This section examines why involvement in corruption should be avoided by individuals and organisations in the infrastructure sector.
The order of priority of the above reasons will depend on the personal values of an individual. These reasons are examined in further detail below.
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.
(1) The moral argument
Corruption can cause death, injury, and financial loss to innocent parties. It results in fewer or defective schools, hospitals, roads and other public services. It is therefore morally wrong.
Corruption in relation to public sector projects
Corruption in relation to public sector projects usually involves bribery and/or fraud being perpetrated against a government body. It is, therefore, the public that ultimately pays for this corruption (through additional taxes or lost services). This corrupt activity can occur in a number of ways:
- Needless, unviable or over-designed projects. A project may be commissioned which is not necessary, or which is unviable or over-designed, and the main purpose of which is to act as a vehicle for corruptly channeling public funds into the private accounts of government officers and their associates. In such cases, the initial corruption in conceiving or over-designing the project may rest with the responsible government official and the consultant designer. However, where a contractor takes on such a project while aware or suspicious that the project is corrupt from inception, the contractor may also become implicated in the corruption. The ultimate wasted costs in respect of this project are borne by the public.
- Bribes included in the contract price. The cost of bribes paid by contractors to corrupt government officials is usually recouped by including the amount of the bribe in the contract price. As a result, the cost of the bribe is ultimately paid out of public funds.
- Contract prices fraudulently inflated. Where a contract is corruptly awarded, it is often the case that the contract price is significantly inflated, not just to cover the cost of the bribe, but also to maximise profit for the contractor. Where the contractor is assured of success in winning the contract, it will have considerable freedom to demand a high contract price. These inflated contract prices are paid out of public funds.
- Fraudulent claims approved and paid. Contractors may submit fraudulent claims which are either unmerited or inflated. These claims may be approved for a number of reasons. The certifier may wrongly believe them to be genuine and justified. Alternatively, bribery of the certifier, or other person responsible for approving the claims, may ensure that the claims are approved. In addition, bribery of the relevant government official will ensure that she/he does not challenge the approvals and that the claims are paid. The losses caused by payment of fraudulent claims are often far greater than losses resulting from bribery to win contracts. The cost of fraudulent claims will be borne by the public.
- Defective or dangerous works provided. Contractors may use bribery to persuade a certifier to approve defective works or materials. This can result in projects being provided which are seriously defective, and which deteriorate very quickly, so requiring repair or replacement far earlier than should be the case. Alternatively or in addition, defective work may result in dangerous structures which may cause injury or death. It is the taxpayer who will have to fund any repair or replacement of the defective products, and compensate those harmed by them.
In simple terms, corruption in the public sector causes death and injury, and is stealing from the taxpayer. Money is stolen which could be spent on hospitals, schools, roads, and other vitally important infrastructure. This loss will be felt most severely in poorer countries. It will nevertheless also be felt in developed countries where large sums may also be lost to corruption. For further information on damage to the public sector caused by corruption, see Cost of Corruption.
Corruption in relation to private sector projects
Corruption in relation to private sector projects takes a similar form to corruption in the public sector, but the cost of corruption is not directly borne by public funds. It nevertheless can have widespread and serious consequences. Corruption may have an adverse effect on the quality of the private sector works. It may result in an increase in the financing, capital, operating and maintenance costs of projects. This in turn may result in increased property or utility prices, or increased charges that are required for use of certain facilities such as toll roads or bridges. It may also result in dangerously defective works. All these factors will affect the public. In the longer term, the effects may include less investment (due to the growing concern to ensure ethical investment), and withdrawal of ethical contractors from the market.
It is unlikely that there will be significant corruption in the private sector without such corruption impacting on, or spreading to, the public sector, and vice versa.
(2) Risk of criminal prosecution
There is a risk of criminal prosecution for individuals and organisations involved in corruption. The consequences of prosecution are severe, involving imprisonment, fines and debarment.
Until relatively recently, there had been little risk of prosecution for corruption in the infrastructure sector. However, due to a number of factors, individuals and organisations are now facing an increasing and real risk of prosecution. These factors are as follows:
- Increased awareness and publicity. There is growing awareness of the scale of corruption in the infrastructure sector, and of the personal, public and financial damage that this is causing. The media is focusing increasingly on corruption, and investigative journalists may examine and publish corruption suspicions in detail.
- Increased pressure. There is, as a result of the above awareness and publicity, increased pressure to take steps to eliminate this corruption. Civil society, aid organisations, multi-lateral development banks, governments, the media, and organisations working in the infrastructure sector are all responsible for this increased pressure.
- Anti-corruption conventions and laws. Such pressure has resulted in the passing and ratification of a number of international anti-corruption conventions (in particular the United Nations Convention against Corruption and the OECD Convention on Combating Bribery). Countries which have ratified such conventions are required to enact the necessary laws to criminalise corruption offences, to ensure that those laws are enforced, and to co-operate with other countries in enforcement.
- Increased risk of detection. Far greater attention is now being paid to methods of detecting corruption in infrastructure projects. There is also increased protection for and encouragement of whistle-blowing. Thus, there is now a far greater risk that corruption will be uncovered.
- Increased willingness to prosecute and punish white-collar crime. There is increasing pressure to ensure that white-collar crime (which includes corruption offences) is punished as severely as blue-collar crime. This means that there is a growing likelihood that where an individual is convicted of corruption, more severe penalties may be imposed than previously.
- Increased resources allocated to prosecution of corruption: Many countries have increased the resources allocated to the prosecution of corruption, and in some cases have established specialist anti-corruption prosecution units.
In consequence of the above factors, there are now many cases of individuals and organisations being prosecuted for corruption offences.
The penalties for corruption offences can be severe. In most jurisdictions, such penalties for individuals may include several years’ imprisonment and heavy fines. For organisations, the criminal penalty will normally be a substantial fine and possible debarment from public sector work. Involvement in corruption now presents a real risk of harsh punishment for both individuals and organisations.
For further information on criminal liability, see Liability for Corruption.
(3) Risk of financial loss
There is a risk of significant financial loss for individuals and organisations who are involved in corruption.
As it becomes more acknowledged that corruption must be prevented and penalised, so governments, funders, project owners, competitors, and employers have become less tolerant of corruption. There is, therefore, an increasing tendency for these parties to adopt stronger commercial or financial measures against corruption. Such measures can have a significant adverse financial impact on individuals and organisations involved in corruption, and may include the following:
- Debarment of organisations because of corruption involvement. In many countries, public sector project owners are now required by law to debar convicted organisations from participating in their projects. For example, the European Union Procurement Directives require compulsory exclusion of an organisation from all EU public sector contracts for a specified period if the organisation has been convicted of a corruption offence. Multi-lateral development banks have adopted debarment policies whereby an organisation which has been found to have been involved in corruption will be debarred permanently or for a number of years from participating in any of their projects. Aid organisations and commercial lenders are increasingly unlikely to allow organisations which have been convicted of corruption, or debarred by multi-lateral development banks, to participate in projects which they are funding.
- Termination of corrupt contracts. A contract which has been obtained through corruption is often either void, or can be terminated, and this can have significant financial consequences. For example, if a contractor pays a bribe to win a contract, or submits fraudulent data with its tender, and if the project owner discovers the corruption, it is possible that the project owner will terminate the contract (if it has already been awarded to the contractor).
- Reputational damage for organisations. The increasing attention given to corruption issues, and the growing desire for ethical business, means that organisations which are associated with corruption (even where there has been no conviction) may suffer in terms of share value, and may also find that they are increasingly considered to be undesirable business partners. It may also mean that the organisation may find it more difficult to win work, raise financing, and employ good staff.
- Reputational damage for individuals. Involvement by an individual in corruption may irreparably damage an individual’s reputation. Organisations are paying increasing attention to their own reputation, and to corporate social responsibility, and are therefore increasingly unlikely to employ an individual who has been involved in corruption.
- Dismissal of individuals from employment. Organisations are imposing stricter disciplinary measures against employees who have been involved in corruption. It is becoming more common for an officer or employee of an organisation to be dismissed from employment because of involvement in corruption. An organisation may prefer to lose an employee rather than damage its business or reputation.
- Disciplinary action against individual members by professional institutions. Professional institutions are becoming more conscious of their duty to deter corruption by their members, and may impose fines on, or suspend or disqualify from practice, members who have engaged in corruption.
- Litigation against individuals and organisations for losses caused by corruption. Significant financial loss can be caused to an organisation which is the victim of corruption. For example:
- a tenderer which loses a tender because of bribery by a competitor may lose both the cost of submitting its tender and the potential profits from the contract;
- a contractor against whom a project owner submits a fraudulent claim (which is then approved by a corrupt certifier) may have to pay the project owner’s fraudulent claim.
It is becoming increasingly likely for such organisations to take legal action to recover their losses. Such proceedings may be taken against both the corrupt organisation and the individuals involved in the corruption, who may be required to compensate the victim for its losses. These proceedings can also be costly in terms of lawyers’ and consultants’ fees, lost management time, and emotional stress.
For further information on financial loss caused by corruption, see Cost of Corruption.