Conduits for Bribes and Guarantors of Corrupt Deals

Posted on October 21st 2010, by Matteo Bigazzi

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 and Corruption – Why the Perfect Fit?

Posted on September 16th 2010, by Matteo Bigazzi

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