Corruption and Fraud in International Projects

HOW THE MOST COMMON SCHEMES – BRIBERY AND KICKBACKS, BID RIGGING AND FRAUD – OPERATED

Most of the bribery schemes began with demands from government or project officials, rather than offers from contractors, although the latter occurred, as did cases of both sides conspiring to loot a project. In some places corruption was so ingrained that no demands were necessary and the standard payments were automatically built into bid prices.

The cases often started with the demand or offer of relatively small favors. Several contractors offered to pay for "plant or study tours" for project personnel and their spouses, which were really vacations and shopping expeditions, other contractors "rented" office space or living quarters, some of which were never occupied, from project officials at exorbitant rates.³ Other companies were asked, or offered, to pay for the education of project officials' children, or to employ their relatives. One consulting firm provided several years of free lodging to an international aid agency employee.

As the schemes progressed, smaller bribes often were paid in cash in local currency, as were some very large bribes (several installments of $75,000 or more), but the risk of loss and the awkwardness of such transactions ⁴ usually led to other means of payment. In the West African case the bribe recipient, an employee of an international development agency, began by insisting on cash (which filled many large card board boxes), and then switched to travelers' checks, in the apparent but mistaken belief that such instruments were not traceable.

An Australian consulting firm, active in South Asia, generated cash for bribes by asking cooperative suppliers to submit fictitious invoices for slightly more than the amount needed. The firm would pay by check or wire transfer, which it recorded as a legitimate expense. The supplier would cash the payment and return the proceeds to the consulting firm, minus a 5% commission, providing the anonymity of cash as well as the benefits of a tax-deduction. In Africa, many small companies were willing to sell fictitious invoices to be used for such purposes.

Larger bribes were paid by check or wire transfer, recorded on the payer's books as a fee to a middleman, a local agent, a subcontractor, or a "local partner." The latter was the preferred method in Africa and Indonesia.⁵ Under this device, the host government would require that a certain percentage, usually about 10%, of the contract price of an international company, be set aside for local firms, ostensibly to promote "technology transfer" or "capacity building." The local firms usually were mere shell companies, owned by project or government officials, their spouses, children or relatives. In some cases, all of the funds paid to them were diverted.

Bribe recipients usually wanted their payments to be made in foreign currency to an account in a developed country where they could travel on business or holiday, speak the language, had property or relatives, or their children studied. Traditional bank secrecy jurisdictions, such as Switzerland, are still popular, but more often the payments followed the paths cited above. Bribe recipients in former French and Portuguese colonies in West Africa tended to deposit funds or acquire properties in France and Portugal, those in English-peaking East Africa favored the UK. Cyprus in the Eastern Mediterranean was popular with the Russians and others in the Middle East; Dubai attracted funds from the Subcontinent. Hong Kong and Singapore were the places of choice in the Far East. Corrupt funds from Latin America, the Soviet Republics and Nigeria were found in accounts in the US and the Caribbean.

The need to pay 10%, 20%, 30% or even more of a contract in bribes required many payers to spend considerable time and effort to prepare and submit fictitious expenses, supported by false supporting documents, to generate the bribe funds, and two sets of books – one to show the project, auditors and lenders, which falsely reflected that all of the funds were applied legitimately, and the other, for internal use, which showed the amounts paid in bribes, the actual funds available for project work, and the real profits. In one Indonesian case, the contractor employed four persons full time whose sole function was to prepare fictitious invoices and false and counterfeit documents – airline tickets, hotel and rental car receipts – to cover the bribe expenses.

From Kickbacks to Hidden Interests: the Use of Front Companies

Many dishonest officials discovered they could generate larger profits by secretly owning a contractor or subcontractor of their own than by demanding kickbacks from others. Such front companies ranged from firms that actually provided goods or services (usually at greatly inflated prices) and earned millions of dollars, to empty shells that subbed out all of the work, or billed for work never done.

In a former Soviet Republic, a project supervisor set up a construction company that used state employees and assets, and hired it on his projects; in West Africa, a project manager used his project employees to staff his engineering company, which he imposed as a subcontractor on international contractors. In other cases in Russia and the former Soviet Republics, project managers purchased hundreds of thousands of dollars in office supplies, vehicles and computers through a series of front companies that they owned, and resold them to the project at several times their actual value. They compounded the fraud by delivering defective, used or inoperable equipment. Foreign suppliers were pleased to do business through the front companies because it relieved them of dealing with the otherwise inevitable bribe demands

"Loan Brokers"

"Loan brokers" – professional, full-service "bagmen" who represented dishonest project personnel – were discovered on a number of projects in the former Soviet Republics, Africa, and South East Asia. The brokers typically were émigrés from those regions who resided in London or the US and who could travel freely. Acting on behalf of their client officials, they helped rig bids, solicited bribes, set up front companies, and collected and laundered the proceeds, taking a cut for themselves.

Bid Rigging

As discussed above, corruption usually led to some form of bid rigging, as disreputable contractors and officials tried to eliminate honest competitors. ⁶ The most common bid rigging schemes were relatively straightforward, and included:

• Drafting unreasonably narrow specifications. This was quite common, especially in IT contracts, and included specifying products by brand name, or requiring that a bidder have been selected an excessive number of times before (25 times in one India case, which excluded all competitors but one);
• Secret promises by project officials to approve later "contract amendments" to increase the price or scope of work after the contract award. This also was widespread, and is known as "buying in;"
• A variation of the above, in which the favored bidder alone is told that certain components in the request for bids will not be called for, allowing the insider to low ball that line item – a scheme known as "unbalanced bidding";
• By far the most common method of avoiding competitive bidding, however, was simply to sole source contracts to favored contractors or consultants, often accomplished by artificially splitting procurements into several separate components to avoid reaching competitive bidding levels

Some contractors eliminated their competitors by paying them not to compete, offering to employ them as subcontractors, or entering into collusive bidding arrangements and dividing the available work at inflated prices. Contractors and project personnel in India collaborated to file bogus bid protests, or cited contrived "pre-qualification" requirements to get rid of international firms that threatened local cartels.

Fraud by Contractors

Fraudulent practices by contractors were common, even the norm, particularly in Africa, Indonesia and the Subcontinent. The schemes were, of course, facilitated by the bribes paid to the officials who were supposed to supervise the project, and were motivated in part by the need to recover these funds. The schemes included, among many others:

• Billing for works never performed, or consultants never employed, or expenses never incurred (This is how it is possible to steal 90% of a project;
• Failing to meet contract specifications, particularly on the construction of roads (failing to lay the proper foundation, or to include drainage, or to use the proper materials);
• Delivering substandard or defective product; e.g., used vehicles or computers for new (quite common), expired or adulterated medicines, and so on;
• Billing for engineering or consulting studies at inflated rates, and delivering boilerplate or product copied from other sources at virtually no expense (also quite common);
• Overcharging for goods and civil works, often by a factor of three or four, or even more;
• Obtaining fraudulent contract amendments to increase the price of the contract;
• Submitting false or exaggerated CV's for personnel, and billing less-qualified, lower paid staff as higher-level personnel;

Common frauds by local project officials included:

• Diverting project assets – from computers to automobiles to heavy road grading equipment – to private use. Even such petty abuses can seriously disrupt a project: four-wheel drive vehicles stripped of tires, batteries and other parts become unavailable for visits to project sites, leading to deterioration and delays in the project
• Unnecessary or padded foreign travel for supposed meetings with suppliers, study tours or training;
• Creating "ghost employees" and fictitious expenses and diverting the payments.
• Leasing warehouses, equipment, or "office space" to the project or contractors.

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