anatomy of transnational corruption - world bank · the anatomy of transnational corruptionthe...
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The Anatomy of Transnational CorruptionThe Anatomy of Transnational CorruptionThe Anatomy of Transnational Corruption
“Corruption is an insidious plague that has a wide range of coercive effects on societies…
It undermines democracy and the rule of law, leads to violations of human rights, distorts markets, erodes the quality of life, and allows organized crime, terrorism and other threats to human security to flourish”
- Kofi Annan, Speaking to U.N General Assembly
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What is actually in the school buildingWhat is actually in the school buildingWhat is actually in the school building
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Recent Case Samples: Big and SmallRecent Case Samples: Big and SmallRecent Case Samples: Big and Small
• UN Oil for Food Investigation– $1.8bn in kickbacks and surcharges– 270 names recovered from Oil Ministry– 2000 companies implicated
• Titan– Largest FCPA fine in history (Approx. U.S. $30m by SEC)– Paid $2m in “agent” fees to consultant who was aid to then President of
Benin to assist Titan in Telecom project– False books and records– Payment to Staff of IBRD
• Mayor Long Branch NJ– Paul Zambrano, the former Mayor of West Long Branch, NJ, entered a
guilty plea to accepting a bribe, Zambrano admitted that, as mayor in West Long Branch, he accepted cash payments totaling $15,000 from undercover FBI to helpi obtain public contracts in West Long Branch
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MDB Investment Approach-VulnerabilitiesMDB Investment ApproachMDB Investment Approach--VulnerabilitiesVulnerabilities
k
LenderLender Member Member GovGov’’tt
LineLineMinistryMinistry
P.I.U.P.I.U.k k k
TMTMSupervises Implementation of MDB Loan
Good and ServicesGood and Services
$ Loan$ Loan
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• Bribes and kickbacks• Front companies• Bid rigging or collusive agreements• Use of “loan brokers”/”commissioners”• Conflicts of interest• Theft from local accounts and abuse of
project assets• Fraud/Forgery/Misrepresentation
Types of Corruption ObservedTypes of Corruption ObservedTypes of Corruption Observed
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Government Funding Source
Government Funding Source
Contractor Inc.Contractor Inc.A.K.A. “local rep”
$ $$
$
$
--Centerpiece of corruption scheme is the Centerpiece of corruption scheme is the ““KickbackKickback””--Normally in conjunction with other schemes (e.g. bid rigging)Normally in conjunction with other schemes (e.g. bid rigging)--Cash payments, wire transfers disguised to leave no footprintsCash payments, wire transfers disguised to leave no footprints--Appearance of legitimate relationship between actorsAppearance of legitimate relationship between actors--Conspiracy of silence existsConspiracy of silence exists——further complicating detectionfurther complicating detection
““BrokerBroker””//””commissionercommissioner””
Legitimate RelationshipIllicit Relationship
Kickback SchemeKickback SchemeKickback Scheme
Subcontractors
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Can act as agents for corrupt company officers and government officials
• Can operate behind shell companies toextort money from contractorsset up front companies for officials (subcontractor)help rig the award of contracts
• Brokers/Commissioners take their cut and forward project officials cut
• Some are hired as project advisers
Loan Brokers/Loan Brokers/Loan Brokers/
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A Government Funding Source
$ $$
$
““BrokerBroker”” asasProject AdvisorProject Advisor Contractor Inc.
$
--Middleman can appear in more than one location and there may be Middleman can appear in more than one location and there may be multiple middlemen operatingmultiple middlemen operating--Lack of audit capability running to subcontractors makes it diffLack of audit capability running to subcontractors makes it difficult icult to decipher legitimate from illegitimate relationshipsto decipher legitimate from illegitimate relationships
Legitimate RelationshipIllicit Relationship
Kickback SchemeKickback SchemeKickback Scheme
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MDB case which shows middleman working with numerous contractors on large infrastructure projectMDB case which shows middleman working with MDB case which shows middleman working with numerous contractors on large infrastructure projectnumerous contractors on large infrastructure project
Subcontractor“middle man”
PIU DIRECTOR
$
$
$
$
$
$
$
$
$
consultantconsultant contractor
contractor
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Actual kickback receipt insisted on by a contractor who became fed up with paying kickbacks on projectsSIGNED BY PIU OFFICIAL-Convicted June 9, 2004
Kickback ReceiptKickback Receipt
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PIU CONTRACTOR INC.
Owners
Owners
Owners
Hidden owner-Government official
Hidden owner-Government official
Corporate Shield
--Company appears with no historyCompany appears with no history--Company providing diverse disconnected servicesCompany providing diverse disconnected services--Few records exist on ownershipFew records exist on ownership--Extreme interest shown by PIU official in companyExtreme interest shown by PIU official in company--Subcontractor who is hired as local agentSubcontractor who is hired as local agent
Front CompanyFront CompanyFront Company
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PIU
CONTRACTOR INC. Employee,
relative, friend
-Conflicts appear in many ways—having a personal stake in the outcome of a contract is a per se conflict-PIU officials, friends, relatives, family members involved w/ contract-Corruption may co-exist with conflict-If appearance of conflict, make disclosure early before questions arise
Conflict of InterestConflict of InterestConflict of Interest
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Bid Rigging & Collusion• Drafting tailored specifications to exclude
unfavored bidders• Tipping off the favored bidder that certain
components in bid will not actually be called for• Telling bidders to bid low and recover profit
later through contract modification• Short notice periods for bidding - “emergencies”• Bidders agree who will win contract• Component of larger corruption scheme
Bid RiggingBid RiggingBid Rigging
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PIU CONTRACTOR INC.
Procurement Consultant
Off Shore Company
Subcontractor
Subcontractor$ $
$
$
$
$ $
$
Grand CorruptionGrand Corruption
Legitimate RelationshipIllicit Relationship
Combination SchemeKickback, Conflict, Front Company, Bid RiggingCombination SchemeCombination SchemeKickback, Conflict, Front Company, Bid RiggingKickback, Conflict, Front Company, Bid Rigging
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How Corruption has Manifested Itself in Global Development Projects:
A Case Study Illustrating TF Corruption
Trust Fund CorruptionTrust Fund CorruptionTrust Fund Corruption
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What happened:• MDB staff were issuing consulting contracts,
using CTFs, to designated consulting companies in exchange for kickbacks
• Consulting companies often performed marginal work
• Trust Fund Co-financing officer would alert task leaders to existence of funds in a particular CTF
• Task leaders would apply for funds and receive preferential treatment on their applications for TFs
Consultant Trust Fund CasesConsultant Trust Fund CasesConsultant Trust Fund Cases
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• Recurring use of one consulting company• Close personal relationship between consulting
companies and MDB Staff• Vague, incomplete and nonexistent TORs• Consultants used false qualifications and ghost
employees• Shared addresses/phone numbers among consulting
firms• Use of multiple company names for same consultants• Use of consulting company for diverse tasks
• e.g. postal reform study, set up conference, financial management, procurement consulting, supervision
What was Found After Launching Inquiry (Red Flags)What was Found After Launching Inquiry What was Found After Launching Inquiry (Red Flags)(Red Flags)
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*IllustrativeLegitimate RelationshipIllicit Relationship
TF Officer #1
Task Manager Task Manager
Debarred Entities Debarred Entities
BS #1
MDB staff #3MDB Staff #2
Consultant ConsultingCompany
ConsultingCompany
ConsultingCompany
ConsultingCompanyConsultant
Trust Fund Corruption*Trust Fund Corruption*Trust Fund Corruption*
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Legitimate RelationshipIllicit Relationship *Illustrative
PROJECT DIRECTOR
Co B & PRINCIPLE
Co A. & Co. B.A JV
Co A.
Offshore Co
$100
,000
Kic
kbac
k
$280,000 Kickback
MDB S #3
TM
MDB S #1
Project Corruption*Project Corruption*Project Corruption*
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Legitimate Relationship *IllustrativeIllicit Relationship
Co AMDB S #2
13 TOTAL ENTITIES
TF Officer
#1
TM TM
PROJECT DIRECTOR
Co B. & PRINCIPLE
Co. A & Co B. JV
Offshore Co
MDB S #1
$100
,000
Ki
ckba
ck$127,000 Kickback
Debarred Entities
Employee
Debarred Entities
BS #1
BS #3
$280,000 KickbackConsultant ConsultingCompany
ConsultingCompany
ConsultingCompany
ConsultingCompanyConsultant
Project CorruptionProject CorruptionProject CorruptionTrust Fund CorruptionTrust Fund Trust Fund CorruptionCorruption
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Financial Times, February 7, 2001
Donors freeze funding to MDBDonors freeze funding to MDBDonors freeze funding to MDB
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The DOJ published convictions in Trust Fund CasesThe DOJ published convictions in Trust The DOJ published convictions in Trust Fund CasesFund Cases
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• Keen interest by officials in certain contractors or subcontractors and efforts by officials to bend or break procurement rules to favor these companies
• Bidding irregularities - e.g. unnecessarily narrow specifications, unjustified disqualification, contract awards just under review limits
• Unusual or unexplained (or poor explanations for) delays in the selection of bidders or contract signings
• Abuse of the contract amendment process
• Proposed Sub-Contractors who provide few or no legitimate services
• Poor Quality or Delayed Implementation
Important Red Flags
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• Officials live beyond their means
• New or unknown companies appear as suppliers or subcontractors
• Trading or “investment” companies appear as suppliers or subcontractors
• Unusually high prices for standard items
• Payments go to accounts in secrecy jurisdictions (e.g. Switzerland, Liechtenstein, Cyprus, Dubai, Hong Kong, Nauru…)
• Reputation in the community as corrupt
Important Red Flags
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• Be aware of the Red Flags• Enforce rules and controls• Exercise “professional skepticism” (if something does not
seem right-it probably isn’t)• Don’t Rely on Appearances: Look behind the paperwork and
beneath the surface• Assume corrupt parties know “the system”• Train staff on how to recognize and deal with fraud and
corruption• Reward staff who identify fraud or corruption• Communicate concerns to appropriate officials
Countermeasures
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What can be done pre-investment?What can be done preWhat can be done pre--investment?investment?
The Corruption Assessment
Borrowing From the Playbook of Private Investment Bank
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Corruption AssessmentCorruption AssessmentCorruption Assessment• Examine reputations, associations, activities and ethics of
potential fund recipients and their local partners (companies and their key officers).
• Identify undisclosed liabilities or questionable financial reporting.• Verify Business Continuity/Disaster Recovery Plans.• Clarify the nature of relationships between government officials
and contractors.• Search and interrogate all Anti-Money Laundering
(AML)/Prohibited Lists and Debarment lists.• Review partner organizations’ AML controls and Ethical
Guidelines. • Establish a tickler system to review due diligence after project
commences.
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Conduct detailed research into Potential Fund Recipients & Local Partners:• Detailed Background Checks• Interviews & Reference Checks—Contact local Chambers of Commerce and banks.• Full database background research including media searches, legal and corporate
recordsDetailed research to yield information on:
• Recipients • Fraudulent or Corrupt practices? • Existing allegations of corruption?• Payments of bribes to obtain contracts, licenses, permits, etc?• Major Shareholders
• Local Partners• Who are they?• Fraudulent or Corrupt practices?• Reputation in local community?• Political connections?
• Conflicts of interest between recipients and their partners and local government officials.
Corruption AssessmentCorruption AssessmentCorruption Assessment
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Conduct detailed research into Environmental, Country Risk and Social Impact:• Fraudulent & Corrupt practices
• What is the country environment towards corruption?• Are payments of bribes necessary to obtain contracts, licenses, permits, etc?
• Environment• Stable political environment?• Human Rights violations?• Natural catastrophe exposures?• Territorial exposures?
• Conflicts between investor and local government officials• Country risk assessment
• Determine if partner organization and country participate in anti-corruption program.• Assess the myriad of regulatory, political, legal, intellectual and criminal risks of doing
business in a particular country. • Full database background research conducted on all countries of interest:
• Media searches • Legal records • Corporate records
Corruption Assessment:Corruption Assessment:Corruption Assessment:
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