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1
Corruption: A PandemicCorruption: A Pandemic
May 2006May 2006
2
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
3
Project impact of corruptionProject impact of corruptionProject impact of corruptionProject impact of corruption
• Service
• Quality
• Pricing
• Impact
4
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
6
Actual School 500 Feet AwayActual School 500 Feet Away
7
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
8
KATRINAKATRINAKATRINAKATRINA
Fraud Rampant
9
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
10
• 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
11
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
13
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
14
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
16
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
17
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.
20
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
21
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?
22
RemediesRemediesRemediesRemedies
• Classical Responses– Enforcement: How to make it more
effective?• What can be done pre-investment ?• During Implementation
– New optics• Post Investment
– Lessons Learned
23
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
24
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)
25
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
26
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
27
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@[email protected]