What is corruption?

This section examines the different types of corruption which can occur in the infrastructure, construction and engineering sectors.

There is no international legal definition of corruption.

In its narrowest sense, corruption is interpreted as referring to bribery only.

In its wider sense, corruption includes bribery, extortion, fraud, cartels, abuse of power, embezzlement, and money laundering. These activities will normally constitute criminal offences in most jurisdictions although the precise definition of the offence may differ.

The wider definition is preferable as these corrupt acts:

• Are all criminal offences
• Normally involve deception
• Are concealed
• Have illegal profit as their objective
• Often occur together
• Normally result in financial loss/defective quality
• Require similar preventive/detection measures.

The following paragraphs explain these offences in more detail, and give examples.

Bribery

Bribery is a criminal offence in most jurisdictions.

In general terms, bribery is committed where a person (A) offers or gives some benefit to another person (B) as an inducement for that person (B) or another person (C) to act dishonestly. It may also occur where B requests or solicits a benefit from A as an inducement for B or another person (C) to act dishonestly. In such cases, all those persons (A, B and C), as well as other persons who were complicit in the offence, may be guilty of bribery.

Nature of a bribe. A bribe may be a cash payment, or it may be a non-cash advantage (such as the promise of a future contract, or a holiday).

The dishonest activity includes any dishonest act or omission. It may be an act or omission done by someone in relation to his employer’s or principal’s business. For example, a government officer acting on behalf of a government department may, if offered a bribe, dishonestly award a contract.

Institutional bribery refers to a situation where a bribe may be paid or received with the full approval of the organisation which is the employer of the individual paying or receiving the bribe. This may occur, for example, where a contracting company authorises its commercial director to pay a bribe to win a tender.

Personal bribery refers to a situation where a bribe may be paid or received by a representative of an organisation without the approval of that organisation. This may occur, for example, where a government officer receives a bribe to award a contract, where the government department in question would not approve the bribe.

Supply-side bribery refers to those persons or companies who are responsible for offering or paying bribes.

Demand-side bribery refers to those persons or companies who are responsible for demanding or receiving bribes.

Gifts, hospitality, charitable donations and other benefits can amount to bribery if they are given or received with the intention that they will induce someone to act dishonestly.

A "facilitation payment" is the term often used in relation to payments made to officials so as to obtain or expedite services to which the payer is entitled (for example, the obtaining of contract payments which are due, import or work permits, or installation of telephone lines). The amounts which are paid are often quite small, yet the consequences of not paying can be serious. (For example, a contractor may not receive a large part of contract payments due, or a delay in issuing an import permit could delay a project, which could increase the contractor’s costs and cause the contractor to have to pay liquidated damages to the project owner for delay.) In practice, the following distinction is sometimes made between bribes and facilitation payments. A bribe is regarded as being a payment made to someone to act in a way in which he should not act (for example, by wrongly awarding a contract to the bribing party, or wrongly releasing a party from a legal obligation) whereas a facilitation payment is regarded as being a payment (other than the fee required by law) made to a person to do something which he should already be doing (for example, issuing a visa or customs clearance that is properly due).  However, although there may be this distinction, most countries treat the payment and receipt of facilitation payments as a form of bribery.

Examples of bribery. Bribery in relation to an infrastructure project can occur in numerous ways. For example:

• A project owner may bribe a government official in order to obtain planning permission for a project.
• A bidder may bribe the project owner’s designer to design a project in a manner which improperly favours that bidder over other bidders.
• A bidder may pay a bribe to the project owner’s representative to win the contract.
• A contractor may pay a bribe to the project owner’s representative to have defective or non-existent work approved.
• The project owner may pay a bribe to the project engineer in return for the engineer refraining from issuing a payment certificate or an extension of time to a contractor.
• If the parties are in dispute in relation to the construction of the project, one party may bribe a witness, expert, arbitrator or judge in order to give false evidence, or to give a favourable opinion or verdict.
• A maintenance contractor may pay a bribe to a representative of the project owner in return for being awarded a contract to maintain the project during its operation.

For examples of how bribery may occur in the different phases of the project cycle

Extortion

Extortion is a criminal offence in most jurisdictions. It occurs where one party makes threats against another party of adverse consequences unless demands, usually for payment, are met by the other party. The extortion may constitute, for example, refusal to provide customs clearance for equipment or materials, or refusal to make payments or issue certificates that are due. Sometimes the threats may involve threats of physical harm. If the party who is the victim of the extortion provides the payment or other benefit, it will normally become liable for the offence of bribery. However, the party making the extorted payment may have a defence to bribery if the threat was of imminent death or personal injury.  The concepts of extortion and facilitation payments can overlap, and the terms are sometimes used to describe the same occurrence.

Fraud

Fraud is a criminal offence in most jurisdictions. It is sometimes referred to as “deception”. Fraud usually involves one person (or group of persons) deceiving another person in order to gain some financial or other advantage. In the context of an infrastructure project, fraud offences may include:

• Manipulation of pre-qualification or tender requirements so as to favour a particular bidder
• Exaggerating a person's experience on a CV or job application
• Concealment of defects
• Dishonestly levying liquidated damages
• Dishonestly withholding payment
• Dishonestly exaggerating the quantum of a claim
• Fabricating or falsifying evidence to support claims (e.g. by falsifying time sheets or delivery records).

Parties may be liable for the offence of fraud where they deliberately undertake the fraudulent action with full knowledge of the circumstances. Alternatively, it is possible for a party to be liable for fraud if it was reckless as to the circumstances. For example, a company may be liable for fraud if it submits a claim for additional payment which it suspects may be inflated but fails to take reasonable steps to determine that the claim is accurate.   For examples of how fraud may occur in the different phases of the project cycle

Cartels

Cartel activity is a criminal offence in most jurisdictions. It occurs where two or more organisations unlawfully collude in relation to the bidding for contracts or the pricing of equipment, services or materials. These offences are sometimes known as collusion, competition or trust offences.  The underlying principle of these offences is that organisations must be prevented from secretly colluding to raise prices to a higher level than would be the market price if there was genuine open competition. A collaboration between organisations which is lawful and disclosed to the customer (e.g. a joint venture) would not normally be a breach of cartel laws. In the context of an infrastructure project, cartels may include:

• Bidding cartels:  The bidders agree in advance as to which of them will win the tender. There is therefore no genuine competition for the tender.  The winner as a result can submit a higher price.
• Loser’s fee:  The bidders genuinely compete to win a tender.  However, the bidders all agree, without the knowledge or consent of the customer, to include in all of their tenders an additional amount. The winner shares this additional amount between all the losers to compensate them for their bidding costs.
• Price fixing:  Suppliers (e.g. of concrete) agree that they will compete against each other, but will never drop below an agreed price per unit.
• Cover pricing:   A contractor is too busy to undertake a project, but must bid to stay on the customer's tender list. It obtains a competitor’s price in advance and puts in a price higher than the competitor so as to lose.

Abuse of power

Abuse of power is a criminal offence in many jurisdictions. It occurs where a person in public office deliberately or recklessly acts in a way that is contrary to his duty and is in breach of his position of public trust. In the context of an infrastructure project, abuse of power may include a public official:

• Secretly owning a contractor or supplier, and
  • Wrongly making a contract award or payment decision in favour of that contractor or supplier; or
  • Wrongly directing an organisation working on the project to award a contract to or pay that contractor or supplier
• Favouring friends or relatives for appointments or contracts (nepotism or “cronyism”)
• Victimising or intimidating staff so that they make decisions which support the official’s view.

The above abuses by the government official may either be as a result of a deliberate corrupt decision, or because the conflict of interest affects his impartial judgment.

Embezzlement

Embezzlement is the term sometimes used to describe the wrongful appropriation of funds which you have a duty to safeguard.  For example, a public official who diverts public funds to his private bank account, or an accounts clerk who sets up phantom employees on the company's payroll and pays these employees' salaries into his own bank account.  It is a type of theft which normally involves an element of fraud, and should be distinguished from the type of theft which involves e.g. breaking into a person's house and stealing some contents.

Money-laundering

Money-laundering is a criminal offence in most jurisdictions. It occurs where a party moves cash or assets obtained by criminal activity from one location to another. For example, a company submits a fraudulent claim to a project owner for work which it did not carry out. The project owner pays the fraudulently obtained sum into the company’s bank account with Bank A. If the company then moves the payment to Bank B, this may constitute the offence of money-laundering. Money-laundering is often used to conceal the criminal source of funds.

The relationship between the above offences

In many cases, the above offences overlap, and many corrupt transactions may result in the commission of several offences.

Bribery normally involves a degree of fraud. A bribe paid to win a project will normally be concealed by some fraudulent act (e.g. false documentation) with the aim that the project appears from the outside to have been won on a genuine arms-length basis.

Fraud (e.g. submission of false claims) does not necessarily involve bribery. However, many acts of fraud may need an act of bribery in order to complete the fraud. For example, a contractor may submit a false claim to a project owner (which is fraud) and may then bribe the project owner's supervisor to approve the claim (which is bribery). Alternatively, a project owner may wish fraudulently to withhold payment from a contractor and may bribe a third party certifier to certify falsely that liquidated damages or costs for rectification of defects are payable by the contractor.

Cartels may be prohibited by a separate type of criminal offence, but may also be prosecutable as fraud (as the customer is being deceived to believe that there is genuine competition between the bidders).

Any act of bribery or fraud by a public official will normally also constitute an abuse of power.

Embezzlement will normally involve an element of fraud, and may be an abuse of power.

Any movement through the banking system of the proceeds of a bribe, extortion, fraudulent act, cartel, abuse of power or embezzlement will normally constitute money laundering (as the proceeds of a crime are being moved).

Although bribery normally receives a higher public profile, the financial wastage in a project due to fraudulent practices such as claims inflation is often higher than that attributable to bribery.

Other related offences

Corruption offences may also involve breaches of tax and accounting laws and stock market regulations. For example, a bribe wrongly shown in the accounts as an agency commission for legitimate services would constitute a false accounting entry which may be in breach of accounting laws and stock market regulations and may also constitute other types of criminal offence. Deduction of a bribe against tax may also constitute a breach of tax law. Prosecutors may find it easier to prosecute under accounting or tax laws rather than bribery laws as proof may be easier. Thus, a wide range of people may be caught in both the initial offence (such as bribery or submission of fraudulent claims), which may involve site and commercial staff, and in subsequent offences, which may involve accounting and legal staff.