Bribery in international construction

By James Mullen, Associate, Fenwick Elliott

In Issue 18 of IQ, Sarah Buckingham reviewed the extra-territorial reach of the UK anti-bribery legislation [1]. In Issue 19, we take a more global look at the risks of bribery on construction projects.

A recent report1 by Global Construction Perspectives and Oxford Economics forecasts that by 2030 the volume of construction output will grow by 85% to US$15.5 trillion worldwide, with China, the US and India leading the way and accounting for 57% of all global growth. There is no doubt that global construction is big business, particularly in the emerging markets where large construction and infrastructure projects are being carried out more and more. However, construction (both at home and abroad) has always been viewed as a sector that is extremely vulnerable to bribery.

Why is international infrastructure and construction seen as being so vulnerable and at high risk of bribery?

There are numerous reasons, including:

1. Many of the large international construction and infrastructure projects are carried out in the emerging markets which are often seen as high risk jurisdictions for bribery.
2. The significant scale of international infrastructure and construction projects can make it easier to hide bribes or inflate costs.
3. Large international infrastructure and construction projects often have complex structures with hundreds (if not thousands) of contractual links and supply chains. Each link/chain can be an opportunity to pay or receive a bribe, whilst the complicated structure of a project provides opportunities for the concealment of unlawful activity.
4. Foreign construction companies working abroad will almost inevitably require the services of local agents and third party intermediaries. However, it is through these third party channels that bribes are often paid.
5. There may be various cultural differences. For example, what a local agent or contractor considers to be acceptable in their jurisdiction may not be considered acceptable in, for example, the UK or the US.   
6. Almost all large international infrastructure and construction projects will have some form of government involvement at one level or another. For example, the majority of infrastructure projects are government-owned, whilst even projects in the private sector will require government approvals, permits and licences etc. which, if not controlled properly, provide easy opportunities for officials to extract bribes.

Opportunities for bribery at different phases of a project

There are opportunities for bribery to occur at virtually every phase of a construction project, whether domestic or international.

Tendering and procurement

Tendering and procurement is the stage of a construction project that is often considered to be the most vulnerable to bribery. An obvious example is the payment of bribes to a representative of, or an advisor to, the employer or a government to secure a contract. Further down the contractual chain, subcontractors could bribe an employee of the main contractor to win a subcontract, or a supplier could bribe the main contractor to ensure that it chooses them instead of a rival supplier. Notwithstanding the illegality of such payments, they will inevitably affect the value and quality of the work being procured.

Bribes could be paid direct but most often they are made through third party intermediaries. Alternatively, local well-connected third party procurement agents may themselves receive bribes from local suppliers to influence the contractor’s choice of supplier. Indeed, the use of third party intermediaries, not only at the tender and procurement stage but also throughout the project, is seen by many as the most high risk area for bribery taking place. As the prominent global anti-corruption organisation, Transparency International (“TI”), says in their recent guidance on managing third party risk:

“Third parties and intermediaries in particular are the single greatest area of bribery risks for companies. These risks are growing as companies move into new markets and put ever more of their operations in the hands of third parties…”2

As noted above, on international projects a contractor will inevitably need to obtain various permits, licences, planning permission and approvals from “government officials” (a title that can be interpreted widely’). This may provide the officials with opportunities to extract bribes in exchange for the award of these.

Construction

Various opportunities for bribery arise during the construction stage. For example, often on international construction projects contractors will import goods and materials, and sometimes “facilitation payments” may be required to get these through customs.

Another example could be where substandard materials are used or substandard work is carried out in order to save money. Some of the money saved is then used to bribe the relevant checkers to sign off the substandard materials or work as acceptable. As most works or materials on construction projects are eventually covered up by other components, the substandard materials and work can be easily concealed.

What are governments and organisations doing to tackle bribery?

The Organisation for Economic Co-operation and Development’s (OECD) Anti-Bribery Convention (“Convention”) came into force in 1999 and established legally binding standards to criminalise bribery of foreign public officials in international business transactions. All 35 OECD members (including the UK and the US) and 6 non-member countries (including Russia and South Africa) have adopted the Convention.

Bribery Act 2010

In July 2011, the UK’s Bribery Act 2010 (“Act”) came into force which makes it an offence for a person to pay or receive a bribe, whether directly or indirectly. In addition, under section 7 of the Act a corporate body is guilty of an offence if an “associated person” (who can be an employee, agent or subsidiary company) bribes another person intending to obtain or retain business or a business advantage for the company.

Sanctions for failing to comply with the Act include fines, imprisonment, disqualification of company directors and confiscation of property.

The liability on companies under section 7 is strict and the only defence to a section 7 prosecution is if the company can show that it had “adequate procedures” in place designed to prevent bribery (see below).

The territorial scope of the Act is wide. It applies to bribery committed by anyone in the UK or, if overseas, by a British citizen, or any other person with a “close connection” with the UK can be prosecuted. Further, the corporate offence under section 7 applies to any UK incorporated entity and any overseas entity that carries on a business or part of a business in the UK.

Therefore, even if a project is aboard, UK companies could still find themselves caught by the Act if, for example, it is found that their employees, agents or subsidiaries are paying or accepting bribes in exchange for the award of contracts. In Issue 18 of International Quarterly, we reported on a recent prosecution of a UK-listed construction company [1] involved in a project in the UAE (the case is the first conviction under section 7 of the Act and highlights its extraterritorial reach).   

Foreign Corrupt Practices Act 1977

The US’s equivalent to the Act is the Foreign Corrupt Practices Act 1977 (“FCPA”). The FCPA has two key elements: (i) the prohibition of bribes to government officials to obtain or retain business; and (ii) the requirement that companies maintain accurate books and records and adequate internal accounting controls (this is intended to prevent accounting practices designed to hide corrupt payments).

The FCPA applies to unlawful activities by US persons (US citizens, nationals or residents) or any company that is registered or has its principal place of business in the US, or is organised under US laws. It also applies to foreign companies or persons who engage in any act in furtherance of a corrupt payment while in the US.     

Sanctions under the FCPA include fines and imprisonment. Further, companies and individuals may be excluded or debarred from certain federal programmes and also be ineligible to receive export licences. In addition to these sanctions, a corporation or individual may also be subject to civil or criminal actions.

The FCPA also includes certain defences. For example, unlike the Act, the FCPA permits certain “facilitation payments” to foreign officials to make them perform routine government actions. However, this exemption (which is commonly known as the “grease payment” exemption) is construed narrowly and only applies in certain situations. Another exemption under the FCPA is where the payments are lawful under the written laws and regulations of the foreign official’s country. 

United Arab Emirates

In the UAE there is currently no stand-alone or equivalent piece of legislation to the Act. However, in Issue 18 of International Quarterly, we briefly discussed the steps being taken in the UAE to combat bribery [1].   

Why should companies work towards preventing bribery and corruption?

The obvious reason is that a failure to prevent bribery could result in a prosecution, with heavy financial penalties and even penal sentences. However, there are also other reasons, for example the legal costs of investigating allegations of bribery which are likely to be significant, the risk of debarment from government contracts and, importantly, the damage to reputation which may affect a company’s ability to win contracts in the future. As TI says on their website:

“Foreign bribery has significant adverse effects on public well-being around the world. It distorts the fair awarding of contracts, reduces the quality of basic public services, limits opportunities to develop a competitive private sector and undermines trust in public institutions.

Engaging in bribery also creates instability for companies themselves and presents ever-growing reputational and financial risks…”

What steps can companies take to prevent bribery?

The number of global investigations, prosecutions and adjudications for bribery is increasing. In a recent interview,3 the Chair of the OECD Working Group on Bribery emphasised that the OECD’s next phase of implementing the Convention would involve focusing on two important areas. First, it will continue to seek to enforce the Convention (i.e. it will continue to investigate, prosecute and adjudicate those that breach the Convention). Secondly, however, the OECD will look to engage the private sector more and work with them as partners to ensure that effective compliance systems are in place. In other words, they want to do more to prevent bribery happening in the first place rather than having to address it after it has already happened.        

As noted above, under the Act an organisation may defend itself if it can prove that “adequate measures” and codes of conduct are in place to prevent bribery. The Ministry of Justice (“MOJ”) has published guidance (albeit, at a high level) in the form of six principles to help companies consider whether they have adequate measures in place.4 These principles are:

1. Proportionality: the action taken should be proportionate to the risks faced and the size of the business. For example, a company might need to do more to prevent bribery if the organisation is large or working abroad in a market where bribery is known to be commonplace.
2. Top level commitment: ensuring that the people at the top of the company are committed and active in preventing bribery within the organisation.  
3. Risk assessment: companies should think about the risks they may face. For example, a company may research the markets it operates in and the people it deals with, particularly if it is entering into a new business arrangement or a new market overseas.
4. Due diligence: knowing exactly who you are dealing with can help to protect the organisation from taking on people who might be less than trustworthy. Therefore, a company may want to carry out due diligence on the people/other companies that it will be dealing with.  
5. Communication: communicating company policies and procedures to staff and to others who will perform services for the company enhances awareness and helps to deter bribery. Therefore, a company may wish to consider whether additional training and awareness raising is required depending on the size and type of business.
6. Monitoring and review: the risks a company faces and the effectiveness of its procedures may change over time. Therefore, a company may want to regularly monitor and review its anti-bribery procedures to keep pace with any changes in the bribery risks, for example if a company enters into a new market.

In addition to the MOJ’s guidance, other steps that a construction company may want to consider taking include:

1. The inclusion of anti-bribery and anti-corruption clauses in contracts.
2. Ensuring that effective financial and audit procedures are in place to monitor (both internally and externally) for bribery during the project.
3. Ensuring that employees are fully aware of the company’s procedure for reporting bribery, in particular the procedure for whistle-blowing (this is still an area that needs significant work – only about 2% of all reported instances of cross-border bribery and corruption have come from whistle-blowers).        
4. As to due diligence, a construction company working abroad should carry out due diligence on any joint venture partners (a company could potentially fall foul of anti-bribery legislation because of the actions of their JV partner(s)), subcontractors and local suppliers, agents and intermediaries.

Conclusion

Bribery will always be a risk in the construction sector. However, international governments and organisations have made it clear that they are committed more than ever to enforcing anti-bribery legislation. Therefore, companies need to be aware that even on a global construction project, they could still fall foul of domestic anti-bribery legislation, such as the Act. Accordingly, companies should ensure that they have an effective compliance system in place to try to prevent bribery occurring in the first place but also, if it does occur, to try to give themselves as much protection as possible against prosecution.

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• 1. Global Construction 2030
• 2. Transparency international, Managing third party risk: Only strong as your weakest link, June 2016.
• 3. IBA Global Insight, August/September 2016, pp. 17—21.
• 4. MOJ, “Bribery Act 2010, A Quick Start Guide”, p. 4. www.justice.gov.uk/downloads/legislation/bribery-act-2010-quick-start-guide.pdf [4]