In the July 31, 2014 edition of the Jakarta Post there was a featured article “Smith & Wesson bribery scandal involves National ?Police officers,” which reported that  “the Indonesian Corruption Watch (ICW) has called for an investigation into an alleged attempt by US gun-maker Smith & Wesson to bribe officials at the National Police.” Such civil group investigations into the “demand” side of bribery is very relevant to a recent paper by? Transparency International (TI) called  “Curbing Corruption in Public Procurement, A Practical Guide.” The TI paper, as stated in the on-line brief, “provides government officials, businesses and civil society with a practical introduction to the risks of corruption in public procurement.”

In addition, the report “outlines key principles and minimum standards which, when respected, can protect public contracting from corruption.” In my experience and opinion, the Guide goes well beyond that scope, and is an incredibly reflective representation of corruption risks that are prevalent in international public procurement. Thus, I hope that my comments, where I reflect on my encounters with such corruption, might lend additional value to this already compelling work through the elevation of real world examples and perspectives.

As the report states in the introduction “few government activities create greater temptations or offer more opportunities for corruption than public sector corruption,” and the OECD estimates that “corruption amounts to between 20 per cent and 25 percent of the procurement budget.” Thus, procurement corruption is a problem and dynamic that exists both on paper and in reality, and as the OECD points out, on a massive scale.  While the TI paper does an excellent job of breaking down public procurement into four chronological stages, what I found resonating was the description of how there is a continuum of corruption in terms of level and scale. The report speaks of corruption by “low and mid-level public officials” (see prior post on TI paper “Countering Small Bribes”) and “corrupt acts committed at a high level of government.” 

The guide also calls attention to subtle forms of corruption that are used to “manipulate budget allocations and project selection, even before the contracting process begins.” Indeed, as the report calls out, such activities occur “through the manipulation of eligibility criteria in the tender documents, or having technical specifications that are biased and without merit.” That description reminded me of a tender in the Middle East whereby the delivery period as stated in the specification was prohibitively short, as getting the necessary regulatory licenses after award would actually burn through through the entire delivery period.  It was a requirement to which adherence would be impossible, or so I thought.

Hello I must be going

I travelled to the Middle East to meet with the procurement chief (this was a substantial tender) and to see if this requirement could be changed as to allow for a reasonable delivery period “after regulatory licenses” were secured. In non-procurement speak, I was asking for a delivery period that would be fair to all bidders, as no vendor could control how long it would take to get a license.  Well, as I sat there professing the need for a modification, I noticed that on the chief’s desk was the approved and signed license for the competitor, who was also the incumbent supplier. To get that license, the competitor needed the end-user signature (being the person to whom I was speaking), and that would have occurred three to four month prior. Thus, needing no translator, and understanding what I was facing, I finished my coffee, thanked the procurement official for his time, and departed.

That is but one example of a public tender where one entity knew via corruption that it was going to receive an award, and the procurement authority used a restrictive delivery period as called forth in the tender document, to guarantee the result. It takes two to corrupt, and I hope this example demonstrates how both the supply and demand side work together to get a desired outcome, as the Guide states “even before the contracting process begins.” While I don’t know if a bribe was paid in my Middle East example, does it really matter, as the process itself was corrupted?

 Small Island, big purchase

The report talks of the “Financial Impact” of corruption, as “burdening a government with financial obligations for purchases or investments that are oversized, not needed or not economically justified.”  This is a very real and serious issue, and I have seen numerous examples of needless and wasteful purchases, some of which were designed to facilitate corrupt transactions (sometimes it was just disorganization and the output of inefficient procurement processes and personnel).  Either way, such procurements do not facilitate the public good through the acquisition of products and services that are needed by governments and hence, serve the well being of the citizenry.  I recall one story of a small island nation with an outgoing leader who started a buying binge prior to his departure from office. During that time period, there was a large procurement of  defense product, far beyond what the tiny island could have needed for domestic security, and I remember asking the sales manager, "what are they going to do with all that stuff?"

I didn’t really need an answer, I knew this was wrong,  and my question was rhetorical as part of my own rationalization process.  It was certainly clear to me that the purpose of that procurement had nothing to do with domestic security and it was nothing but an unnecessary purchase with corrupt intent under the “umbrella” of public safety.  A very telling example, and as the report states, these are funds that “could be used to provide or improve essential amenities and services” as opposed to facilitating corruption for personal financial benefit.

Principles                                                                                                               

The paper sets out a number of principles that “minimize corruption risk” in the procurement process, and a number of them resonated with me in the context of my own experience but the one that caught my attention was professionalism.  As the report states, “where procurement officials are poorly paid, badly trained or lacking a viable career path the risk of corruption increases.” Here we have a dangerous dynamic from the perspective of trying to change corrupt procurement environments. As Mr. Matteson Ellis states “when low-level government officials are not paid enough, they sometimes rationalize seeking rent by other means.”*

Making the Pension

Where you add regime change, which brings in a new group of procurement officials, it is a recipe for procurement corruption on a number of levels. After these new procurement officials get seated, they may aggressively seek bribes knowing their employment might be of limited term due to the next changeover (as with their predecessors).  I remember one such instance, post regime change, where an intermediary shared how there was going to be a series of procurements, as new officials knew that they only had a few years “to make their pension.” Accordingly, in such regions where you have low paid officials, high turnover due to regime change, and a lack of training, I see few solutions to this corruption spiral.  As described by Mr. Ellis, in such regions with weak state institutions,  “bribe requests might be baked into the economic order.”

Like the sales person on the front line of international business who may be looking at a pay check that speaks to “win above all else,” for the procurement official who sees nothing but opportunity to supplement what might be a meager state pay-check, both sides now look at corruption as win-win.  Small bribe or big bribe, this is a dangerous dance for all involved.

Corruption in the Dark

As the report states, “corruption thrives in the dark,” and “lack of information on governmental activity and decision making can easily hide corrupt manipulation of decisions in a procurement process.” So what can be done? Well, until governments seek to address the issues of training, compensation and turnover with respect to procurement organizations and personnel, perhaps the part of the TI Paper called “Checklist for Government Officials,”  (page 21, 3.2.) should be reviewed. This is a critical section which was designed to highlight red-flags “about the integrity of the process,” and which might also be a suitable guide for multinationals. In other words, where those inherent procurement red-flags exist within a region, country, or ministry, perhaps the corporation is well advised to “stay-away” until those built-in institutional perils are addressed and changed.

Accordingly, we are left with organizations such as Transparency International and those like the Indonesian Corruption Watch, who are not going to let the issue of bribery remain solely with the regulators at the individual and corporate level. In my experience, corruption risk needs to be addressed through a continued focus on international public procurements, as this is where the “demand” side of corruption exists. My complements to TI for publishing the Guide on Procurement; I found it surprisingly reflective of the realities “on the ground” of international business.  

* in How to Pay a Bribe  “Regional Flavor: Crosscutting Corruption Issues in Latin America,” which makes a very relevant companion guide to the TI piece.
 

Topics:  Bribery, Compliance, Corruption, FCPA, Federal Procurement Systems, OECD, Procurement Guidelines, Public Entities, Public Procurement Policies, Smith & Wesson, Transparency

Published In: General Business Updates, International Trade Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Richard Bistrong FCPA Real-World Blogger and Speaker | Attorney Advertising

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