Combating corruption and
fraud in international projects

 

Introduction

This paper is intended to be a brief introduction to corruption and fraud in international aid and business projects in the developing world.

 

The topics covered are:

 

q      The nature and extent of the problem,which is even worse than generally acknowledged;

 

q      The three most common and costly schemes encountered in such projects, which are interrelated:

Kickbacks and bribery – to influence a contract award, then

 

Bid rigging –to assure the selection of the company that agreed to pay the bribe, and then

 

Fraud – to recover the cost of the bribe, inflate profits and otherwise exploit the corrupt relationship.

 

q      The major red flags of the above schemes, including the red flags of bribes hidden through payments to a corrupt local agent, which is the most common method of payment used on large projects by sophisticated payers;

 

q      Countermeasures that can be employed by honest contractors, government agencies and project officials, including comprehensive training, compliance and voluntary disclosure programs.

 

q      Investigative tactics that might work in difficult, international cases, including steps that can be taken locally, where the suspected corrupt parties resides.

 

q      Possible remedies, such as:

Referral for criminal investigation and prosecution in the United States under the U.S. Foreign Corrupt Practices Act (FCPA) or elsewhere under the OECD and other international anti-corruption treaty provisions

 

Private civil actions by the aggrieved parties

 

Referral for administrative action and penalties,by international lenders and aid groups, such as debarment of contractors.

 

The Problem

Corruption is now generally acknowledged to be the primary reason for the failure of many development projects in the third world, despite the investment of billions of dollars a year, and more than a trillion dollars in the last thirty years. Since most aid is given as loans, the squandered funds further burden the recipients - the poorest countries on earth - with crushing, unproductive debt.

 

The situation is just now starting to get some of the attention it deserves. The World Bank and other development agencies are funding anti-corruption initiatives for their members and have formed investigative units to monitor their own programs. European and Latin American countries have signed treaties and passed legislation to outlaw the bribery of foreign officials. International business groups and local beneficiaries have insisted on more oversight and accountability.

 

Still the problem outstrips the resources marshaled against it. In many parts of the third world, corruption must be expected and dealt with on virtually every project. Unless more is done, quickly, corruption will threaten the reputation and continued funding of donors, the development and stability of the poorer countries, and even the security of the West, as corruption contributes to the poverty and despair that helps fuel international terrorism.

 

TRANSPARENCY INTERNATIONAL CORRUPTION INDEX

According to the Corruption Perceptions Index for the Year 2002 prepared by Transparency International, a private anti-corruption advocacy group, countries perceived to be the most and least corrupt in the world were:

 

Most Corrupt Countries – Top Ten

 

Bangladesh

Nigeria

Paraguay

Madagascar

Angola

Kenya

Indonesia

Azerbaijan

Uganda

Moldova

 

Least Corrupt Countries – Top Ten:

 

Finland

Denmark

New Zealand

Iceland

Singapore

Sweden

Canada

Luxembourg

Netherlands

United Kingdom

 

It is impossible not to note that the countries on the "least corrupt " list are among the most prosperous and stable places on earth, and that those on the "most corrupt" list are quite the opposite. Whether it is more accurate to say that the latter countries are corrupt because of their poverty and instability, or poor and unstable because of corruption, is unclear. What is clear is that corruption is much more of factor contributing to the misery of the inhabitants than generally realized, for the reasons discussed below.

The complete 2002 Transparency International list can be found in the Appendix at the end of the paper.

 

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