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Anatomy of Anatomy of TransnationalTransnational Corruption Corruption

February 2006February 2006

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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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MDB Financed Rural SchoolMDB Financed Rural School

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Actual School 500 Feet AwayActual School 500 Feet Away

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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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KATRINAKATRINAKATRINA

Fraud Rampant

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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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Example: Forged DocumentsExample: Forged DocumentsExample: Forged Documents

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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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Outcomes of InvestigationOutcomes of InvestigationOutcomes of Investigation

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Suspension of FinancingSuspension of FinancingSuspension of Financing

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Financial Times, February 7, 2001

Donors freeze funding to MDBDonors freeze funding to MDBDonors freeze funding to MDB

30Washington Times, December 2000

MDB Staff FiredMDB Staff FiredMDB Staff Fired

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Criminal ConvictionsCriminal ConvictionsCriminal Convictions

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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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