The Discreet Science
The Use of Intermediaries to Legitimise Corruption: Some Conclusions
A key attribute of intermediaries is their ability to camouflage illegitimate payments as legitimate ones. By doing so, they not only provide an aura of legality to a corrupt transaction, they also provide the perfect opportunity to generate off-book funds, which are then used for illicit payments between the parties involved.
The process by which intermediaries are used to legitimise the creation of illicit funds was clearly illustrated in the 2008 complaint made by the SEC against Siemens AG. The SEC argued that “business consultants were typically hired pursuant to business consultant agreements, contracts that on their face obligated Siemens to pay for legitimate consulting services. In reality, many business consultant agreements were shams in that the business consultants performed no services beyond funneling bribes.”
Greater detail is provided in the Statement of Offense filed by the US Department of Justice (DOJ) in connection with the guilty plea by Siemens SA, a Venezuelan subsidiary of Siemens. The document describes the mechanics behind the bribes paid by Siemens SA in exchange for the contracts to build metro systems in the cities of Valencia and Maracaibo. This involved according to the Department of Justice, the “creation of sham agreements for ‘studies,’ ‘consulting,’ ‘workshop equipment,’ ‘ and ‘supplies’ to falsely document and conceal bribe payments that were being funneled through multiple entities to officials of the Venezuelan government in exchange for favorable treatment.”
The use of intangible or difficult-to-measure deliverables to camouflage bribes is common practice in corrupt schemes. However, it is also not uncommon for corrupt payments to relate to tangible deliverables for which there does not appear to be a legitimate commercial justification. The opportunity for corruption in such cases arises from an artificial creation of a need. Although the transaction itself may not raise suspicion, as on the surface it appears legitimate, it is the raison d’être behind such transactions that should be questioned.
The Guardian reported a good example of this in early 2007, following revelations made by a Tanzanian middleman. According to the article BAE Systems, the UK’s biggest arms supplier, “secretly paid a $12 million commission into a Swiss account in a deal which led to Tanzania, one of the world’s poorest countries, buying a controversial military radar system” which critics said was not only overpriced but also “unnecessary”.
Also typical is the involvement of foreign corporate entities, typically based in offshore or otherwise secretive jurisdictions. In the case of Siemens SA, for example, a number of consulting companies were used – based in Georgia, Dubai and Cyprus – which were controlled by a Venezuelan businessman with “extensive contacts with then current and former government officials in Venezuela” and by a German individual who had been a former manager and consultant of Siemens.
So, again, we can see how and why intermediaries represent the perfect instrument for corruption. It’s a discussion that we could carry further, but I think this series of posts has proven the point. The OECD Working Group on Bribery in International Transactions put it very crisply in a recent report: “there are indications that intermediaries are involved in most foreign bribery cases.” As mentioned in previous posts, their importance for corruption is second to none.
Whilst we can dissect and analyse the characteristics of intermediaries there is little that can be done to eradicate them from international business transactions. They thrive in a bureaucracy that has been built into the commercial regulations of many countries. In fact, the symbiotic relationship between private and public sectors often cannot exist without intermediaries who are often legitimate, but just as often corrupt.
The greatest challenge for companies and individuals dealing with intermediaries is gaining a full and proper understanding of the requirement, role, activities and methods of these third parties. Without such understanding, it is impossible to assess one’s exposure to risk.
Conduits for Bribes and Guarantors of Corrupt Deals
In my last post I began analysing what it is that makes intermediaries such powerful instruments of corruption. I touched upon their ability to create opportunities for those seeking corrupt practices by transposing into the grey economy a whole host of services that are typically available in the realms of legitimate business.
The most widely acknowledged role of intermediaries is their ability to act as conduits for illicit payments. There are several reasons for this:
- Intermediaries are a vehicle for the creation of illicit funds. They provide numerous alternatives for a company to divert funds off-book, for example by invoicing for fictitious services, artificially inflating prices for real services, or fraudulently remitting discounts. Because of their versatility, intermediaries can be used to siphon off funds from virtually any department within a company; sales, marketing, and procurement to name but a few. They are also the perfect instrument for corruption schemes involving skimming. For example, when large volumes of raw materials change hands, a negligible price discrepancy can enable the generation and concealment of significant corrupt funds.
- Intermediaries are also the perfect instrument for the payment of bribes. Once intermediaries have been used to create off-book funds, they are the obvious choice for channelling such funds to the ultimate recipient of corrupt payments.
- Using intermediaries is a tested method to conceal the identity of those that are parties to a corrupt transaction. The possibility to interpose several layers of intermediaries between payers and receivers of bribes provides a level of complexity that results in the effective concealment of the nature, purpose and outcome of a corrupt transaction.
- Finally, intermediaries are often used for converting proceeds of corruption on behalf of those receiving bribes. In our work, we see countless examples of corporate vehicles, generally offshore, controlled by middlemen that hold assets such as prime real estate or luxurious yachts on behalf of those benefitting from corruption.
It is should therefore come as no surprise that the pervasive role of intermediaries has been emphatically underscored by Transparency International (TI), the leading civil society organization devoted to combating corruption. In presenting the results of its flagship Corruption Perception Index (CPI) of 2006, TI’s press release stated that:
“…facilitators of corruption continue to assist political elites to launder, store and otherwise profit from unjustly acquired wealth, which often includes looted state assets. The presence of willing intermediaries – who are often trained in or who operate from leading economies — encourages corruption; it means the corrupt know there will be a banker, accountant, lawyer or other specialist ready to help them generate, move or store their illicit income… Corrupt intermediaries link givers and takers, creating an atmosphere of mutual trust and reciprocity.”
Trust is paramount. None of these transactions could occur if the parties involved did not trust each other. Trust, however, should not in this case be mistaken for good faith. The rationale for trust is purely commercial, and consists of the repeated benefits which payers and receivers of bribes are able to obtain from a continued and trusted relationship with an intermediary. Intermediaries are able to ensure that the sought after benefits are obtained by both sides of a particular deal based on the promise of future benefits to come. This enables intermediaries to position themselves as guarantors of corrupt deals.
In my next post I will spend some time discussing how intermediaries provide an aura of legitimacy to corrupt transactions, something that enables them to operate with considerable – and unsuspected – openness and freedom.
Intermediaries: Creators of Corruption Opportunities
In my last post I began discussing how a broad category of actors typically defined as “intermediaries” provide the perfect instrument to those pursuing corrupt practices. It is now worth taking a closer look at the key characteristics that make intermediaries so fit for this purpose.
Intermediaries are first and foremost creators of opportunity, in more ways than one. They do this by providing their clients (bribe payers and bribe receivers) with a range of services that go well beyond a concealed transfer of cash. They operate as advisors, head-hunters, market entry strategists, bankers and risk managers. In essence, they transpose to the grey economy those services which are typically utilised in legitimate business transactions.
Some examples:
Intermediaries are corruption’s market makers. They are instrumental in identifying opportunities for those willing to pay bribes, particularly where searching openly is too risky. They may even be in a position to advertise their services by disclosing track records and therefore establishing a reputation for getting deals done. Conversely, it is also common for those on the receiving end of bribes to establish a relationship with trusted intermediaries who are forcefully interposed in a transaction or, at times, may be mandated to identify companies or individuals from whom bribes may be sought.
This is particularly true in the case of highly regulated industries, where government licenses are required for businesses to operate and where the authority to grant such licenses is placed with government agencies created ad hoc. An example that has recently come to light involved the Kyrgyz operations of a subsidiary of Alliance One International Inc, a global tobacco merchant. According to an August 2010 filing, in the mid 1990s the government of Kyrgyzstan had established “an agency and instrumentality of the government, to manage and control the government-owned shares of the tobacco processing facilities throughout Kyrgyzstan” to which bribes were paid to assure “access to the tobacco processing facilities” controlled by the special purpose government agency.
Intermediaries are also cost efficient. Companies seeking to engage in corrupt practices are bound to face costs, such as: searching for illicit partners, determining agreement conditions and enforcing agreement terms. Intermediaries can significantly lower these costs by providing information to potential clients in respect of the capability of a government official, or representative thereof, to actually provide the required services.
Intermediaries offer a forum to the parties involved. Because payers and receivers of bribes operate outside the law, they need to trust each other: intermediaries provide this trust by virtue of the repeated nature of their interactions with both parties. Whereas loyalty between two parties of a corrupt transaction is often limited to the transaction itself, intermediaries are typically vested in the continuance of their relationships. Jeffrey Tessler for example, the indistinct British solicitor who came to world fame courtesy of the largest FCPA settlement in the history of US companies, reportedly had long standing relationships with both Halliburton and the Nigerian government for decades prior to the scandal coming to light. Tellingly, Tesler’s pivotal role in the corruption scheme was first explained to the authorities by a former employee of Technip, a French partner of the Nigerian consortium led by Halliburton, perhaps an indication that Tesler had failed to establish with Technip the same relationship of trust he enjoyed with Halliburton.
I could go on, but believe the point has been made. The extent and sophistication of the services offered by intermediaries is such that their role cannot be reduced to that of an ancillary instrument for the payment of a bribe. Where there is a company or an individual prepared to gain an advantage through corrupt practices, intermediaries will open up a world of opportunities. With the clear advantage of doing so in an informal, concealed yet trusted manner. This combination is at the root of their ability to thrive in corrupt environments.
There’s more to come on this topic — in my next post I will address the more traditional perception of intermediaries as conduits for bribes and also touch upon their unique ability to act as guarantors of corrupt transactions.
Intermediaries and Corruption – Why the Perfect Fit?
Intermediaries are a broadly defined category of third parties related to a transaction, such as agents, middlemen, business consultants, JV partners and foreign subsidiaries. They are often used to bring together the public and private sectors, for a fee, with the private sector engaging intermediaries to pay bribes, often for benefits for which they already qualify, with much (but not all) of that money being passed on to public officials. The importance of intermediaries, in the grand scheme of corruption, is second to none.
There are many compelling points that can be brought forward to argue the case of intermediaries being the principal catalyst of corrupt transactions. As is often the case, the point is best made through simple observation.
Over the past couple of years, we have witnessed some record-breaking FCPA settlements: in 2008, Siemens agreed to the highest regulatory settlement in the history of the US Foreign Corrupt Practices Act, amounting to US$ 800 million. Regulatory action by German authorities brought the worldwide total cost to Siemens to settle its cases to US$ 1.6 billion. A year later, it was the turn of a Halliburton subsidiary, Kellogg Brown & Root, to top the charts for the largest FCPA settlement paid by US companies: a combined total of US$ 579 million in fines and disgorgements.
The corrupt practices underlying these regulatory actions are telling of the nature of corruption. In the case of Kellogg Brown & Root, the company’s CEO admitted to having “negotiated bribe amounts with the office holders’ representatives and agreed to hire the two agents to pay the bribes…approximately $132 million to the first agent, a consulting company incorporated in Gibraltar, and more than $50 million to the second agent, a global trading company headquartered in Tokyo, Japan.” This in exchange for the award of four contracts in Nigeria, valued at over US$ 6 billion.
In the case of Siemens, according to the SEC the company “made thousands of separate payments to third parties in ways that obscured the purpose for, and the ultimate recipients of, the money. At least 4,283 of those payments, totalling approximately US $1.4 billion, were used to bribe government officials in return for business to Siemens around the world.”
Numbers like these are, quite simply, staggering. Billions of dollars of bribes paid through intermediaries by just two companies not only demonstrates the size of the corruption problem, but also underlines the crucial role played by intermediaries: it would be reasonable to argue that without their involvement, such proportions of corruption could not be achieved.
It should therefore come as no surprise that intermediaries have caught the attention of regulators from the very genesis of anti-corruption legislation. When speaking about the origins of the FCPA, and in particular about the investigation by the SEC of illegal campaign contributions in the Watergate era, Stanley Sporkin, former director of the enforcement division at the SEC, recalled coming in one day and “asking Bob Ryan of the staff to go and find out from Gulf Oil how Gulf Oil made these payments and how did they book an illegal payment. And he came back within a day and had the whole case. They had set up two phony subsidiaries they called Bahama X and Bahama Y. They put $5 million into each one of them and took the money back to the companies’ offices and put it in the safe of the CEO, and that’s where payments came from.”
More recent anti-corruption enforcement, such as the cases mentioned above, confirm that the intermediary-centred corruption model continues to bear equal, if not greater importance. Further demonstration of the criticality of intermediaries to corruption comes from recent academic studies of anti-corruption reforms.
So what is it that makes intermediaries such a perfect fit for corruption?
There is a generalised perception that companies use intermediaries in order to avoid direct contact with corruption, essentially as facilitators of improper payments. This is obviously true, but also far too simplistic. Intermediaries interact with corruption at multiple levels and reducing their role to that of a mere conduit for bribes would equal to a gross underestimation of their importance.
Intermediaries are the meeting point between relevant parties of a corrupt transaction. They provide an informal forum for the discussion and pursuit of converging interests that, because of their illegal or improper nature, cannot be openly discussed. By virtue of such pervasiveness, intermediaries influence and define the very essence of a corrupt transaction often overlapping with every stage, or ingredient, involved in the process.
In my next few posts, I will be deconstructing the role of intermediaries touching upon the various levels and stages of their involvement with corruption. Ultimately, I hope that this analysis will help to better understand the nature of the beast and, by doing so, improve our ability to address the issues that arise from it. Be sure to stay tuned!
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Academic references:
1 – “Intermediaries and corruption” by Kevin Hasker and Cagla Okten
2 – “How Middle-men can Undermine Anti-corruption Reforms” by Kjetil Bjorvatn, Gaute Torsvik and Bertil Tungodden
