Annex B
Report Five by Transparency INternational
(UK): Anti-corruption Initiative in the Construction and Engineering
Industry: The Prevention of Bribery through Agency Commissions
Author: Neill Stansbury—March 2004
1. SECTION 1—INTRODUCTION
1.1 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.transparency.org.uk.
1.2 This Report, "The Prevention of
Bribery through Agency Commissions", is designed to assist
banks, export credit agencies and auditors in preventing or identifying
the use of agents' commissions to pay bribes. This document:
(a) gives in Section 2 an example of how
an agency agreement is used to conceal the payment of a bribe;
(b) summarises in Section 3 the damage and
risks imposed by bribery;
(c) provides in Section 4 recommendations
as to increased due diligence.
2. SECTION 2—EXAMPLE
OF A
BRIBE PAID
THROUGH AN
AGENCY AGREEMENT
2.1 (The following example is example 1.1
from TI(UK)'s "Report Two—Examples of Corrupt Practices"
which contains 15 examples of corrupt practices in the construction
and engineering industries (www.transparency.org.uk))
A contractor wishes to bid for an industrial
plant in an overseas country. The owner of the plant will be the
overseas Government, and the contract will be placed by that Government's
Ministry of Industry.
The contractor submits a pre-qualification application,
and is accepted as being qualified to submit a tender. Shortly
after pre-qualifying, the contractor is telephoned by an individual
whom the contractor does not know. The individual explains that
he has excellent contacts in the Ministry of Industry, and can
help the contractor be awarded the contract. A meeting is arranged.
At the meeting, the individual names, on a "confidential"
basis, his contacts in the Ministry. The Minister is married to
the sister of his wife. The Minister, he explains, has the absolute
final say over the award of the contract. He further explains
that the Minister nurses grievances against the contractor's country,
and as a result, some considerable effort must be placed into
persuading the Minister of the benefits of the contractors bid.
He can help in this regard. The Ministry's target price for the
contract is US$50 million, and the individual will require a commission
of 5% of the contract price payable in advance into an off-shore
bank account in return for his assistance.
The contractor receives two other approaches
from other individuals who also claim good contacts in Government.
Having met the two other individuals, the contractor chooses the
first individual. The contractor's attempts to reduce the commission
and to change the payment currency, timing and destination fail.
However, the contractor does succeed in linking the timing of
the payment to receipt by the contractor of the contract down
payment from the client.
The contractor requests its in-house lawyer
to draft an agency agreement for the individual. 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 agents 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 notify the contractor in writing
as to where the payment should be made.
In accordance with the internal procedures of
the contractor, this agency agreement is approved in a board meeting
involving the Chief Executive, the Commercial Director, the Sales
Director, the Project Director and the Finance Director. It needs
to be approved at board level due to the amount of the commission.
Furthermore, the appointment of the agent falls within each of
the individual's scope of responsibility. The Sales Director needs
to approve it, as the appointment of a sales agent is a sales-related
function. The Commercial Director needs to approve it, as the
agency agreement is a legal document. The Project Director will
have the commission as a project cost within his project budget.
The Finance Director will need to arrange payment of the agent.
Each of these individuals knows that the agreement is a sham,
and that the US$2.5 million commission will be used to bribe the
Minister and other parties. Even though the agent has not expressly
said to them "I will use the commission as a bribe",
they are aware that there could be no other explanation for the
requirement to pay such a large amount of money in foreign currency
when no legitimate goods or services are being provided in return.
They also selected the agent on the basis of his high-level contacts.
They know that they will never in reality use any of the supposed
translation and secretarial services referred to in the agreement,
as they will appoint this type of staff directly in their site
office. They also know that such services could be obtained for
vastly less than US$2.5 million. They also know that payment for
these local services, if genuine, would be made in the country
concerned in the local currency, and would not be paid into an
off-shore bank account. They are all aware, or at the very least,
strongly suspect, that the agency agreement is purely a sham,
and that it will be used to deceive the auditors, financing banks
and the export credit agencies as to the purpose of the transaction,
and that it would be used to shield the contractor from allegations
of impropriety if they ever were to emerge. They are privately
very uncomfortable with the arrangement, but they believe that
there is no alternative, as the contractor stands no chance of
winning the project unless this commission is paid Jobs are at
stake in the contractor's manufacturing plant. They justify the
practice to themselves on the basis that "It is part of the
game—everyone does it". They do not fear prosecution.
They are not aware of any instance in their home country of anyone
being prosecuted for this type of transaction. In any event, prosecution
was virtually an impossibility, as these arrangements were hardly
ever reported to the authorities.
The contractor submits the bid to the Ministry
for US$49,870,000 (just under the US$50 million target of which
the agent has advised the contractor). The bid process involves
sealed bids with no publication of price details of the competitors'
bids. The following day, the agent telephones the contractor.
The contractor is apparently 3rd lowest in the pricing. The lowest
is US$48 million. The agent requests the contractor urgently
to submit a confidential "clarification to the Ministry offering
to drop its price to US$47,7,900, 000 on the basis of an alternative
technical proposal. The contractor makes a minor adjustment to
the specification, and submits the price adjustment and technical
"clarification".
The contractor is awarded the contract.
The contract includes the provision by the contractor
to the Ministry of a financial package supported by a buyer credit.
This comprises a loan from a bank to the Ministry worth 85% of
the contract price for a fixed term of 15 years. The contractor
will draw down payments from this loan package direct from the
bank as the construction works proceed. The balance of 15% will
be paid direct to the contractor by the Ministry. Once the contract
is completed, the contractor will have been paid 100% of the contract
price, and the Ministry will need to repay the bank the 85% loan
over the 15 year repayment period. The bank is insured against
default by the Ministry by a guarantee issued by an export credit
agency. The premium for such insurance has been paid by the contractor
direct to the export credit agency, and has been included by the
contractor in its contract price. In order to arrange such export
credit cover, the contractor has completed an application form
to the export credit agency in which it has disclosed the existence
and level of the commission payment, the name and address of the
agent and the scope of services of the agent. The contractor has
also completed a declaration to the export credit agency that
it is not aware of any corrupt activity in connection with the
contract.
The commission payable to the agent is included
under the export credit cover, and is financed to the extent of
85% under the bank loan.
The contractor receives the down payment from
the Ministry. The agent notifies the contractor of an off-shore
bank account into which the commission should be paid. The contractor
pays the commission.
The contract is completed. Neither the export
credit agency nor the bank at any stage investigates the true
purpose of the commission. The contractor's auditors check the
project accounts. On seeing that the agency agreement on the face
of it creates a legal obligation to pay the commission, they make
no further enquiries.
2.2 Analysis of Example
2.2.1 The above is an example of probably
the most widespread method of bribing to obtain an international
infrastructure contract. It is a method used throughout the world,
but particularly in countries with a more developed legal and
audit environment. The reason for this is probably that the legal
environment in these countries compels companies to cloak their
actions in a veneer of legality. The use of the agency agreement
has proven a simple and effective tool to enable these companies
to bribe with impunity.
2.2.2 When major tenders are being prepared,
the participants in the bid team work closely and frequently together.
Working sandwich lunches and after work drinks are common in the
pressurised environment of tender preparation. In this environment,
secrets are not normally kept. The fact that an agent is being
appointed who is being paid a large commission which is likely
to be passed on to a member of the purchasing utility or Government
will often be widely known by the contractor's senior management.
They may joke about the fact that three different agents were
competing to prove their close connections with the Ministry.
It is also unlikely that any member of the board of directors
would not have been told the true or suspected purpose of the
transaction when the agency agreement was approved.
2.2.3 The in-house lawyer who drafted the
agency agreement would probably know its true purpose. An external
lawyer who has experience in the industry would also probably
know, or, at the very least, suspect.
2.2.4 In some, but not all cases, the representative
at the bank and at the export credit agency will know the true
purpose of the agency commission (either through industry experience,
or through being informally told by one of the contractor's representatives).
Perhaps the banker or export credit agency's representative, on
being told about the likely purpose of the commission will say,
jokingly, "I didn't hear that!"). In other cases, they
will not expressly know, but even the most limited enquiries would
make them realise the likely purpose of the commission, particularly
bearing in mind the normal extent, currency, and payment destination
of these commissions, and the enormous disparity which often exists
between the level of the commission and the services which the
agent is meant to provide under the agency agreement.
2.2.5 In reality, most people in the industry
involved in this type of international transaction know what happens.
However, most would be prepared to hide behind the veneer of legality
provided by the agency agreement. This is what will probably happen
in the event that the bribe becomes exposed.
(a) All those with actual knowledge of the
transaction (ie those who have met the agent and have approved
the agreement) will claim that they had no idea whatsoever that
the agent would pass any money onto the Minister or other related
party. They will say that the agent is on the face of it independent
of the Ministry, and that the money was paid to the agent, and
not to the Ministry. What the agent does with his money is his
business, not theirs. They will hand over all documents related
to the negotiation and execution of the agency agreement, and
these will show no link whatsoever with the Ministry or to the
ultimate purpose of the payment. They will claim that it is normal
business practice to require a local contact, and that the commission
was a normal market price for such a service.
(b) All those without actual knowledge of
the transaction will claim that they were never told by the contractor
the nature or purpose of the transaction. Inspection of their
documents will again show no mention of any underhand purpose.
(c) The lawyers will claim client privilege,
and refuse to answer questions. However, if this privilege were
to be waived they would claim that they were merely asked to draft
a commercial agency agreement, and had no duty to investigate
its purpose.
(d) The auditors will claim that it is their
duty merely to match payment obligations with actual payments,
and that they did so in matching an apparently legal agreement
with payment of the commission. Furthermore, they will rely on
the undertaking given to them by the directors that the contractor
has complied with the law in all its transactions (this undertaking
will almost always be given by the directors—a director
who has broken the law would be very unlikely to admit to the
auditor that he had broken the law).
(e) The bank will deny any actual knowledge
of the purpose of the commission.
(f) The export credit agency will deny any
actual knowledge. They will also rely on the undertaking given
by the contractor in applying for export credit cover which expressly
confirmed that no corrupt activity had taken place. The contractor
will probably have given this undertaking with the intention of
relying, if challenged, on the argument that they never knew what
the agent would do with the commission.
2.2.6 The above example analyses the position
where the contractor appoints the agent direct. The bribe can
be further concealed if the agent is appointed by a parent, associated
or subsidiary company of the contractor in another jurisdiction,
or by a consortium or joint venture partner, or sub-contractor
of the contractor.
2.2.7 The above example and analysis must
be distinguished from the situation where a genuine agent is appointed
for a legitimate purpose, and is paid a reasonable fee for legitimate
services provided. Recommendations as to increased due diligence
which could help to distinguish genuine agency arrangements from
sham arrangements are contained in Section 4 below.
2.2.8 The above example analyses the appointment
of an agent by a contractor. Similar principles would apply to
the appointment of an agent by a consulting engineering firm.
3. SECTION 3—THE
DAMAGE AND
RISKS IMPOSED
BY BRIBERY
3.1 Bribery causes immense economic and
social damage. In particular, it can produce the following results
(a) an unnecessary project;
(b) a project design which requires unnecessarily
complex or expensive components;
(c) increased project costs;
(d) wasted tender expenses;
3.2 In addition, bribery poses a significant
business risk to banks, export credit agencies, auditors and shareholders
as described in TI(UK)'s "Report Four—Corrupt Practices
on Construction Projects—the Business Risk to Banks, Export
Credit Agencies, Auditors and. Shareholders" (www.transparency.org.uk).
In particular, if the project contract was procured by a bribe,
the contract could be terminated by the client for illegality.
This could have potentially, catastrophic financial consequences
for the relevant contractor's or consulting engineer's shareholders
and auditors, and for the banks and export credit agencies involved
in the project. Participants can also be criminally liable.
4.SECTION 4—INCREASED
DUE DILIGENCE
4.1 Banks, export credit agencies and auditors
therefore need to increase significantly their due diligence in
this regard. Many agency agreements are genuine, and the agents
undertake valuable legitimate services. However, many agency agreements
are shams, and are used wholly or partially to conceal bribes.
Steps need to be taken to try to distinguish the two situations.
4.2 TI(UK)'s business tool "Agency
Due Diligence" (www.transparency.org.uk) has been designed
to be used by banks, export credit agencies and auditors to assist
them in assessing whether an agent appointed in relation to a
construction or engineering project 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 a bribe.
It provides:
(a) an Agency Questionnaire which can be
sent by banks, export credit agencies and auditors to the contractors
or consulting engineers which they are financing, insuring or
auditing;
(b) an Assessment of Agency Questionnaire
which can be used by banks, export credit agencies and auditors
to analyse the answers given to the Agency Questionnaire.
DISCLAIMER
5. 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 Tool 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 Tool.
COMMENTS ON
THIS REPORT
6. TI(UK) welcomes comments on this Report,
and suggestions for its improvement. These should be sent to neill.stansbury@transparency.org.uk
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