K2 Global Consulting

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.