How corruption occurs

How Corruption Occurs / Examples of Corruption

Corruption can occur during any phase of an infrastructure project, and can involve any one or more of the project participants. It can include bribery, extortion, fraud, cartels, abuse of power, embezzlement, and money laundering.

This section examines, using hypothetical examples, how corruption can occur in each phase of a project.

Overview

Corruption can occur during any phase of an infrastructure project, including during project identification, financing, planning and design, procurement, project execution, and operation and maintenance.

Corruption in these phases can involve any one or more of the government, project owner, funders, contractors, consultants, sub-contractors, suppliers, joint venture partners, agents, and these parties’ associated and subsidiary companies. Most of these parties will be organisations, and will therefore be represented by individuals (i.e. their personnel). In some cases, these parties are the perpetrators of the corruption. In other cases, they are the victims.

In some cases, the party involved in the corruption may be acting deliberately with a view to making an illicit gain. In other cases, the party may be acting recklessly (i.e. without proper thought). In other cases, the party may feel forced into the corrupt action as a result of physical, financial or commercial pressures, or through extortion. In other cases, the party may not realise that corruption is occurring. See “Why Corruption Occurs” for further explanation of the reasons and motivation for corruption.

Corruption takes place in a wide variety of ways, including through bribery, extortion, fraud, cartels, abuse of power, embezzlement, and money laundering. These actions 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. See “What is Corruption” for further explanation of these offences.

The types of bribe can take many forms, including cash, assets, donations to political parties, gifts and entertainment, and the promise of future work.

Corruption is normally concealed, as is explained in “Concealing Corruption“.

The following paragraphs summarise some forms of corrupt practice which can take place during the different phases of an infrastructure project.

In relation to some of the subsections below, there is a separate linked webpage which gives more detailed examples of more complicated forms of corruption in that phase, and an explanation of those examples.

1. Corrupt practices in project identification

Project identification involves determining the need for a project, and the type of project which will fulfil this need. The project should be identified based on the best interests of the project owner (which in the case of a public sector project owner will equate to the best interests of the public).

Corruption can occur when one or more parties involved in project identification seek to choose a project primarily or partly for their own illicit benefit rather than for the benefit of the project owner.

Corruption may occur, for example, where:

A public official ensures that a road project is selected not because it will fulfil the most pressing national need, but because it will pass by the official’s house or home town, thereby benefitting the official.
An airport project is commissioned which is far in excess of the country’s requirements, because the government minister responsible for approving the project intends to maximise the size and cost of the project and thereby maximise the opportunities for the minister to receive bribes in respect of the project.

2. Corrupt practices in project financing

The project owner, whether public sector or private sector, may require financing to enable the project to be constructed. The parties involved in the construction of the project, such as contractors, consultants and suppliers, may require financing to assist with their cash flow or capital purchases prior to receiving payment for their project work, services and materials. The financing may comprise bank loans, bonds or equity finance.

Corruption can occur where one or more of the parties involved in the financing arrangements ensure that the arrangements in some way improperly benefit them, rather than the whole benefit going to the intended parties.

The following are examples of corrupt practices which can occur during the provision of financing for a project:

A funder may pay a bribe to a manager of the project owner in return for the funder being awarded the contract by the project owner to provide finance for the construction of a project. The bribe may be for the purpose of being awarded the contract, or may be for the purpose of achieving higher interest rates or fees than would otherwise be the case.
A manager of the funder may be entitled to a personal performance bonus if a loan transaction is completed. In order to ensure receipt of the bonus, the manager may exaggerate the borrower’s financial stability to the funder’s loan approval committee.
A manager 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 it to the project owner at a profit, or secretly buy shares in a company which will benefit from the project.
The project owner may pay a bribe to the funder’s manager to ensure that the funder approves the financing, or awards it on unduly favourable terms to the project owner.
In cases where the funder requires a feasibility report on a project before agreeing to provide finance, the project owner may pay a bribe to the consulting engineer preparing the report to conceal adverse 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 by claiming payment under the funding for work which has not been done.
The investors in a private sector project may give free or cheap equity to a public official in return for project approval.

3. Corrupt practices in planning and design

Planning and design is when the project owner, having identified the project:

obtains the planning, building approval, and other permits necessary to construct the project
plans the manner in which the project will be constructed
designs the layout and technical requirements of the project.

Corruption can occur where one or more of the parties involved in, or who could benefit from, the planning and design arrangements pay bribes in order to obtain necessary permits, or ensure that the design arrangements in some way improperly benefit them, rather than the whole benefit going to the intended parties.

The following are examples of corrupt practices which can occur 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 from the project owner by refusing to approve a legally compliant project unless a bribe is paid. For example, the official may require cash payment, or a share in the profits of the project owner, or the use of the official’s own companies to provide construction services or supplies to the project owner.
A contractor who intends to submit a tender to construct the project may bribe a manager of the project owner or the design engineer to specify a design which improperly favours that contractor over the other competing contractors. For example, a certain technology which is only possessed by one of the contractors may be specified, even though other technologies may be preferable or cheaper. This would normally result in those contractors who do not possess the specified technology being kept off the pre-qualification list, or being rejected as non-compliant at tender stage.

4. Corrupt practices in procurement (pre-qualification and tendering)

The contractual structure will vary for different projects.

The project owner may contract directly with a contractor who will be responsible for undertaking all the works. The contractor may then in turn place contracts for parts of the works with sub-contractors.
Alternatively, the project owner may contract with several different contractors for different parts of the works.
The project owner, contractors and sub-contractors may appoint consultants who will be responsible for professional advice, design or project management.
Contractors and sub-contractors may contract with suppliers for the supply of equipment and materials.

In respect of each of the above contracts, there will be a procurement process whereby the appointing party will select, normally through a competitive process, another party which is best placed on a cost and/or quality basis to supply the necessary works, materials, equipment or services. The party offering the supply is normally called the tenderer or bidder.

Where there may be a very large number of tenderers for a contract, the appointing party may implement a pre-qualification process prior to the tender process. Parties are asked in the pre-qualification process to establish their technical, financial and quality credentials to be able to undertake the work. Only those with adequate credentials will be asked to tender for the contract.

Corruption can occur in relation to the procurement of any of these contracts, and could involve the appointing party, the tenderers, consultants involved in tender evaluation, and the personnel of these parties.

The main types of corruption which can occur during the procurement phase are bribery, fraud and cartels.

The following are a few summary examples of the circumstances in which corruption could take place during the procurement phase of a project:

The pre-qualification and tender process may be corruptly abused by the managers running the process in order to give preferred tenderers an advantage. For example by corruptly, in return for a bribe from the preferred tenderer, or as a result of a conflict of interest:
- rejecting at pre-qualification stage other potential tenderers which are properly qualified so as to improve the prospects of the preferred tenderer
- providing confidential details to the preferred tenderer about the procurement or evaluation process, or the prices of competitors
- allowing the preferred tenderer to change their prices or tender details after the tender submission by all competitors
- manipulating the tender evaluation by giving unjustified points to the preferred tenderer, or unjustifiably deducting points from competitors
- ensuring that there is no competitive tender, so that the preferred tenderer is the only candidate (e.g. by falsely declaring an emergency procurement, or national security requirements).
The examples of bribery given above will normally be accompanied by acts of fraud. For example, if a corrupt party abuses the pre-qualification or tender process, they will normally need to falsify records to cover up the abuse (e.g. by falsifying the tender evaluation score sheet).
Organisations which undertake the work or services for a project, or which supply materials and equipment to a project, may participate in a cartel. For example:
- Tenderers may secretly collude with each other to form a cartel. The members of the cartel will agree on which of them will win the contract and at what price, thereby allowing a higher price to be submitted than would be the case if there was genuine competition between them.
- A group of suppliers of materials may collude to fix the minimum price of the materials they supply.
There may also be fraudulent practices which occur during procurement phase without any related bribery occurring. For example:
- A tenderer may include false information in its tender submission about its financial status, its work experience and the number and quality of its personnel and equipment. This false information will lead the project owner to believe that the tenderer is more capable than it actually is, thereby giving the tenderer an improper advantage.

More detailed examples of corruption during the procurement phase, with accompanying explanation, are contained in “Examples of Corruption in Procurement”.

5. Corrupt practices in project execution

The project execution phase is when the project is actually constructed.

The following are a few summary examples of the circumstances in which corruption could take place during the project execution phase:

A contractor submits to the project owner a claim for payment for work done, a variation, additional cost, or an extension of time. In submitting such claim, the contractor acts fraudulently by deliberately or recklessly:
- claiming a greater payment, cost or time than the amount to which the contractor is properly entitled under the contract
- falsifying the reasons and justification for the claim
- submitting falsified records to support the claim (e.g. false programmes, invoices, timesheets etc.)
- concealing from the project owner records which would prejudice the claim.
A project owner fraudulently submits false or exaggerated claims against the contractor alleging that the contractor has delayed the project, or that the contractor’s works are defective. The project owner then withholds these claimed amounts from payments due to the contractor.
An earth-works sub-contractor fraudulently exaggerates the amount of materials removed or replaced, or the number of items of equipment on site, in order to receive a greater payment from the contractor than is due.
A contractor bribes the project engineer or project owner’s site supervisor to persuade them to improperly:
- approve defective or non-existent work
- issue an unnecessary variation which materially increases the contractor’s scope of work and which has an inflated price
- issue a payment certificate or an extension of time to the contractor, which is not properly due.

Alternatively, the project engineer or project owner’s site supervisor demands an illicit payment from the contractor in return for issuing the above approvals or certificates when they are validly due.

A project owner bribes the project engineer to refrain from issuing a payment certificate or an extension of time to which the contractor is entitled.
A government official demands payment of a bribe in order to issue an import permit required by a contractor to bring equipment into the country.
A gang threatens damage to site equipment unless they are paid weekly protection money.

More detailed examples of corruption during the project execution phase, with accompanying explanation, are contained in “Examples of Corruption in Project Execution”.

6. Corrupt practices in operation and maintenance

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.

Updated on 13th May 2024