Corruption: A Pandemic May 2006

1. Corruption: A PandemicMay 2006

2. General Impact of Corruption • Escalating poverty levels • Corrodes economic development • Undermines legitimacy of the public service • Damages reputation and investment potential of a country • Destabilizes democracy and governments • Increases serious crime

3. Project impact of corruption • Service • Quality • Pricing • Impact

4. Kofi Annan Speaking To General Assembly “Corruption is an insidious plague that has a wide range of coercive effects on societies… It undermines democracy and the rule of law, leads to violations of human rights, distorts markets, erodes the quality of life, and allows organized crime, terrorism and other threats to human security to flourish”

5. MDB Financed Rural School

6. Actual School 500 Feet Away

7. What is actually in the school building

8. KATRINA Fraud Rampant

9. MDB Investment Approach-Vulnerabilities Lender Member Gov’t $ Loan Line Ministry TM Supervises Implementation of MDB Loan P.I.U. k k k k Good and Services

10. Types of Corruption Observed • Bribes and kickbacks • Front companies • Bid rigging or collusive agreements • Use of “loan brokers”/”commissioners” • Conflicts of interest • Theft from local accounts and abuse of project assets • Fraud/Forgery/Misrepresentation

11. Government Funding Source Contractor Inc. Illicit Relationship Legitimate Relationship Kickback Scheme $ $ $ $ Subcontractors “Broker”/ ”commissioner” $ A.K.A. “local rep” -Centerpiece of corruption scheme is the “Kickback” -Normally in conjunction with other schemes (e.g. bid rigging) -Cash payments, wire transfers disguised to leave no footprints -Appearance of legitimate relationship between actors -Conspiracy of silence exists—further complicating detection

12. $ $ $ A Government Funding Source “Broker” as Project Advisor Contractor Inc. $ Illicit Relationship Legitimate Relationship Kickback Scheme $ -Middleman can appear in more than one location and there may be multiple middlemen operating -Lack of audit capability running to subcontractors makes it difficult to decipher legitimate from illegitimate relationships

13. consultant contractor consultant contractor $ $ $ Subcontractor “middle man” $ $ $ $ $ $ PIU DIRECTOR MDB case which shows middleman working with numerous contractors on large infrastructure project

14. Kickback Receipt Actual kickback receipt insisted on by a contractor who became fed up with paying kickbacks on projects SIGNED BY PIU OFFICIAL-Convicted June 9, 2004

15. Corporate Shield Owners PIU Owners CONTRACTOR INC. Hidden owner-Government official Owners Hidden owner-Government official Front Company -Company appears with no history -Company providing diverse disconnected services -Few records exist on ownership -Extreme interest shown by PIU official in company -Subcontractor who is hired as local agent

16. PIU CONTRACTOR INC. Employee, relative, friend Conflict of Interest -Conflicts appear in many ways—having a personal stake in the outcome of a contract is a per se conflict -PIU officials, friends, relatives, family members involved w/ contract -Corruption may co-exist with conflict -If appearance of conflict, make disclosure early before questions arise

17. Bid Rigging • Bid Rigging & Collusion • Drafting tailored specifications to exclude unfavored bidders • Tipping off the favored bidder that certain components in bid will not actually be called for • Telling bidders to bid low and recover profit later through contract modification • Short notice periods for bidding - “emergencies” • Bidders agree who will win contract • Component of larger corruption scheme

18. Example: Forged Documents

19. Common Fraud by Local Project Officials Common frauds by local project officials include: • Diverting project assets – from computers to automobiles to heavy road grading equipment – to private use. Even such petty abuses can seriously disrupt a project: four-wheel drive vehicles stripped of tires, batteries and other parts become unavailable for visits to project sites, leading to deterioration and delays in the project • Unnecessary or padded foreign travel for supposed meetings with suppliers, study tours or training; • Creating "ghost employees" and fictitious expenses and diverting the payments. • Leasing warehouses, equipment, or "office space" to the project or contractors.

20. PIU CONTRACTOR INC. Illicit Relationship Legitimate Relationship Combination SchemeKickback, Conflict, Front Company, Bid Rigging Grand Corruption $ $ $ $ $ Subcontractor Procurement Consultant $ Subcontractor $ Off Shore Company $

21. Is there Corruption in my Project • Vulnerabilities Matrix • Various Indicators that can be Measured as various points in the Project Cycle • Problem is: • What do you do if you have corruption? • Mandatory Reporting-then what?

22. Remedies • Classical Responses • Enforcement: How to make it more effective? • What can be done pre-investment ? • During Implementation • New optics • Post Investment • Lessons Learned

23. Current Model Project Life Cycle Analysis Country Assistance Strategy Identification Vulnerabilities **Preparation** Where Corruption Can Occur Appraisal Negotiations and Board Approval Enforcement (Investigations) **Implementation and Supervision** Implementation and Completion Lesson Silo/ Impact Evaluation

24. Proposed Corruption Detection Method Project Life Cycle Analysis Country Assistance Strategy Corruption Assessment Identification **Preparation** Forensic Audits Where Corruption Can Occur Appraisal Enforcement (Investigations) Negotiations and Board Approval **Implementation and Supervision** Implementation and Completion Evaluation

25. Feeding the Lessons Back into the Project Project Life Cycle Country Assistance Strategy New Policy and Control Changes Identification **Preparation** Forensic Audits Where Corruption Can Occur Appraisal Enforcement (Investigations) Negotiations and Board Approval **Implementation and Supervision** Corruption Resource Center Implementation and Completion Lessons Learned Evaluation

26. What can be done pre-investment? The Corruption Assessment Borrowing From the Playbook of Private Investment Bank

27. Corruption Assessment Fund Recipients Contractors Conflicts of interest between recipients and contractors. Conduct detailed research into potential Fund Administratorss. Conduct detailed research potential Contractors. Clarify the nature of relationships between government officials and contractors. Check for undisclosed business interests and obtain financial disclosures Interviews & Reference Checks. Examine reputations, associations, activities and ethics of potential fund recipients and their contractors (companies and their key officers). Detailed Background Checks Interviews & Reference Checks. Verify Business Continuity. Existing allegations of fraudulent & corrupt practices. Contractors’ existing allegations of fraudulent & corrupt practices. Prohibited and restricted lists Search and interrogate all Anti-Money Laundering (AML)/Prohibited Lists and Debarment Lists. Full database background research. Full database background research including media searches, legal and corporate records. Identify undisclosed liabilities or questionable financial reporting. Establish a tickler system to review due diligence after project commences.

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