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Why avoid corruption?

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Why avoid corruption?

This section examines why corruption should be avoided in the infrastructure, construction and engineering sectors.

Corruption should be avoided for the following reasons:

  • The risk of criminal prosecution;
  • The risk of financial loss;
  • The moral argument

The order of priority of the above will depend on the personal values of an individual.

As explained in What is corruption, The term "corruption" in the wider sense to include bribery, extortion, fraud, deception, collusion, cartels, abuse of power, embezzlement, trading in influence and money laundering.   Consequently, the discussion in this section applies to all such criminal activity.

Risk of criminal prosecution

A real risk. Until relatively recently, there has been little risk of prosecution for corruption in the infrastructure, construction and engineering sectors. However, due to a number of factors, individuals and companies are facing an increasing risk of prosecution. These factors are as follows:

  • Increased awareness. There is growing awareness of the scale of corruption in these sectors and of both the social and commercial damage that this is causing.
  • Increased pressure. There is as a result increased pressure to take steps to eliminate this corruption. Civil society, aid organisations, multi-lateral development banks, governments and the industry itself are all responsible for this increased pressure.
  • Better laws and an increased risk of prosecution. Such pressure has resulted in the passing and ratification of a number of 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 domestic and overseas bribery of public officials and also to ensure that those laws are enforced.
  • 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.
  • Serious penalties. The penalties for corruption offences can be severe. In most jurisdictions, such penalties for individuals may include several years' imprisonment and heavy fines. For companies, the criminal penalty will normally be a substantial fine.
  • Company directors and employees. Corruption now presents a real risk of harsh punishment for both senior and junior officers and employees.

Risk of financial loss

Serious financial loss. As it becomes more acknowledged that corruption must be prevented and penalised, so governments, funders, project owners, competitors, and employers will become less tolerant of corruption. There is, therefore, an increasing tendency for these parties to adopt stronger measures against corruption. Such measures can have a significant financial impact and may include:

  • Debarment of companies because of corruption involvement. Several organisations, such as multi-lateral development banks, have adopted debarment policies whereby a company 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. Whilst aid organisations and other lenders may not yet have official debarment policies, it is becoming increasingly unlikely that they would allow companies which have been convicted of corruption or debarred by multi-lateral development banks, to participate in projects which they are funding. In addition, some public sector project owners are now required by law to debar convicted companies from participating in their projects. For example, the European Union Procurement Directives require compulsory exclusion of a company from all EU public sector contracts if the company, or any of its senior managers, have been convicted of a corruption offence.
  • Exclusion of companies from projects because of unsuitability. Funders and project owners are increasingly carrying out better due diligence in order to determine the risk of corruption of including certain companies in projects, even if they have had no conviction for corruption. Thus, for example, companies which have not adopted adequate anti-corruption measures may be considered unsuitable to tender.
  • 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 party 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 corrupt party).
  • Reputational damage for companies. The increasing attention given to corruption issues and the growing desire for ethical investment means that companies 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 company 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. Companies are paying increasing attention to their own reputation and consequently to corporate social responsibility, and are therefore increasingly unlikely to employ an individual who has been involved in corruption.
  • Dismissal of individuals from employment. The growing trend of anti-corruption requirements by governments, funders and project owners has the effect that employers must now be seen to be imposing stricter disciplinary measures against employees who have been involved in corruption. It is becoming more common for an officer or employee of a company to be dismissed from employment because of involvement in corruption. A company may prefer to lose an employee rather than damage its business.
  • Disciplinary action against individual members by professional associations. Professional associations 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.

It is becoming increasingly likely for such companies to take legal action to recover their losses. Such proceedings may be taken against both the corrupt company and the individuals involved in the corruption. These proceedings can be costly in terms of lawyers' and consultants' fees, lost management time and emotional stress.

The moral argument

Corruption in relation to public sector projects usually involves bribery and/or fraud being perpetrated against a government body. It is, therefore, the taxpayer that ultimately pays for this corruption. This can occur in a number of ways:

  • Needless, unviable or over-designed projects. The most blatant type of corruption occurs where a project is 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 government 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.
  • 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 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 again be borne by the public.
  • Contracts awarded and claims approved in the hope of future or indirect gain. The corrupt awarding of contracts and corrupt approval of fraudulent claims may take a more insidious form. Large bribes may not necessarily change hands directly. Favours may consist of a discreet assurance of future employment once a government official leaves office. Such favours may be promised in exchange for preferential award of planning permissions or contracts, or for ensuring that inflated contract prices or claims are left unchallenged.
  • 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 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 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.

Corruption in the private sector 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 immediate adverse effect on the cost and 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 ordinary population. 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. This will leave the market even further open to corruption which will then inevitably affect other sectors. It is unlikely that there will be significant corruption in the private sector without such corruption impacting on, or spreading to, the public sector.