Eliminating Corruption in Our Engineering/ Downloaded from ascelibrary.org by 46.3.197.68 on 01/03/18. Copyright ASCE. For personal use only; all rights reserved. Construction Industry MAARTEN DE JONG; WILLIAM P. HENRY, P.E.; AND NEILL STANSBURY ABSTRACT: The public works/engineering/construction sector has been identified as the most corrupt sector in the world. For a long time the industry had no concerted plan to attack the problem, but in the late 1990s several events happened that have given rise to the industry s most far-reaching effort to address corruption. Efforts are underway by world governments, engineering/construction organizations, and individuals to combat corruption and conduct business in an honest, transparent, and fair manner. In this article we discuss the magnitude of corruption in the industry, describe the most common types of corruption, identify actions being taken to eliminate corruption in the industry, and explain what individuals can do to address the problem. We are all proud of our engineering/construction industry s role in shaping our world. Our water and wastewater systems have done more to improve public health than all the hospitals in the world. Our roads and bridges, railroads, transit systems, airports, and ports move people to and from their houses and jobs, and move goods from producers to consumers. The buildings we produce provide houses, stores, manufacturing, energy refineries, power plants, education schools, and health care hospitals. Life as we know it would not exist without engineers, constructors, material suppliers, equipment suppliers, lenders, and owners who plan, design, construct, operate and maintain our built environment. Yet, despite all of the good that the engineering/ construction industry has done, our industry still receives notoriety for corruption. The public works/engineering/ construction sector has been identified as the most corrupt in the world Transparency International 2008. For a long time, the industry had no concerted plan to attack the problem. Some governments had enacted legislation to outlaw overseas bribery the Foreign Corrupt Practices Act in the United Statesisanexample butenforcementhadbeenspotty.however,inthelate-1990sseveraleventshappenedthatgaveriseto Leadership and Management in Engineering 105 J ULY 2009
theindustry smostfar-reachingefforttoaddresscorruption. Inthispaper, we: Identify the magnitude of the problem; Define and give examples of the most common types of corruption; Identify some major players in the engineering/ construction industry who are taking action to eliminate corruption in the industry; Explain what individuals can do to address the problem; and Explore available data regarding how successful the efforts are. It is our intent for everyone in the engineering/construction industrytounderstandthat: Corruption exists; Corruption is a serious problem; Illegal and unethical activities have been carried out by the full spectrum of parties to construction work; The forms of corruption are varied; Corrupt acts occur when two or more people make bad decisions; and The cost of corruption goes beyond money corruption kills. MAGNITUDE OF THE PROBLEM Indeed, anticorruption is a movement whose time has come. According to an estimate by the World Bank Institute, the cost of corruption represents five percent of the world economy or more than $1.5 trillion a year World Bank Institute 2004. With all the situations needing attention in our world, it is vital that we understand the magnitude of corruption in the engineering/construction industry to assess the priority we should place on eliminating it. To do that, we need to understand the size of our industry and the negative impact of corruption. How big is our industry worldwide? The size is measured in trillions of dollars and is about one-third the size of the U.S. economy. It is larger than Japan s economy and nearly twice the size of Germany s economy. The industry is truly big business. No one knows the true cost of corruption. However, an estimate for the industry s loss to corruption is 10 percent or $500 billion per year. To put that number in perspective, think back to when the U.S. Congress passed the new Transportation Bill, SAFETEA-LU. After more than a year of debate, the bill covered $286 billion over six years, or $47.7 billion per year. So, globally, the engineering/construction industry losses to corruption could be over eight times the amount of money the U.S. government spends on transportation annually. These numbers show that corruption is of a magnitude that simply cannot be ignored. Numbers tell part of the story, but not all of it. Emerging trends are also major considerations. Two forecasts have strong implications for the potential for corruption in the future. The first forecast is that by 2015 six years from now 80 percent of the money spent on infrastructure in the world will be spent in developing countries. According to the United Nations, two-thirds of the major cities in the world will be in those developing countries by 2020. What does this level of activity in the developing countries tell us? The first thing that comes to mind is that those countries do not have the engineering planning and design, construction and materials, and equipment supply firms needed to produce that volume of work. So, we can expect to see global consortia being formed for projects. New firms will work in these countries, and new working relationships will be forged. Each area will have its own way of doing business, and there will be lots to learn about how things are done. These kinds of uncertainties offer great potential for corrupt actions. The second thing that comes to mind is that there is often a high level of corruption in developing countries in all business activities not just the engineering/construction industry. Transparency International, the world s largest nongovernmental anticorruption organization, with chapters in 90 countries, regularly publishes a Corruption Perceptions Index which rates the perceived level of corruption in countries. The developing countries consistently rate lowest, which indicates a high likelihood of corruption. When you look at the magnitude of the engineering/ construction industry, the funds potentially lost to corruption, and the forecasts of where major activities will be, you get a picture that can be interpreted as a possible growth scenario for corruption in the industry. Corruption is currently a major problem with the potential to get much worse. CORRUPTION KILLS Although the above figures illustrate the enormity of the financial loss caused by corruption, they do not illustrate the human cost. By diverting resources from inoculation programs, medicines, hospitals, and water and food supply projects, people die from preventable disease and hunger. In addition, corruption results in projects that are built to unsafe designs or that use dangerous construction methods, equipment, or materials. Quite simply, corruption kills. Corruption kills not only because money intended for the poor ends up in the pockets of corrupt officials, but because the bribes set in motion a chain of harmful events the selection of unqualified contractors; the gross inflation of costs; the failure to complete work; the delivery of substandard goods, or too often, of nothing at all that hamper development and add to unproductive debt. In fact, corruption and its J ULY 2009 106 Leadership and Management in Engineering
progeny of fraud, waste, abuse, and neglect are now widely acknowledged to be the single greatest impediment to the development of impoverished countries. JUST WHAT IS CORRUPTION? Corruption, according to Webster s Dictionary, is the impairment of integrity, virtue, or moral principle. It can also be an inducement to do wrong by improper or unlawful means. In the engineering/construction industry, corruption can take several forms depending on who is involved: Government official, Owner, Funder, Engineer, Constructor, Material supplier, Equipment supplier, Lender, and Regulatory/permitting agency. One point to always keep in mind: corruption takes two individuals agreeing to act together in a corrupt manner. Corruption occurs when individuals make bad decisions. The engineering/construction industry has many forms of corruption. The main ones are kickbacks and bribery, front companies, bid rigging and collusion, fraud, and conflicts of interest. Government and project officials can divert funds from projects by demanding kickbacks from contractors in exchange for the award of a contract, the payment of invoices, or the approval of contract amendments or other services. This is the most common way to steal because it is easy to accomplish, hard to detect, and very lucrative. For example, a 10 percent kickback demand on a $50 million road rehabilitation project would yield $5 million untaxed. And this is from just one project; many corrupt officials manage many projects. It is not uncommon for corrupt project staff or owners to secretly set up front companies that do business with the project, usually at inflated prices for poor quality services. At times, project staff convert project funds and assets directly to their own use. These transactions are relatively small compared to those described above, and include such unimaginative but remunerative offenses as: Embezzling funds directly from project accounts; Converting vehicles and computers to personal use; using project funds to pay for vacations, buy cars, or build houses; or Selling goods intended for the project, such as medicines, food, or construction materials, for personal profit perhaps through their front companies, and so on. Corrupt contractors can defraud projects to recover the costs of their bribes and inflate profits by overcharging for goods and services, charging for goods and services that are never delivered, substituting less expensive and lower quality materials for those called for in the contract, or billing lesserpaid employees at higher rates on consulting contracts. Kickbacks and bribery are the two sides of the same corruptive coin. Kickbacks known also as extortion are asked for by someone in a position of power from someone seeking a favorable decision by the person in power. Bribes are offered to a decision maker by someone seeking a favorable decision. Kickbacks can be sought by owners from engineers or constructors, by engineers from potential subcontractors, by constructors from potential subcontractors or material suppliers, by material or equipment suppliers from potential subcontractors, or by regulatory/permitting agencies from engineers, constructors, materials or equipment suppliers. Bribes occur in the opposite direction. Kickbacks and bribes result in funds earmarked for projects going into the pockets of individuals. When kickbacks and bribes replace quality in selection processes, project quality and reliability are lowered. The end result is that the people who need and are relying on the project will be the ones who suffer. The flow of kickback or bribe funds can be quite complex. Cash payments leave no trail for auditors. International bank transfers can be difficult to trace. In some countries, it is impossible to establish ownership of bank accounts or assets. Forged documents may be used to create seemingly legitimate paper trails. In some cases, middlemen are used to facilitate the transfer of funds. It is often difficult to decipher legitimate business relationships with middlemen from illegitimate ones. One overarching attribute of kickback/bribery schemes is a strong conspiracy of silence among the participants. For all these reasons, kickback/bribery schemes have flourished for centuries, and continue to do so today. Front companies are often newly established entities. They do not show a history of successful work. Often, they will offer diverse, disconnected services. The above could also describe a legitimate joint venture company formed for a project. One big difference between the front company and the legitimate joint venture lies in the ownership records. The front company has few records of ownership; the joint venture is fully transparent on ownership. The reason for few ownership records is that the owners do not want to be known. They may be high-ranking government officials who would receive profits from the front company. Owners could also be officials in the project implementation unit who will have a voice in awarding work to the front company. A front company often acts as the local agent for a project, not as one of the key producers of the work. Bid rigging and collusion are other corrupt activities that can take a variety of forms. Owners personnel can participate by setting very short bid periods so only firms they have notified illegally about the upcoming bid have sufficient time to prepare a sound bid. Owners personnel can also Leadership and Management in Engineering 107 J ULY 2009
exclude qualified firms from bid lists and only allow favored firms to compete. Contractors may engage in collusion by making agreements on who will get each of a series of projects. In this way, the designated winner can submit an artificially high bid, while the others submit even higher ones. There can also be collusion between owner s and contractor s personnel. For example, a favored contractor may be asked to submit an artificially low bid to assure that it will get the project. During the course of the work, the owner s staff will allow contract modifications and change orders that raise the contractor s revenue, lower the contractor s cost, or both. Bid rigging and collusion may also be part of larger corruption schemes. Finally, all types of conflicts of interest are forms of corruption. Conflicts of interest can range from per se conflicts where a person has a direct personal stake in the outcome to more camouflaged ones where friends and/or family members receive the unwarranted rewards. The way to minimize conflicts of interest is to require disclosures of all real and potential conflicts by all parties owners, potential contractors engineers or constructors, suppliers, and lenders to a project prior to the start of procurement activities. During the progress of a project, or a series of projects, there are often red flags that may indicate corruption: Recurring use of one company prime contractor, subcontractor, supplier, agent ; A close, personal nonbusiness relationship among project parties; The terms of reference in contracts are vague or incomplete; Firms use false qualifications or show resumes of qualified people but use other less-qualified staff on the project; Different firms use the same address or phone number; A firm does business using a variety of names; and One firm does many diverse tasks. Corruption exists. We can take the tack that that s the way the world is or we can act now and act together to eliminate corruption in our industry. The choice is ours! CURRENT ACTIONS Many members of the engineering/construction industry have decided to act. A big step is to improve the openness and transparency of the decision-making processes from procurement to performance of the work by all parties involved in a project owner; engineers, both lead and subcontractors; constructors, both prime and subcontractors; material and equipment suppliers; funders; lenders; and regulators. The key members of the engineering/construction industry who have current action programs are governments who may be owners or regulators, engineers, constructors, lenders, evaluators, and professional organizations. Governments Governments around the world are tightening their legislation against corruption. Examples include the United Nations Convention against Corruption; the Organization for Economic Cooperation and Development OECD Convention on Combating Bribery; the Inter-American Convention against Corruption; two Council of Europe Conventions on Corruption; two European Union Conventions; the African Union Convention on Preventing and Combating Corruption; and the Asian Development Bank ADB /OECD Anti Corruption Action Plan for Asia and the Pacific. The most significant convention, due to both its scope and geographic reach, is the United Nations Convention which has been signed by 140 countries. It came into force in December 2005 and requires: The development, implementation, or maintenance of effective, coordinated anticorruption policies; The establishment of transparent, competitive, and objective procurement systems and public finance procedures; The criminalization of bribery, trading in influence, embezzlement, abuse of power, illicit enrichment, money laundering, and false accounting applicable to both public and private sector ; The establishment of independent and adequately resourced entities to fight corruption; and International cooperation and extradition. In order to comply with the obligations imposed by these conventions, many countries had to change their antibribery laws. In particular, all OECD countries were required by the OECD Convention to ensure that their laws made it a crime, prosecutable in the home country, for their companies and nationals to pay a bribe overseas. All OECD countries have now changed their law in this regard. Previously, an individual who paid a bribe overseas may have been confident that they would never be prosecuted. The country in which the bribe was paid may have had an ineffective prosecution system, and the individual s home country may have had no jurisdiction over an act that took place overseas. Now that has changed. A person may be prosecuted both in the country in which the bribe is paid, and in their home country. International antimoney-laundering regulations have been tightened, and bank secrecy laws have been relaxed. As a result, there is an increased likelihood that the payers and recipients of corrupt payments will be identified. In addition, convention obligations require countries to cooperate in the identification and recovery of corruptly obtained assets. Many governments are also aware that effective anticorruption action needs more than merely signing a convention or changing the law. In July 2005, the world s eight largest economies issued a G8 communiqué which committed the G8 nations to Reduce bribery by the private sector by rig- J ULY 2009 108 Leadership and Management in Engineering
orously enforcing laws against the bribery of foreign public officials, including prosecuting those engaged in bribery; strengthening antibribery requirements for those applying for export credits and credit guarantees, and continuing our support for peer review, in line with the OECD Convention; encouraging companies to adopt antibribery compliance programs and report solicitations of bribery; and by committing to cooperate with African governments to ensure the prosecution of those engaged in bribery and bribe solicitation. Prosecution authorities in OECD countries are now conducting a significant number of investigations under the new laws into alleged corrupt behavior. Although this has resulted in few prosecutions, the number is expected to increase as a result of improved reporting and increased international cooperation. Debarment is becoming a more widely used government tool. It is a system under which companies or individuals who are found guilty of corruption are prevented from participating in future projects owned or funded by the debarring organization. Many governments operate a debarment system. For example, as a result of the European Union Procurement Directives 2004, all European Union member states were required, by January 31, 2006, to ensure that their laws provided for mandatory exclusion of a company from public sector and utility contracts if the company, or its directors, or any other person who has powers of representation, decision, or control of the company, have been convicted of corruption, bribery, fraud, money laundering, cartels, and specified other offences. In May 2006, an OECD antibribery working group, which comprises the export credit agencies of all OECD countries, issued its Action Statement on Bribery and Officially Supported Export Credits. This requires all OECD export credit agencies to enhance their anticorruption actions. Among the actions are requirements that export credit agencies: Encourage applicants for export credits to develop, apply, and document appropriate antibribery management control systems; Require applicants to provide undertakings that neither they, nor anyone acting on their behalf, has engaged, or will engage in bribery; Verify whether applicants appear on a multilateral development bank debarment list, or are being investigated, or have been convicted of bribery; Require disclosure of agents and their commissions; and Obtain recourse from an applicant in the event of bribery. Organizations The consulting engineering community has also been active in developing and implementing anticorruption programs. The International Federation of Consulting Engineers FIDIC has developed Guidelines for Business Integrity Management in the Consulting Industry. These guidelines show how to develop an integrity management system based on uniform, transparent, and accountable practices in a firm. The constructors have also taken bold steps against corruption. The World Economic Forum WEF Partnering against Corruption Initiative PACI was established by the construction section of WEF, and has expanded to include natural resources development firms. Over 130 major international companies from the construction and engineering, oil and gas, and mining and mineral sectors, with combined annual revenues in excess of US$500 billion, and from over 35 countries, have committed not to tolerate bribery, and to implement effective anticorruption procedures. The major international lenders have also been active in developing and implementing anticorruption programs. In February 2006, the African Development Bank, Asian Development Bank, Inter-American Development Bank, European Investment Bank, European Bank for Reconstruction and Development, the International Monetary Fund, and the World Bank agreed to standardize their definition of corruption, to improve the consistency of their investigative rules and procedures, to strengthen information sharing, and to assure that compliance and enforcement actions taken by one institution are supported by all others. They also agreed to work together to develop concrete proposals to assist countries in strengthening their capacity to combat corruption, and to improve cooperation with civil society and other stakeholders and institutions with the goal of enhancing transparency and accountability. In addition, all multilateral development banks operate debarment systems. The best known is that of the World Bank, which has a large corruption investigation department, and which publishes a list of debarred individuals and organizations on its Web site. The World Bank has also developed its Voluntary Disclosure Program. This is a program that allows firms that have been involved in corrupt activities to confidentially describe their activities in detail in exchange for lack of debarment. The program is in its infancy, but holds promise as a tool to combat corruption. Our engineering/construction industry has drawn the attention of organizations that evaluate how decisions are made in countries. Transparency International TI is the leading evaluator of our industry and has developed the Business Principles for Countering Bribery and its accompanying guidelines, implementation plan, and verification module. Transparency International also publishes its Corruption Perceptions Index and Bribe Payers Index, and works with others to improve the efforts of all against corruption. For example, TI, the United Nations Global Compact 10th Principle, the International Chamber of Commerce s Commission on Anticorruption, and the World Economic Fo- Leadership and Management in Engineering 109 J ULY 2009
rum s Partnering against Corruption Initiative have agreed to coordinate their efforts to disseminate good practice and guidance materials and to support each others implementation and compliance tools. The Global Infrastructure Anticorruption Centre GI- ACC was launched in May 2008. It publishes the GIACC Resource Centre, which is a Web resource that provides free access to information, advice and tools designed to help stakeholders understand, prevent and identify corruption in the infrastructure, construction and engineering sectors. Since launch, the Resource Centre has been visited by organizations from over 125 countries. www.giaccentre.org. GIACC also has published the Project Anticorruption System PACS, which is a modular system designed specifically for construction projects. These modules include anticorruption commitments, independent monitoring, due diligence, transparency, and training. Individuals We have discussed what companies and institutions are doing to address corruption in the engineering/construction industry. Recognizing that individuals making bad decisions is the root cause of the problem, the engineering societies around the world, whose members are individuals, not firms, are also acting to fight corruption. Several organizations have developed model codes of conduct and guidance to assist individual engineers improve their understanding of ethical practices and the damage and risks of corruption, and to enhance their disciplinary procedures. The United Kingdom Institution of Civil Engineers has published a revised Code of Professional Conduct and accompanying Advice on Ethical Conduct, which deal expressly with the issue of corruption. The American Society of Civil Engineers has worked as the secretariat for more than 100 engineering societies globally to develop and distribute Combating Corruption in Engineering and Construction An Engineer s Charter. This document prohibits corruption by engineers, and the signatory organizations pledge they will work with other international organizations to eradicate corruption. ASCE has also amended their Code of Ethics, specifically Cannon 6 which states that: Engineers shall act in such a manner as to uphold and enhance the honor, integrity, and dignity of the engineering profession and shall act with zerotolerance for bribery, fraud, and corruption. Canon 6 also calls for engineers to: Not knowingly engage in business or professional practices of a fraudulent, dishonest, or unethical nature; Be scrupulously honest in their control and spending of monies, and promote effective use of resources through open, honest, and impartial service with fidelity to the public, employers, associates, and clients; Act with zero-tolerance for bribery, fraud, and corruption in all engineering or construction activities in which they are engaged; Be especially vigilant in maintaining appropriate ethical behavior where payments of gratuities are institutionalized practices; Strive for transparency in the procurement and execution of projects, including disclosure of names, addresses, purposes, and fees or commissions paid for all agents facilitating projects; and Encourage the use of certifications specifying zerotolerance for bribery, fraud, and corruption in all contracts. This language is much more specific in addressing the role of the individual engineer when confronted with bribery, fraud, and corruption in our engineering/construction industry. It is now accepted that cooperative action is essential if corruption is to be prevented. Tackling corruption is not a competitive issue. Everyone apart from the corrupt will benefit if corruption is eradicated. A level playing field will be achieved, and companies will be able to compete and to perform free from the risks, unfairness, and uncertainties which corruption imposes. Several cooperative initiatives have been established. The World Federation of Engineering Organizations brings together national engineering organizations from more than 90 nations and represents some 15,000,000 engineers from around the world. It has established an international Anticorruption Standing Committee, with members from each continent, to agree on appropriate anticorruption actions. The United Kingdom Anticorruption Forum is an alliance of business associations, professional institutions, and organizations in the United Kingdom with interests in the domestic and international infrastructure, construction, and engineering sectors. It was founded in October 2004. Its members include the Association for Consultancy and Engineering, British Expertise, Chartered Institute of Building, Chartered Institute of Purchasing and Supply, Engineers Against Poverty, Institution of Civil Engineers, Institution of Mechanical Engineers, Institution of Structural Engineers, Royal Institution of Chartered Surveyors, and Transparency International U.K.. These associations represent over 1,000 companies and 350,000 industry professionals. The Forum also includes numerous large, medium, and small companies as active members. The purpose of the Forum is to promote industry-led actions which can help eliminate corruption. In September 2005, the Forum published its Anticorruption Action Statement, which calls on all those with interests in the infrastructure, construction, and engineering sectors to take effective and coordinated action to reduce corruption, on J ULY 2009 110 Leadership and Management in Engineering
both a domestic and international basis, and on both the supply and demand sides. CURRENT STATUS Each member of the engineering/construction industry can take positive steps to reduce corruption. We must all recognize that ignoring corruption is the same as condoning it. A simple, five-part program will start positive action: 1. Educate all those working in the profession on the true cost of corruption in their country; 2. Shine a bright spotlight on corrupt activities wherever you see them; 3. Make it socially unacceptable to be involved in corruption; 4. Encourage organizations to implement anticorruption management measures in their organizations and on their projects; and 5. Educate the next generation of engineers, constructors, owners, government leaders, material and equipment suppliers, and lenders on the true cost of corruption. Despite the positive and significant changes that are occurring, there is still major corruption in many countries. The main problem is that many politicians and government officials in both developed and developing countries are themselves corrupt. They control the decision-making process, and, frequently, the prosecution authorities and courts. They grant themselves immunity against prosecution. They can, therefore, enrich themselves with impunity. Many other leaders who are not corrupt take insufficient action to prevent corruption. It is difficult to achieve change at a working level when leaders are corrupt, and little action is taken to prosecute, or recover stolen assets. Junior officials, who are frequently underpaid, supplement their income with minor facilitation payments, and see little reason to change when their leaders are stealing the income which could have increased their wages. However, in the engineering/construction industry, real change is taking place, and there is no going back. It is essential that all in the industry continue to lead change, and to put pressure on governments, banks, and other participants to play their part. The aim is twofold: 1 to achieve a level playing field where business can be undertaken in an honest, transparent, and fair manner; and 2 to ensure that, in the engineering/construction industry, corruption does not kill. REFERENCES Transparency International. 2008. Transparency International bribe payers index, 2008. http://www.trans parency.org/policy_research/surveys_indices/bpi/bpi_ 2008. World Bank Institute. 2004. http://web.worldbank. org/wbsite/external/wbi/extwbigovant COR/0,,contentMDK:20787588~menuPK:1857785~ pagepk:64168445~pipk:64168309~thesitepk:17405 30,00.html. MaartendeJongisthedirectorofEthicsandBusiness Integrity Services in The Netherlands. He can be reached by e-mail at marten.dejong@ebi-services.nl. William P. Henry is a retired water resources engineer in Sequin, Wash. He is a past president of ASCE and past chairoftheamericanassociationofengineeringsocieties. He is a member of the anticorruption standing committee of the World Federation of Engineering Organizations and cochair of the Asian Civil Engineering CoordinatingCouncilanticorruptioncommittee.Hecan be reached by e-mail at whenrype@wavecable.com. Neill Stansbury is the co-coordinator of the U.K. Anticorruption Forum. He can be reached by e-mail at neill.stansbury@giaccentre.org. LME Leadership and Management in Engineering 111 J ULY 2009