where a bribe has been paid to win a contract, the subsequent contract award is a false statement because it purports to be an award made on an arms length basis.
- Where a bribe has been paid by a contractor to win a contract, the contractor will often seek to recover the cost of this bribe by including an equivalent amount either in the original contract price or in a later contract claim. This will involve making a false statement because the contract or claim price will purport to be the price for the goods or services to be provided, when in fact it will also include the cost of the bribe.
- A company may wish to conceal the fact that it has used one of its subsidiary companies to pay a bribe. It may, therefore, reimburse the subsidiary for the cost of the bribe by way of inter-company charges on the basis that these are for legitimate services, when in fact this is not the case.
Defective works may be physically concealed by other works. For example, a foundation contractor may, for corrupt reasons, supply inadequate quantities of steel reinforcement for the foundations, and then pay a bribe to the building inspector to certify the steel as correctly laid. The inadequate steel reinforcement will then be concealed by concrete.