Annex A
Report Four by Transparency International
(UK): Anti-corruption Initiative in the Construction and Engineering
Industry
INTRODUCTION
1. TI(UK) has published a series of Reports
and Business Tools as part of its Anti-corruption Initiative
in the Construction and Engineering Industry. These Reports
and Business Tools can be freely downloaded from TI(UK)'s web-site
at www.fransparency.org.uk
2. This document, "Corrupt Practices
on Construction Projects—The Business Risk to Banks, Export
Credit Agencies, Auditors and Shareholders", gives an
example of a major construction project which is procured by a
bribe paid by the companies building the project, and the contract
for which is terminated by the client for illegality once the
bribe is discovered. The resultant business risks to the banks
and export credit agencies involved in the project, and to the
companies' shareholders and auditors, are then assessed. Actions
are proposed which may assist these parties minimise these risks.
3. References in this document to "C&E
companies" are references to construction and engineering
companies, and to consulting engineering firms.
EXAMPLE OF
A PROJECT
WHICH IS
PROCURED BY
A BRIBE,
AND THE
CONTRACT FOR
WHICH IS
TERMINATED FOR
ILLEGALITY
4. (The following example is hypothetical.
However, it utilises genuine market practices and conditions,
and the analysis of the example can easily be applied to real
experiences.)
5. An international consortium submits a
proposal to a government in a developing country to build, own
and operate a power station. There is no competitive bid involved.
The proposal is submitted upon the initiative of the consortium.
6. The consortium comprises among its members:
— a company which owns and operates
power stations in other countries;
— a company which manufactures and
erects power generation equipment;
— a contractor which undertakes civil
and building works.
7. The proposal to the government is based
on the following parameters:
— A company would be formed which would
be the owner of the power station ("Owner"). The shareholders
in the Owner would be the four members of the consortium, together
with some additional outside investors.
— A company would be formed which would
design, supply, erect and commission the power station ("Contractor").
The shareholders in the Contractor would be the power generation
equipment manufacturer and the civil and building works contractor.
— The Owner would sign a contract with
the power utility in the developing country which would require
the utility to purchase all electricity which the power station
is capable of generating for a fixed fee per kwh.
— The government of the developing
country would guarantee the utility's purchase obligations under
the power purchase agreement.
— The Owner would place a contract
with the Contractor to design, supply, erect and commission the
power station.
— The Owner would finance the construction
of the power station by the following means:
— 30% of the cost would be contributed
by equity invested into the Owner by the shareholders in the Owner.
— 70% of the cost would be borrowed
from banks.
— The bank borrowing would be secured
by an export credit guarantee issued by the export credit agencies
in the home countries of the power generation equipment manufacturer
and the civil and building works contractor.
8. The government is receptive to this proposal.
However, the Minister of Energy will not approve the proposal
without a bribe of US$30 million being paid by the consortium
into an offshore bank account. All four consortium members agree
that this bribe should be paid. They agree that the bribe will
be included in the construction cost of the project, and will
be paid by the Contractor through an agent who will act as an
intermediary in paying the bribe.
9. The construction cost of the power station
is US$200 million. This is significantly higher than it should
be for the following reasons:
— The bribe of US$30 million is included
in the price.
— The power generation equipment manufacturer
and the civil and building works contractor are each required
to contribute US$ million of equity into the Owner. They are unwilling
to carry this investment risk, as they are contractors, not investors.
Therefore they include an additional US$10 million in the construction
price to cover their equity investment
— The project is not subject to competitive
bid. Therefore, the prices charged by the contractors are significantly
higher than they would be with a competitive bid.
— In order to make the project financeable
by the banks, the Contractor is required to assume more onerous
completion and performance guarantees than it would normally accept.
It therefore includes a provision for part of these guarantees
in its price.
— The export credit premium is 8% of
the 70% of the contract price which is being financed by the banks.
Therefore, the premium will be charged not only on 70% of the
genuine construction component, but also on 70% of the bribe,
and on 70% of the amount included by the contractors in the price
in respect of equity and provisions.
10. The operating cost of the power station
will be significantly higher than it should be for the following
reasons:
— The interest rate charged by the
banks on the loan is higher than it would be for ordinary sovereign
debt, as the banks have taken into account the greater risks involved
in a private sector project.
— The construction cost is higher than
it should be, and therefore the interest charges are calculated
on a higher base cost.
— The equity investors require a higher
rate of return on their investment than a government utility would
expect to receive.
11. The Owner is to recover its construction
and operating costs through its charge to the utility for each
kwh of power available for generation. The higher costs which
need to be recovered will result inevitably in a higher cost per
kwh than would have otherwise been the case.
12. The projected high cost per kwh does
not pose a problem to the Minister of Energy, as he will receive
a bribe of US$30 million upon commencement of construction of
the project, whereas the charge per kwh which will need to be
paid by the utility for electricity available for generation will
only be paid upon completion of the power station. This will be
three years after commencement of the project. The Minister may
not be in office at that stage. In any event, the money will have
been paid to him into a secret offshore bank account.
13. The Minister arranges the necessary
Government approvals for the project, and arranges for the utility
to sign the power purchase agreement, and for the Government to
sign the guarantee. In doing so, he needs to share the bribe with
various other officials.
14. It is agreed by the consortium members
that the bribe will be paid by the Contractor, and that the cost
will be included in the contract price. The bribe is concealed
by the use of an agency agreement. This agreement attempts to
give a commercial justification for the appointment of the agent,
in that it lists the tasks which he will allegedly perform, including
provision of local office, secretarial and translation services
etc. It places an obligation on the agent to "assist the
contractor in obtaining an award of the contract" but makes
no mention of the agent's contacts in the Ministry. It contains
termination and arbitration clauses. It refers to the amount and
the currency of the commission, and the timing of the payment,
but does not refer to its destination. Instead, it places an obligation
on the agent to notes the contractor in writing as to where the
payment should be made. In reality, the agent will provide none
of these services. His sole role will be to receive payment from
the consortium and to pass it onto the Minister. The senior management
of all parties involved in the consortium are aware of this arrangement,
and are aware that the agency agreement is a sham created to give
an artificial commercial justification for the bribe.
15. The project commences. The bribe is
paid by the Contractor to the agent in US$ into an off-shore bank
account The agent passes the payment onto the Minister after deduction
of the agent's share. The Minister pays the other officials their
share.
16. The project is completed, and the power
station becomes available to produce electricity.
17. By the time the project is completed,
the government in the developing country has changed. The Minister
is replaced. The new government has been elected on an anti-corruption
platform. Rumours have circulated for some time about possible
corruption in connection, with the power station. The new government
appoints forensic investigators to assess the project. The investigators'
preliminary report states that the cost per kwh which is payable
under the power purchase agreement is nearly double the generation
cost of equivalent power stations in other countries. A police
raid on the ex-Minister's house discovers records which show that
he holds off-shore bank accounts. The government applies under
new anti-money laundering regulations for court disclosure orders
against the bank, and traces the history of the payment from the
Minister's account to the agent's account to the Contractor's
account.
18. The utility terminates the power purchase
agreement on the basis that it was procured by a bribe, and was
therefore voidable on the grounds of illegality. As such, the
utility had no obligation to purchase any power from the power
station. The government terminates the guarantee on the same basis.
The power station therefore lies dormant.
19. The terms of the loans required interest
payments to the banks to commence once the power station had been
completed. The Owner is receiving no revenue from the power station,
and therefore cannot pay such interest. The banks therefore call
in the receivers who take over the management of the Owner. The
receivers negotiate with the utility that the utility will purchase
the power at a market rate which is half the previously committed
rate. The power station starts generating.
20. The Minister of Energy and other recipients
of the bribe are arrested in the developing country, and are found
guilty of receiving bribes. They are imprisoned for between three
and seven years. Some of the bribe money is located in offshore
banks accounts, frozen, and then recovered by the developing country.
However, much of the bribe money has been spent or dissipated,
and is, in practical terms, irrecoverable.
21. The government in the developing country
commences criminal proceedings against the four consortium members
who initiated the project. The court decides that all four consortium
members were either aware that the US$30 million was paid as a
bribe, or knew that it probably would be paid as a bribe. It declares
the agency agreement a sham of which the sole purpose was to provide
an artificial commercial justification for the bribe. Although
the agency agreement had been signed and the bribe paid by the
Contractor, which was a separate legal entity, the court finds
that all four consortium members are implicated in the transaction
as aiders and abettors, or co-conspirators. The court fines each
consortium member US$1 million. It also declares all profit and
overhead recovery derived by each consortium member from the project
as proceeds of a crime, and therefore confiscates these amounts,
which totalled US$25 million, under the locally applicable anti-money
laundering regulations.
22. As a result of the evidence produced
at the criminal trial of the consortium members, it is decided
to prosecute the individual directors of the consortium members
who are implicated in the transaction. These include the chief
executive officers, finance directors and commercial directors
of each of the consortium members. These individuals therefore
refuse to travel to the developing country so as to avoid prosecution.
There is no effective extradition treaty between the developing
country and the home countries of the individuals. The prosecution
authorities in the home countries of these individuals therefore
decide to prosecute them in their home countries, as the law in
each of these countries has changed, as a result of the OECD anti-bribery
convention, to permit prosecution in the home country for bribery
even when all aspects of the offence have taken place overseas.
The individuals are convicted in their home countries, and are
imprisoned for periods of between one and seven years.
23. As a result of the convictions, the
individuals are disqualified as directors, and lose their jobs.
They are struck off as members of their professional associations.
24. As the Owner, in receivership, has re-negotiated
the power purchase agreement to result in a tariff of half the
previously agreed amount, the Owner can no longer repay the banks
the full amount of the debt and accrued interest owed to the banks.
The banks calculate their loss in net present value terms at US$50
million. The banks look initially for indemnity from the export
credit agencies. However, the agencies refuse indemnity on the
basis that the underlying contract had been procured by an illegal
act, and the export credit cover had been offered on the basis
of warranties from the applicant that no bribes would be paid.
25. The banks therefore sue the consortium
members for recovery of US$50 million, on the basis that their
criminal actions in paying a bribe had led to the banks suffering
the loss. They use the evidence produced in the criminal trials
as the basis of the civil case. The banks win the court action,
and the consortium members are required to indemnify the banks
to the extent of US$50 million, plus legal costs. The consortium
members cannot afford this level of damages, and the banks accept
US$30 million paid over a period of years in full settlement.
26. As a result of the criminal convictions
for bribery, each of the four consortium members is blacklisted
from all internationally financed projects for a period of three
years. This results in an enormous loss of potential future business
for the four consortium members. As a result, they cut back considerably
on their staff.
27. The combination of the criminal convictions,
confiscation of profits, civil damages, blacklisting and imprisonment
of directors results in a 75% drop in value of the share prices
of two of the consortium members, and the receivership of the
other two. They are all public companies, the shares of which
are predominantly held by pension and investment funds. These
funds seek to recover their losses from the auditors, on the basis
that the auditors failed to exercise proper due diligence, in
that the US$30 million payment to the agent was so material that
it should have been investigated by the auditors, and that reasonable
enquiries by the auditors would have discovered that the agency
agreement which shielded the payment was probably a sham. The
auditors settle the action for a lower amount without admitting
liability, as they did not wish a legal precedent to be set in
this respect.
28. The result is that everyone loses:
— the consortium members are blacklisted
for three years from internationally financed projects;
— two of the four consortium members
go into receivership;
— two of the consortium members lose
75% of their value;
— the outside investors in the Owner
lose their investment which is taken over by the banks;
— the banks have to settle for a lower
payment than their actual loss;
— the auditors have to pay compensation
to shareholders in the consortium members;
— the shareholders in the consortium
members accept a settlement from the auditors of less than their
actual loss;
— the developing country eventually
receives power at a reasonable price, but has a long period during
which the power station is not generating while the dispute is
resolved, and therefore loses development opportunity;
— as a result of the negative publicity
surrounding the project, the developing country has difficulty
financing other projects, and the scandal undermines political
stability;
— some directors are imprisoned;
— the recipients of the bribe are imprisoned;
— all those involved suffer considerable
reputational risk.
29. The above analysis assumes that the
export credit agencies are able to avoid liability to the banks
on the basis that the underlying contract had been procured by
an illegal act. However, it may be that the terms of the indemnity
by the export credit agencies to the banks require the export
credit agencies to indemnify the banks even in this situation.
In this case, the banks would be indemnified by the export credit
agencies, and the export credit agencies would bear the resultant
losses attributed to the banks in the above example. The losses
may therefore be borne by the tax payers in the home countries
of the export credit agencies, as export credit agencies are normally
guaranteed by the home country's government.
30. The possibility of criminal liability
for members of the staff of the banks and export credit agencies
needs also to be considered. It is so widely known that agency
agreements are commonly used to conceal bribes that banks and
export credit agencies are on notice of this situation. Failure
to undertake adequate due diligence in this regard could expose
banks, export credit agencies and individual managers and officers
to the accusation that they were aiding and abetting bribery by
permitting the bribe to-be covered by the project finance and
export credit guarantees.
ASSESSMENT OF
THE RISKS
Is the above scenario possible?
31. The above scenario is clearly possible.
Numerous private sector infrastructure projects have been, or
are being, built around the world. Several of these have had suspicions
of corruption reported in the press. Bribery is common in international
infrastructure projects. The structure described above would share
common factors with many projects.
32. Although the above example involves
a build-own-operate project, similar (although less complex) parameters
would apply to a project procured through more standard methods,
where the end user is the project owner.
33. See TI(UK)'s "Report Two—Examples
of Corrupt Practices" (www.transparency.org.uk) for 15
further examples of corruption on construction and engineering
projects.
Can a contract be terminated if a bribe has been
paid?
34. Whether a contract can be terminated
when a bribe has been paid would normally depend on the laws of
the country in which the project is being built, and the governing
law of the contract. However, many jurisdictions have the legal
concept that a contract which has been procured through an illegal
act (which would normally include a bribe) is either void from
commencement, or can be terminated by the aggrieved party, who
would then be entitled to claim damages. This is true both of
legal systems in developing countries, and under English and other
laws typically chosen to govern such contracts. Many contracts
also contain an express clause entitling termination in the event
of a bribe.
35. Therefore, if a client places a contract
with a C&E company and a bribe is paid in connection with
the contract award, the client would probably be entitled to terminate
the contract and claim damages. Even if the bribe was paid to
a representative of the client, the representative, by committing
a criminal act, would probably be acting outside the scope of
his authority from the client. The consequences of his criminal
act would probably not be binding on the client.
Can the C&E company who has paid a bribe be
liable for the cost consequences of the contract being terminated?
36. Whether a C&E company who has paid
a bribe can be liable for the cost consequences of the contract
being terminated would depend on the applicable law and on the
terms of the contract. However, it is likely that most legal jurisdictions
and contracts would require a party which has undertaken an illegal
act to compensate the affected parties for their resultant loss.
This loss could be extremely significant, and could include the
losses to the client, joint venture and consortium partners, sub-contractors,
banks and investors.
Can a C&E company be liable for a bribe paid
by the C&E company's agent?
37. It is quite common, particularly on
large international infrastructure projects, for a C&E company
to appoint a local agent. The agent will normally be paid a commission
if the C&E company is awarded the project. The whole or part
of the commission is often used to bribe an influential person
working for the client or the government of the client's country,
so as to secure the award of the project to the C&E company.
In some cases, the agent is appointed by the C&E company primarily
to pay a bribe. It is paid a sum of money which is significantly
disproportionate to the legitimate scope of work which the agent
is contracted to carry out. Often this money is paid in foreign
currency into an off-shore bank account. There would be other
circumstances, however, where the C&E company would appoint
an agent with the genuine intention that the agent only carry
out legitimate services. In this case, the agent may still pay
a bribe in connection with the C&E company's scope of work,
but without the C&E company's knowledge, and against the C&E
company's wishes.
38. Civil liability would depend on the
applicable law in question, and on the terms of the contract.
However, a contract is often either void, or can be terminated,
in the event that a bribe has been paid in relation to the contract
award. Therefore, if an agent pays a bribe to a representative
of the client, and the client terminates the contract as a result
of the bribe, and/or claims damages, then the contractor may be
liable for the consequences, even if it had no knowledge of the
bribe.
Can a C&E company be liable for a bribe paid
by the C&E company's joint venture or consortium partner?
39. In situations where individual companies
do not have the expertise or financial strength to construct the
entire project, companies may form a consortium or joint venture
to construct the project. In this situation, one of the consortium
or joint venture partners may pay a bribe to a representative
of the client on behalf of all the partners. This decision may
be taken with the consent of all the partners, and the cost of
the bribe may be concealed in one partner's scope of work, or
may be reimbursed to the paying partner by the other partners
by means of a leadership or other fee. In other cases, the decision
to bribe may be made by one partner without the knowledge of the
other partners, and against the wishes of the other partners.
40. As far as civil liability is concerned,
the partners in a joint venture or consortium are normally jointly
and severally liable under the contract to the client. The outcome
would depend on the applicable law in question and on the terms
of the contract. A contract is often either void, or can be terminated,
in the event that a bribe has been paid in relation to the contract
award. Therefore, if a joint venture or consortium partner pays
a bribe to the client, and the client terminates the contract
as a result of the bribe, and/or claims damages, then all the
joint venture or consortium partners may be liable to the client
for the consequences, even if they had no knowledge of the bribe.
Can a C&E company be liable for a bribe paid
by the C&E company's sub-contractor?
41. It is unlikely in most situations that
a sub-contractor to a C&E company would pay a bribe to a representative
of the client in relation to the award by the client of a contract
to the C&E company. However, this would be possible in the
case of a major sub-contract, where the likelihood of the sub-contractor
obtaining the work from the C&E company depends on the client
awarding the contract to the C&E company. In some cases, the
C&E company and its sub-contractor may agree that the bribe
will be paid by the sub-contractor, and would be included in the
sub-contract price. The intention may be that the bribe would
be better concealed in the books of the sub-contractor than in
the books of the C&E company. In other cases, the sub-contractor
may pay the bribe without the knowledge of the C&E company,
and against the wishes of the C&E company.
42. As far as civil liability is concerned,
the C&E company is normally liable under the contract to the
client for. the acts of its sub-contractors. The outcome would
depend on the applicable law in question and on the terms of the
contract. A contract is often either void, or can be terminated,
in the event that a bribe has been paid in relation to the contract
award. Therefore, if a sub-contractor pays a bribe to the client
in relation to the contract award, and the client terminates the
contract as a result of the bribe, and/or claims damages, then
the C&E company may be liable to the client for the consequences,
even if it had no knowledge of the bribe.
If the above termination scenario is possible,
why is it not occurring more frequently?
43. There are many reasons why the above
scenario (a contract procured with a bribe being terminated for
illegality) is not occurring more frequently. Until fairly recently,
corruption was accepted by both developing and developed countries
as the status quo. For example:
(a) It was not a crime in many OECD countries
for a bribe to be paid overseas.
(b) Bribes paid as "necessary"
agent's commissions were officially tax deductible in some OECD
countries.
(c) Aid agencies, export credit agencies
and international financing organisations regarded it as their
primary role to facilitate exports and international development.
Bribes were regarded as a necessary lubricant to achieve these
ends.
(d) Bribery was regarded in business as an
essential and normal part of doing business.
(e) International arbitrators and courts
were frequently unwilling to make adverse findings on the basis
of alleged bribery.
44. This has now changed.
(a) Several organisations have introduced
conventions against corruption (eg UN, OECD, Council of Europe,
EU). These require signatory countries to criminalise bribery,
and to take effective enforcement action.
(b) It is now a crime in the UK for a UK
corporation or national to pay or receive a bribe, even if the
offence takes place entirely outside the UK. Similar laws now
apply in other OECD countries.
(c) Corporate governance requirements and
the trend towards ethical investment demand increasing standards
of integrity.
(d) Banks, export credit agencies, auditors
and shareholders are beginning to appreciate that corruption introduces
unacceptable elements of catastrophic risk
(e) Money-laundering laws in most financial
centres require the reporting of suspicious transactions, and
permit the freezing of assets.
(f) Arbitrators and courts are becoming more
aware of corruption-related issues.
45. Previously, the consequences of the
catastrophe scenario outlined in paragraphs 4 to 30 above were
too severe for anyone to contemplate. If a client in a developing
country considered terminating a contract as a result of a bribe,
the developing country may have come under serious pressure from
developed country governments and international financing organisations
to fulfill the contract (even though possibly procured by a bribe)
so as to ensure future aid and finance to that developing country.
The developing country may have been advised to "uphold contract
provisions" even though these were illegally procured. This
type of pressure is now probably illegal, as a result of the conventions
referred to above, and subsequent law changes. Any organisation
or person trying to persuade the developing country to overlook
the bribe and its consequences could be guilty of aiding and abetting
a criminal offence, or of attempting to pervert the course of
justice.
46. Many businessmen are still not fully
aware of the above changes, or of their consequences. Business
practice has in many cases not yet caught up with the changes.
International infrastructure projects take years to develop, and
years to build. Many projects currently under construction may
have been procured by bribes agreed and paid prior to the recent
changes in law and practice. Many projects agreed since the law
changes may have been procured through bribes, either because
businessmen have been unaware of the law changes, or were reckless
as to the potential consequences.
47. It is inevitable that existing and new
projects will now come under far greater scrutiny. Publicity and
pressure in the anti-corruption arena is growing rapidly. Individuals
(even if not directly involved in the payment of the bribe) can
no longer afford to cover up bribery offences due to the risk
that they will be implicated as aiders and abettors. Government
staff should no longer be able to pressurise a developing country
government into overlooking a bribe, and therefore upholding an
illegal contract. UK Government officials are now required to
report a suspected bribe committed by UK nationals or organisations
to the appropriate UK authorities.
48. This changed situation unquestionably
places increased business risks on the parties involved. These
risks must be dealt with now. They cannot be ignored. The primary
responsibility falls on the C&E company to ensure that it
does not pay a bribe, and that a bribe is not paid by its agents,
joint venture and consortium partners, and sub-contractors. However,
it is clear from the above example that the following parties
connected with the C&E company are also at grave risk in the
event that a bribe is paid:
— banks lending money to the C&E
company, or to the relevant infrastructure project;
— export credit agencies providing
guarantees in relation to the project;
— auditors of the C&E company;
— shareholders in the C&E company.
It is imperative therefore that these parties
take the necessary actions to minimise these risks.
SUGGESTED ACTIONS
49. TI(UK)'s "Report One—Introductory
Report" (www.transparency.org.uk) makes numerous proposals
for actions which could be taken by the various sectors in the
C&E industry to reduce corruption. The following brief suggestions
are specific to banks, export credit agencies, auditors and shareholders.
As stated above, the following parties are significantly at risk
from corrupt practices.
Banks and Export Credit Agencies
50. Banks lending money, and export credit
agencies providing guarantees, whether to a project, or to the
C&E company constructing the project, should only agree to
provide finance or guarantees if the C&E company has implemented
an internal ethical code which commits the C&E company to
a strict anti-corruption policy. (See TI(UK)'s Business Tool "Business
Principles") (www.transparency.org.uk).
51. Banks and export credit agencies need
to increase their vigilance and due diligence, so that corrupt
practices are avoided in relation to C&E companies or projects
which they are funding or guaranteeing. In particular, when deciding
whether or not to finance or guarantee a project, banks and export
credit agencies need to ascertain whether agents or other intermediaries
are being appointed by the C&E company, or by the C&E
company's parent, subsidiary or associated companies, consortium
or joint venture partners, or major sub-contractors. The banks
and export credit agencies then need to try to find out whether
or not these agents could be used as conduits for the payment
of a bribe. TI(UK)'s "Report Five—The Prevention
of Bribery Through Agency Commissions" (www.transparency.org.uk)
gives an example of how an agency agreement is used to conceal
the payment of a bribe, summarises the damage and risks imposed
by bribery, and provides recommendations as to increased due diligence
which could be undertaken. TI(UK)'s Business Tool, "Agency
Due Diligence" (www.transparency.org.uk) contains an
Agency Questionnaire and Assessment of Agency Questionnaire. It
is designed to be used by banks, export credit agencies and auditors
to assist them in assessing whether the agent is a legitimate
agent appointed to undertake genuine services for a reasonable
fee, or whether the agent has been appointed to act as a conduit
for the payment of a bribe.
52. Banks and export credit agencies should
require the use of project integrity pacts which oblige the participants
in a project to act with integrity. The integrity pacts are policed
by an independent assessor and contain enforceable sanctions.
(See TI(UK)'s "Report Six—Integrity Pacts";
and TI(UK)'s Business Tools "Integrity Pact—Project—Pre-qualification
and Tender" and "Integrity Pact—Project—Execution")
(www.transparency.org.uk).
53. Banks and export credit agencies should
deny finance or credit support, for a specified length of time,
to C&E companies which have engaged in corrupt practices (blacklisting).
54. Banks and export credit agencies should
report corrupt practices to the authorities, and to any applicable
trade or professional association.
Auditors
55. Apart from a C&E company's management,
no-one is in a better position to assess the legality of the C&E
company's actions than its auditors. They in theory have unfettered
access to a C&E company's staff and records. If an employee
believes that there is a realistic chance that corrupt activities
will be uncovered by the auditors, and that the auditors will
report such activities to the authorities for prosecution, then
that employee is far less likely to participate in these activities.
The auditors therefore become a very important preventive mechanism.
Auditors are already under pressure to increase their vigilance
after Enron, Worldcom, Tyco, Parmalat and other scandals. They
need to increase their due diligence in relation to payments or
receipts which could be bribes. See TI(UK)'s "Report Five—The
Prevention of Bribery Through Agency Commissions" and
TI(UK)'s Business Tool "Agency Due Diligence"
(www.transparency.org.uk).
56. Auditors should report corrupt practices
to the authorities, and to any applicable trade or professional
association.
Shareholders
57. The majority of shares in listed companies
are held by investment funds. They can have a huge impact on the
way companies are run. They are the owners of the companies. The
majority of them hold the shares on trust for small private investors
and pensioners.
58. Investment funds should:
(a) question the boards of C&E companies
in which they invest to see whether the companies are at risk
from the consequences of corrupt practices;
(b) refuse to invest in C&E companies
which do not operate effective anti-corruption policies.
DISCLAIMER
59. The comments in this Report on the law
and its consequences are neither comprehensive nor complete, and
should not be relied on. They are intended merely to give indicators
as to possible consequences. Independent legal advice should always
be obtained. The proposed actions and Business Tools referred
to in this Report are suggestions only, and will need to be adapted
to the specific circumstances of each case. Neither TI(UK) nor
the author can accept responsibility for the consequences of any
action claimed to be taken in reliance on the contents of this
Report or Business Tools.
COMMENTS ON
THIS REPORT
60. TI(UK) welcomes comments on this Report,
and suggestions for its improvement. These should be sent to neill.stansbury@transparency.org.uk
March 2004
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