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Corruption: A PandemicCorruption: A Pandemic

May 2006May 2006

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General Impact of CorruptionGeneral Impact of CorruptionGeneral Impact of CorruptionGeneral Impact of Corruption

• Escalating poverty levels • Corrodes economic development • Undermines legitimacy of the public

service • Damages reputation and investment

potential of a country• Destabilizes democracy and governments • Increases serious crime

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Project impact of corruptionProject impact of corruptionProject impact of corruptionProject impact of corruption

• Service

• Quality

• Pricing

• Impact

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Kofi Annan Speaking To General Kofi Annan Speaking To General AssemblyAssemblyKofi Annan Speaking To General Kofi Annan Speaking To General AssemblyAssembly

“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”

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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 What is actually in the school buildingbuildingWhat is actually in the school What is actually in the school buildingbuilding

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KATRINAKATRINAKATRINAKATRINA

Fraud Rampant

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MDB Investment Approach-MDB Investment Approach-VulnerabilitiesVulnerabilitiesMDB Investment Approach-MDB Investment Approach-VulnerabilitiesVulnerabilities

k

LenderLender Member Gov’tMember Gov’t

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 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 “Kickback”-Centerpiece of corruption scheme is the “Kickback”-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 -Cash payments, wire transfers disguised to leave no footprintsfootprints-Appearance of legitimate relationship between actors-Appearance of legitimate relationship between actors-Conspiracy of silence exists—further complicating detection-Conspiracy of silence exists—further complicating detection

““Broker”/Broker”/””commissioner”commissioner”

Legitimate RelationshipIllicit Relationship

Kickback SchemeKickback SchemeKickback SchemeKickback Scheme

Subcontractors

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A Government Funding Source

$ $$

$

““Broker” asBroker” asProject AdvisorProject Advisor Contractor Inc.

$

-Middleman can appear in more than one location and there -Middleman can appear in more than one location and there may be multiple middlemen operatingmay be multiple middlemen operating-Lack of audit capability running to subcontractors makes it -Lack of audit capability running to subcontractors makes it difficult to decipher legitimate from illegitimate difficult to decipher legitimate from illegitimate relationshipsrelationships Legitimate Relationship

Illicit Relationship

Kickback SchemeKickback SchemeKickback SchemeKickback Scheme

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MDB case which shows middleman working with MDB case which shows middleman working with numerous contractors on large infrastructure numerous contractors on large infrastructure projectproject

MDB case which shows middleman working with MDB case which shows middleman working with numerous contractors on large infrastructure numerous contractors on large infrastructure projectproject

Subcontractor“middle man”

PIU DIRECTOR

$

$

$

$

$

$

$

$

$

consultant

consultant 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 history-Company appears with no history-Company providing diverse disconnected -Company providing diverse disconnected servicesservices-Few records exist on ownership-Few records exist on ownership-Extreme interest shown by PIU official in -Extreme interest shown by PIU official in companycompany-Subcontractor who is hired as local agent-Subcontractor who is hired as local agent

Front CompanyFront 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 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 RiggingBid Rigging

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Example: Forged DocumentsExample: Forged DocumentsExample: Forged DocumentsExample: Forged Documents

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Common Fraud by Local Project Common Fraud by Local Project OfficialsOfficialsCommon Fraud by Local Project Common Fraud by Local Project OfficialsOfficials

Common frauds by local project officials include:– Diverting project assets – from computers to

automobiles to heavy road grading equipment – to private use. Even such petty abuses can seriously disrupt a project: four-wheel drive vehicles stripped of tires, batteries and other parts become unavailable for visits to project sites, leading to deterioration and delays in the project

– Unnecessary or padded foreign travel for supposed meetings with suppliers, study tours or training;

– Creating "ghost employees" and fictitious expenses and diverting the payments.

– Leasing warehouses, equipment, or "office space" to the project or contractors.

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PIU CONTRACTOR INC.

Procurement Consultant

Off Shore Company

Subcontractor

Subcontractor

$ $$

$

$

$ $

$

Grand CorruptionGrand Corruption

Legitimate RelationshipIllicit Relationship

Combination SchemeCombination SchemeKickback, Conflict, Front Company, Bid RiggingKickback, Conflict, Front Company, Bid RiggingCombination SchemeCombination SchemeKickback, Conflict, Front Company, Bid RiggingKickback, Conflict, Front Company, Bid Rigging

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Is there Corruption in my ProjectIs there Corruption in my ProjectIs there Corruption in my ProjectIs there Corruption in my Project

• Vulnerabilities Matrix• Various Indicators that can be

Measured as various points in the Project Cycle

• Problem is:– What do you do if you have

corruption?– Mandatory Reporting-then what?

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RemediesRemediesRemediesRemedies

• Classical Responses– Enforcement: How to make it more

effective?• What can be done pre-investment ?• During Implementation

– New optics• Post Investment

– Lessons Learned

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Enforcement

(Investigations)

Country Assistance Strategy

Identification

**Preparation**

Appraisal

Negotiations and Board Approval

**Implementation and

Supervision**Implementatio

n and CompletionEvaluation

Where

Corruption

Can

Occur

Project Life Project Life Cycle Cycle

AnalysisAnalysisVulnerabilitie

s

Current ModelCurrent ModelCurrent ModelCurrent Model

Lesson Silo/Impact

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Proposed Corruption Detection Proposed Corruption Detection MethodMethod

Proposed Corruption Detection Proposed Corruption Detection MethodMethod

Country Assistance Strategy

Identification

**Preparation**

Appraisal

Negotiations and Board Approval

**Implementation and

Supervision**Implementatio

n and Completion

Evaluation

Forensic Audits

Corruption Assessment

Where

Corruption

Can

Occur

Project Life Project Life Cycle Cycle

AnalysisAnalysis

Enforcement

(Investigations)

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Feeding the Lessons Back into the Feeding the Lessons Back into the ProjectProject

Feeding the Lessons Back into the Feeding the Lessons Back into the ProjectProject

Country Assistance Strategy

Identification

**Preparation**

Appraisal

Negotiations and Board Approval

**Implementation and

Supervision**Implementatio

n and Completion

Evaluation

Forensic Audits

New Policy and Control

Changes

Where

Corruption

Can

Occur

Project Life Project Life Cycle Cycle

Enforcement

(Investigations)

Corruption Resource

Center

Lessons Learned

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What can be done pre-What can be done pre-investment?investment?

What can be done pre-What can be done pre-investment?investment?

The Corruption Assessment

Borrowing From the Playbook of Private Investment Bank

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Corruption AssessmentCorruption AssessmentCorruption AssessmentCorruption Assessment

Examine reputations, associations, activities and ethics of potential fund

recipients and their contractors (companies and their key officers).

Identify undisclosed liabilities or questionable financial reporting.

Verify Business Continuity.

Clarify the nature of relationships between government officials and

contractors.

Establish a tickler system to review due diligence after project commences.

Search and interrogate all Anti-Money Laundering (AML)/Prohibited Lists and

Debarment Lists.

Conflicts of interest between recipients and contractors.

Existing allegations of fraudulent & corrupt practices.

Prohibited and restricted lists

Check for undisclosed business interests and obtain financial disclosures

Full database background research including media searches, legal and

corporate records.

Interviews & Reference Checks.Detailed Background Checks

Conduct detailed research into potential Fund

Administratorss.

Full database background research.

Conduct detailed research potential Contractors.

Interviews & Reference Checks.

Contractors’ existing allegations of fraudulent & corrupt practices.

Fund Recipients Contractors

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Diligence USA, LLCDiligence USA, LLC 1211 Connecticut Ave1211 Connecticut Ave66thth Floor FloorWashington, DC 20036Washington, DC 20036

(202) 719-1700(202) 719-1700

www.diligencellc.comwww.diligencellc.comGware@diligencellc.comGware@diligencellc.com