Corruption: A Pandemic May 2006

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Corruption A PandemicMay 2006
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General 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 corruption

• Service
• Quality
• Pricing
• Impact

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Kofi Annan Speaking To General Assembly

• 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 School
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Actual School 500 Feet Away
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What is actually in the school building
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KATRINA

• Fraud Rampant

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MDB Investment Approach-Vulnerabilities
Lender
Member Govt
Loan
Line Ministry
TM
Supervises Implementation of MDB Loan
P.I.U.
k
k
k
k
Good and Services
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Types of Corruption Observed

• 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

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Kickback Scheme




Subcontractors
Broker/ commissioner

A.K.A. local rep
-Centerpiece of corruption scheme is the
Kickback -Normally in conjunction with other
schemes (e.g. bid rigging) -Cash payments, wire
transfers disguised to leave no
footprints -Appearance of legitimate relationship
between actors -Conspiracy of silence
existsfurther complicating detection
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Kickback Scheme

-Middleman can appear in more than one location
and there may be multiple middlemen
operating -Lack of audit capability running to
subcontractors makes it difficult to decipher
legitimate from illegitimate relationships
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MDB case which shows middleman working with
numerous contractors on large infrastructure
project
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Kickback Receipt
Actual kickback receipt insisted on by a
contractor who became fed up with paying
kickbacks on projects SIGNED BY PIU
OFFICIAL-Convicted June 9, 2004
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Front Company
-Company appears with no history -Company
providing diverse disconnected services -Few
records exist on ownership -Extreme interest
shown by PIU official in company -Subcontractor
who is hired as local agent
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Conflict of Interest
-Conflicts appear in many wayshaving 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
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Bid Rigging

• 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

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Example Forged Documents
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Common Fraud by Local Project Officials

• 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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Combination SchemeKickback, Conflict, Front
Company, Bid Rigging
Grand Corruption





Subcontractor
Procurement Consultant

Subcontractor

Off Shore Company

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Is 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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Remedies

• 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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Current Model
Project Life Cycle Analysis
Country Assistance Strategy
Identification
Vulnerabilities
Preparation
Where Corruption Can Occur
Appraisal
Negotiations and Board Approval
Enforcement (Investigations)
Implementation and Supervision
Implementation and Completion
Lesson Silo/ Impact
Evaluation
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Proposed Corruption Detection Method
Project Life Cycle Analysis
Country Assistance Strategy
Corruption Assessment
Identification
Preparation
Forensic Audits
Where Corruption Can Occur
Appraisal
Negotiations and Board Approval
Enforcement (Investigations)
Implementation and Supervision
Implementation and Completion
Evaluation
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Feeding the Lessons Back into the Project
Project Life Cycle
Country Assistance Strategy
New Policy and Control Changes
Identification
Preparation
Forensic Audits
Where Corruption Can Occur
Appraisal
Negotiations and Board Approval
Enforcement (Investigations)
Implementation and Supervision
Corruption Resource Center
Implementation and Completion
Lessons Learned
Evaluation
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What can be done pre-investment?

• The Corruption Assessment
• Borrowing From the Playbook of Private Investment
  Bank

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Corruption Assessment
Fund Recipients
Contractors
Conflicts of interest between recipients and
contractors.
Conduct detailed research into potential Fund
Administratorss.
Conduct detailed research potential Contractors.
Clarify the nature of relationships between
government officials and contractors.
Check for undisclosed business interests and
obtain financial disclosures
Interviews Reference Checks.
Examine reputations, associations, activities and
ethics of potential fund recipients and their
contractors (companies and their key officers).
Detailed Background Checks
Interviews Reference Checks.
Verify Business Continuity.
Existing allegations of fraudulent corrupt
practices.
Contractors existing allegations of fraudulent
corrupt practices.
Prohibited and restricted lists
Search and interrogate all Anti-Money Laundering
(AML)/Prohibited Lists and Debarment Lists.
Full database background research.
Full database background research including media
searches, legal and corporate records.
Identify undisclosed liabilities or questionable
financial reporting.
Establish a tickler system to review due
diligence after project commences.
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