Corruption and Fraud in International Projects

INTRODUCTION AND OVERVIEW

According to the World Bank, $2.7 billion a day, or more than a trillion dollars a year, is paid in bribes. These payments are a problem not just because they end up in the pockets of greedy officials, or because they are a drain on the projects' budgets, but because they set in motion a chain of events – the selection of unqualified contractors, the gross inflation of prices, the delivery of substandard goods or of nothing at all – that defeats development and adds to unproductive debt. In fact, corruption and its offspring are now widely acknowledged to be the single greatest impediment to development

This paper briefly describes the problem from ground level – how the schemes operate, their red flags, how they can be detected and proven and hopefully prevented, or at least deterred. Much more is to be learned than can be included here, but the hope is that this short introduction will suggest the real scope of the problem and motivate more concerted and practical action against it.

SUMMARY OF FINDINGS FROM RECENT CASES

The information below is drawn from investigations conducted throughout the world by the author and his colleagues over the last several years.

Simply speaking, how does corruption work… how is money stolen from the projects?

Government and project officials can divert funds from projects by:

• Demanding bribes and kickbacks from contractors in exchange for contract awards and other favors. This is the most common method of siphoning funds because it is easy to accomplish, hard to detect and very lucrative: the standard 10% kickback demand on a routine $50 million road rehabilitation project, for example, would yield the dishonest officials $5 million. This is from just one project, and many officials supervise many projects.
• Secretly owning front companies that do business with the project. The profit margins are usually higher than on kickbacks, especially if the secret owners raise prices and cut back on quality, as is often the case. Corrupt officials also can profit by leasing or selling property to the projects, and by using project employees and assets in their front businesses, without, of course, paying for either.
• Converting project funds and assets to the official's own use. These transactions usually are relatively small compared to those described above, and include:
  • embezzling cash from project accounts,
  • converting vehicles and computers to personal use,
  • using project funds to pay for vacations, buy cars or build houses, or
  • selling goods intended for the project, such as medicines, food or construction materials, for personal profit (perhaps through their front companies), and so on.

Contractors can steal from the projects (and recover the cost of their bribes) by:

• Overcharging for goods and services;
• Charging for goods or services that are never delivered;
• Substituting less expensive, lower quality materials for those called for in the contract, or billing lesser-paid employees at higher rates on consulting contracts, etc.

Many more examples are given below.

Where is corruption the worst?

Based on the cases, the most corrupt places on earth appear to be in Africa, the former Soviet Republics, the Indian Subcontinent (Pakistan, India and Bangladesh), and Indonesia. According to the 2004 Perceived Corruption Index, published by Transparency International (TI), a leading international anti-corruption group, the twenty-five most corrupt countries, in order, with Haiti being the worst, were:

• Haiti
• Bangladesh (Most corrupt in 2003 survey)
• Nigeria
• Myanmar
• Chad
• Paraguay
• Azerbaijan
• Turkmenistan
• Tajikistan
• Indonesia

The ten least corrupt countries, in order, with Finland being the best, were:

• Finland (Also least corrupt in 2003 survey)
• New Zealand
• Denmark
• Iceland
• Singapore
• Switzerland
• Norway
• Australia
• Netherlands
• United Kingdom

The US is 18th on the list. The complete list is at Appendix II.

How frequently were bribes paid?

According to a host of sources – contractors, international aid groups and diplomatic missions, former government officials, local NGO's, the local press, and the results of our investigations – in the most corrupt environments (see above), bribes were demanded and paid on virtually every project. African contractors in particular complained about the "System" that made them pay on every contract; several expressed dismay at the naiveté of the aid organizations and their refusal to address the problem. An employee of a US based consulting firm said their only choice was "to pay or to protest" (the award to another).

In less corrupt areas, the frequency of payments differed depending on the type of project, the ministry involved and the level of oversight. Throughout the third world, however, corruption is the norm and must be expected and dealt with on most projects.

What was the typical bribe amount?

The size of bribes varied, of course, and sometimes was subject to negotiation. Most often the payments were a percentage of the contract or benefit desired: usually 5% to 20% to win a contract award, and less for other favors, such as to have invoices paid or permits issued, etc. In many cases the combined payments totaled 30% to 40% of the contract value, sometimes even more. This made it impossible for the bribe payers to complete the contracts according to their specifications without significant price increases or contract amendments. More commonly, project objectives were abandoned as contractors raised prices and cut back on quality to preserve their profits.

In the worst cases (of which, unfortunately, there were many), corruption and fraud consumed virtually all of a project's resources. In Uganda, literally 90% of a $100 million refugee resettlement project was stolen by corrupt officials and contractors. In Nigeria, Ministry officials asked an engineering company to increase its bill from about $37,000 to $640,000 (more than sixteen times), and to kickback 80% of the excess. And in Pakistan, audits revealed that 80% or more of a billion dollar social action program, and 100% of smaller study projects, had been improperly diverted.

For what purposes were bribes paid?

As noted above, corruption infected all stages of the projects, from the preplanning stage to contract award to the payment of invoices. In several cases officials tilted project design towards areas in which it was easier to collect bribes, such as increased consulting work and studies, and away from those where it was more difficult, such as the purchase of necessary scientific equipment.

Bribes also commonly were demanded and paid to be "short listed," to approve contract amendments and extensions, to compromise auditors, to induce site inspectors and supervisors to look the other way, to avoid the cancellation of a contract for poor performance, and so on.

In several cases in Africa, bribes were channeled to the ruling political party to cover campaign and other expenses – inflated road projects being the most popular source for such funds. In Indonesia, bribes were relied on to cover the shortfall in official budgets. Candidates in that country for "wet" government positions (those that offered good opportunities to collect bribes) had to pay for the posts upfront and share the corrupt proceeds with their superiors

Who received the bribes?

As mentioned above, the bribe recipients included project, government and ministry personnel at all levels (even, at the project level, clerical personnel), political parties, government and external auditors, inspectors and construction supervisors, employees of international aid agencies (to influence project design and to obtain necessary approvals), and potential competitors to dissuade them from bidding.

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