In This Issue
Spring Issue of The Bridge on Engineering Ethics
March 3, 2017 Volume 47 Issue 1

Addressing Corruption in the Global Engineering/Construction Industry

Wednesday, April 5, 2017

Author: William P. Henry

Estimates indicate that more than $500 billion is lost to corruption each year in the global engineering/construction (E/C) industry. While this economic loss is staggering, it pales in comparison to the losses suffered by people in need of water and wastewater projects, roads, schools, hospitals, and residences to improve their lives. Moreover, corruption kills people when projects are poorly constructed, and it reduces funds for needed infrastructure projects.

Corruption reduces the number of projects that are built and compromises the safety of those that are, and is therefore incompatible with sustainable development. Because engineers hold paramount the health, safety, and welfare of the public and support the principles of sustainable development, they must work to eliminate corruption from the E/C industry.

To that end, a constant dialogue is needed among engineers on ethical issues, and it should match the time spent talking about technical issues, safety, costs, and deadlines. For such discussion to be meaningful and effective, engineers need a common vocabulary on the subject.

Vocabulary of Corruption

Ethical behavior is the goal, but many engineers don’t have the vocabulary needed to discuss it. It may help to define components of the opposite of ethical behavior—corruption—to provide needed vocabulary.

Merriam-Webster (www.merriam-webster.com) defines corruption as the “impairment of integrity, virtue, or moral principle,” “inducement to [do] wrong by improper or unlawful means,” and “dishonest or illegal behavior especially by powerful people.” The latter includes the misuse of official power for personal gain.

In the E/C industry, corruption takes a variety of forms because there are so many types of organizations involved in projects:

  • public owners
  • private owners
  • engineers
  • constructors
  • lenders
  • material suppliers
  • equipment suppliers
  • regulatory/permitting agencies.

There are numerous possible interrelationships among these parties and corruption requires only two individuals to act together in an unethical manner, so myriad potential interactions can result in corruption during the procurement and/or execution phases of an E/C project. The main forms of corruption are

  • kickbacks and bribery
  • front companies
  • bid rigging and collusion
  • conflicts of interest
  • fraud
  • money laundering.

Any and all of these can occur on any project.

Kickbacks and Bribery

Kickbacks and bribery are two sides of the same coin. A kickback is a demand for payment by someone in a position of authority in return for a decision favorable to the prospective payee. Bribery is an offer to pay someone in a position of authority to make a decision favorable to the offeror.

The person in the position of authority seeking a kickback may be a purchaser (a government official, private owner, or purchasing agent buying materials, equipment, engineering services, or construction services); engineer, constructor, or supplier selecting subcontractors; lender making a decision to lend to a given owner; or regulator in charge of permitting or inspection decisions.

The person offering a bribe may be an engineer, constructor, material or equipment supplier (seeking business, permits, or inspection approvals), or owner seeking funding. In a recent case two senior executives of Louis Berger, a New Jersey–based construction management company, were sentenced to prison in July 2016 for bribing officials in India, Indonesia, Vietnam, and Kuwait in order to secure government contracts (USAO–New Jersey 2016).

Bribes can be direct payments or “political contributions,” known as “pay to play” payments, which keep qualified, ethical firms from obtaining work. In April 2016 three executives from Birdsall Services Group received prison sentences, fines, and disbarments for a scheme in which their employees made political contributions in New Jersey that the firm then reimbursed to the employees (OAG–New Jersey 2016).

By far the biggest fine for bribery—$1.34 billion—was levied by the US Department of Justice and Germany against Siemens AG for paying more than $100 million in bribes to the Argentine government in order to secure a $1 billion contract (Lichtblau and Dougherty 2008).

There are opportunities for kickbacks and bribery on all projects in all countries.

Front Companies

A front company is established in secret by a corrupt owner or staff to provide little service to a project while being paid substantial fees. It often serves as a local agent, providing services on an international project so it does not have to produce substantial work products.

A front company is usually a new company that has no available track record and offers a variety of unconnected services. Although these traits are also common among legitimate joint venture companies, the biggest difference is the availability of ownership records. A front company has few records of ownership because the owners do not want to be known; a legitimate joint venture has clear, open ownership records.

Bid Rigging and Collusion

Bid rigging and collusion can be accomplished by all members of an E/C project team—the owner, engineer, constructor, lender, supplier, or regulator.

Owners can rig bids by, for example, setting extremely short bid periods so that only the firms they illegally prenotify will be able to submit detailed, responsive bids, or by excluding qualified firms from bid lists that include only “favored” firms.

After contracts have been signed, collusion may involve deals between the owner’s and constructor’s personnel. For example, the owner’s staff may approve unjustified project modifications or change orders that raise the contractor’s revenue, lower its cost, or both, in exchange for compensation.

Constructors and suppliers may engage in bid rigging and collusion by agreeing among themselves which firm will get the contract on each of a series of projects. On each project, the agreed-upon winner submits an artificially high bid, and the others submit even higher bids. This gives excess profits to firms and reduces the funds available for other projects.

Bid rigging and collusion can also be parts of more complex corruption schemes.

Conflicts of Interest

All types of conflicts of interest are forms of corruption. The most obvious conflicts involve decision makers who get direct personal gain from their decisions on a project. Less obvious conflicts of interest involve the decision maker’s friends or family members who get the direct personal gain from a decision. All participants in a project have the potential for conflicts of interest.

Fraud

There are many opportunities for fraud in E/C projects; some of the most common fraudulent acts are

embezzling funds from project accounts

  • taking vehicles, computers, other project equipment or materials for personal use
  • using project funds, equipment, and/or materials for nonproject uses such as building or remodeling a house or taking a vacation
  • selling project equipment or supplies for personal profit
  • setting up employment and collecting paychecks for “ghost employees”
  • substituting lower-quality materials or equipment than specified in the contract, while billing at the contract prices
  • billing employees at rates higher than called for in their pay grades
  • falsely claiming Disadvantaged Business Enterprise (DBE) status.

In August 2016 Larry Davis, an executive with DCM Erectors Inc. that received nearly $1 billion in contracts to rebuild the World Trade Center in New York City, was convicted of wire fraud and conspiracy in Federal District Court in Manhattan (USAO–Southern District of New York 2016). His fraudulent behavior involved claiming that people were owners of qualified DBE firms when they were not.

In 2013 the Justice Department recovered nearly $3 million from TesTech and its owner Sherif Aziz, and CESO and its owners David and Shery Oakes, for falsely claiming DBE status on federally funded transportation projects in Ohio (USDOT OIG 2014).

Opportunities for all types of fraud are open to all project participants.

Money Laundering

Money laundering involves taking illegally obtained money (e.g., from bribes or kickbacks) and channeling it into legal businesses such as a construction company. The company’s revenue and expenses can be overstated and the resulting profit appears to be legitimate.

In March 2016 in Brazil, Marcelo Odebrecht, president of Odebrecht Construction, was sentenced to 19 years and 4 months in prison for corruption and money laundering (Dickerson et al. 2016).

Training is needed to ensure that all engineers fully understand the terms presented above, so that they recognize the behaviors and can communicate about corruption and related activities.

Tools and Programs to Promote Ethical Behavior

Corruption and projects can go together like summer and heat or winter and cold. But just as an individual can don appropriate clothing for heat or cold, an engineer can make sure that a project “dons” the appropriate protective gear to thwart corruption. Protective measures include management systems that are open, transparent, and implemented throughout the project, as well as a project team culture in which all engineers know the potential for corruption on the project, the actions they must take if they find it, and overall expectations of ethical performance.

Practical, economical, and successful personal training and management systems that prevent corruption on projects, and the organizations that developed them, are identified below.

Professional Societies

Most local, national, and international professional societies have adopted codes of ethics that guide their members toward acceptable actions and behavior on projects. Many also provide articles on unethical situations in their publications and have hotlines for members to discuss troublesome project situations.

The members of all these societies are individuals, not companies or agencies. The societies therefore offer materials and opportunities that focus on the individual engineer, including training in avoiding and dealing with corruption, and opportunities for networking with others from different parts of the E/C industry and from different countries.

The American Society of Civil Engineers (ASCE; www.asce.org) offers resources that address good management as well as ethical behavior. Its continuing education department delivers technical, management, and ethics seminars and webinars.

The ASCE Code of Ethics, amended in 2006 to more strongly address corruption, gives strong guidance on ethical practice to all ASCE members and presents the elements needed for a strong anticorruption culture. Canon 6 of the Code of Ethics reads:

Engineers shall act in such a manner as to uphold and enhance the honor, integrity, and dignity of the engineering profession and shall act with zero tolerance for bribery, fraud, and corruption.1

It further stipulates the following Guidelines to Practice:

  • Engineers shall not knowingly engage in business or professional practices of a fraudulent, dishonest, or unethical nature.
  • Engineers shall be scrupulously honest in their control and spending of monies, and promote effective use of resources through open, honest, and impartial service with fidelity to the public, employers, associates, and clients.
  • Engineers shall act with zero tolerance for bribery, fraud, and corruption in all engineering or construction activities in which they are engaged.
  • Engineers shall be especially vigilant to maintain appropriate ethical behavior where payments of gratuities or bribes are institutionalized practices.
  • Engineers should strive for transparency in the procurement and execution of projects. Transparency includes disclosure of names, addresses, purposes, and fees or commissions paid for all agents facilitating projects.
  • Engineers should encourage the use of certifications specifying zero tolerance for bribery, fraud, and corruption in all contracts.

In addition, ASCE’s publication Leadership and Management in Engineering devoted an issue to Addressing Corruption in Our Engineering/Construction Industry (Henry 2009).

At the international level, a number of global or regional societies are active in addressing corruption. Engineers Australia (EA) has been active in revising the country’s National Code of Practice for the Construction Industry (www.fwbc.gov.au). Firms working on government-funded projects there must be in compliance with the code, including all its provisions for ethical behavior. And the World Federation of Engineering Organizations (WFEO; www.wfeo.org), Asian Civil Engineering Coordinating Council (ACECC; www.acecc-world.org), and Pan American Union of Engineering Societies (UPADI; http://upadi.com) each has a standing anticorruption committee that holds annual meetings to share information and leads workshops on addressing corruption on projects.

Constructors

In 2005 the firms in the E/C section of the World Economic Forum launched the Partnering Against Corruption Initiative (PACI),2 a private sector, supply-side initiative to establish multi-industry principles and practices to eliminate corruption in project procurement and performance. More than 140 companies from 39 countries have agreed to the PACI Principles for Countering Bribery, which are based on integrity, fairness, and ethical conduct. The chief executive officer of each participating company pledges, in writing, to

  1. commit the company to a zero-tolerance policy for bribery, and
  2. implement a strong, active anticorruption program to guide the behavior of the company’s employees.

Consulting Engineers

Consulting engineering firms, through the International Federation of Consulting Engineers (FIDIC; http://fidic.org), have developed strong anticorruption programs for engineering and procurement activities with their Business Integrity Management System (BIMS) and Government Procurement Integrity Management System (GPIMS).

FIDIC uses the term “integrity management” because (1) ethical integrity is needed to fight corruption and (2) a strong management system is needed to control a firm’s activities and verify its ethical performance. BIMS provides management documents and examples for companies, and is tailored to a firm’s engineering units; it can be independently verified as an ISO 9000 management system (more on the ISO below). GPIMS is tailored to an organization’s procurement units.

Construction Observers

Transparency International (TI; https://www.transparency.org), a long-time observer of the global E/C industry, has developed business principles, guidelines, and implementation and verification plans for countering bribery, as well as a Corruption Perceptions Index, which rates the openness of a country’s decision-making processes. The more open the process, the less risk of corruption. According to the TI Bribe Payers Index of 2011 (www.transparency.org/bpi2011), public works and construction were the most corrupt industry sectors.

TI’s Project Anticorruption System (PACS) has standards and templates that target bribery and fraud through independent monitoring, due diligence, contract terms, procurement requirements, government commitments, corporate programs, programs for individuals, training, reporting, and enforcement. PACS has been distributed to TI national units, engineering and construction associations, banks, and governments.

Lenders

Major international lenders—such as the World Bank, African Development Bank, Asian Development Bank, Inter-American Development Bank, European Investment Bank, European Bank for Reconstruction and Development, and International Monetary Fund—have standardized their approaches for dealing with corruption. They are also developing proposals to assist countries in combating corruption by providing information about changes governments can make in project procurement procedures and about the roles and activities of regulatory and permitting agencies. Checking on how a government agency does business is always part of complete due diligence.

Standards Organizations

On October 15, 2016, the International Standards Organization (ISO) adopted an antibribery standard (ISO 37001), a management system standard that can complement the standards for quality (ISO 9001), environment (ISO 14001), and safety (ISO 18001). All of these standards need to be included in all project contractual requirements.

ISO 37001 replaced the British Standards Institute (BSI) Standard 10500, the antibribery standard that BSI adopted in 2011. And the American National Standards Institute (ANSI) supports the adoption of ISO 37001.

Independent Industry Groups

The Global Infrastructure Anti-Corruption Center (GIACC; www.giaccentre.org) was founded in 2008 by two experienced construction attorneys in England. The independent, nonprofit organization promotes implementing  anticorruption measures in managing  companies, agencies, and projects. Its approach to managing corruption is similar to the ways safety, quality, and risk are controlled: through procedures, training, monitoring, and enforcement. It led the development and adoption of ISO 37001 and BSI 10500.

The center’s website has a wealth of useful information, including descriptions and examples of corruption that are useful for vocabulary and training exercises; examples of anticorruption programs suitable for agencies, companies, and lenders; a complete project anticorruption system designed to prevent and detect corruption on projects; and an array of anticorruption tools, including

  • sample contract terms
  • a corporate code
  • due diligence procedures
  • sample employment terms
  • gifts and hospitality policy
  • reporting requirements
  • training needs and programs
  • ideas for achieving transparency in an organization.

The GIACC website also provides materials for starting an anticorruption program or for benchmarking an existing program against others. Of particular use is the information on due diligence, covering the laws of the country of the project, confirmation that the project is necessary and conceived for a legitimate purpose, the owner’s history, potential business partners, and contract terms to help ensure that corruption will not be part of a project.

Another resource, the Anti-Corruption Education and Training (ACET) program, was created by international participants in the E/C industry to provide good ethical training for practitioners (and students). The ACET team raised funds, hired a writer and producer, and, with them, developed the script for a 42-minute DVD drama, Ethicana, depicting corruption in the procurement and production of a project. The complete Ethicana package contains the DVD, classroom materials, trainer materials, and a “train the trainer” module.

ACET’s Ethicana resources reinforce the vocabulary needed for dialogue about anticorruption and present situations that both procurement and project staff may face on projects. The situations depicted were developed from the actual experiences of the ACET team members.

After reviewing situations in a classroom, and discussing them with senior personnel and peers, engineers are better able to handle ethical issues in their work. Ethicana shows why engineers should act ethically while following an anticorruption program that tells them what to do. It has been successfully used to train engineers in more than 20 countries on six continents.

Summary

E/C projects are vital to the people for whom they are built, and important to agencies in implementing their mission as well as lenders and firms to keep their business thriving. All indications are that there will be more global projects in the future than ever before. Many are forecast in developing countries where corruption has been systemic. It will take vigilance and ongoing management attention to keep corruption at bay on all projects in all countries.

The two most effective tools for ethical practice are

  1. a project culture founded on ethics, embraced by all levels of staff and management, and communicated to all project team members and business partners; and
  2. strong management systems that start from the highest echelons of the organization and whose implementation is regularly verified throughout the organization.

For the first tool to be effective, all employees must be able to talk with a common, well-understood vocabulary. The importance of this vocabulary cannot be overstated—it is the cornerstone of the ethical component of a project, the difference between people talking with each other versus talking past each other. It enables regular discussions on ethics among engineers, between engineers and managers, and among managers.

For the second tool to be effective, organizations must have anticorruption systems that clearly demonstrate a strong conviction to keep corruption away from projects. Such systems are the day-to-day guardians against corruption. If they are in place, it is wise to benchmark them against what others are doing; if they are not, now is the time to develop and implement them.

There are many sources of information on effective anticorruption systems, which can be developed in stages. The important thing to remember is that these systems are only words on paper unless they are implemented with top-down authority and their continuous use is verified on a regular basis.

Anticorruption materials, guidelines, and training programs give real-life meaning to the words through realistic examples of corruption. These materials can make corruption less likely to occur on every project.

Acknowledgments

This article is dedicated to the memory of Arthur J. Fox, the ASCE president in 1976 who contributed so much to the society’s current anticorruption initiatives and was instrumental in the success of the ACET program that produced and distributed Ethicana.

The contents of this paper have been developed over the past 12 years, during which I have been active in addressing corruption in the E/C industry. Its contents come from interactions with leading engineers, constructors, lenders, NGO leaders, and attorneys. Members and staff of the American Association of Engineering Societies (AAES), ASCE, FIDIC, PACI, EA, GIACC, WFEO, and, most recently, the Pan American Academy of Engineering (API) have added important ideas. If I were to name all from whom I learned, the list would be longer than this article. They all have my thanks for their efforts to address corruption in the E/C industry.

References

Dickerson M, Magalhaes L, Lewis JT. 2016. Odebrecht ex-CEO sentenced to 19 years in prison in Petrobras scandal. Wall Street Journal, March 8.

Henry W, ed. 2009. Addressing corruption in our engineering/construction industry. Leadership and Management in Engineering 9(3).

Lichtblau E, Dougherty C. 2008. Siemens to pay $1.34 billion in fines. New York Times, December 15.

OAG [Office of the Attorney General]–New Jersey. 2016. Ex-CEO of Birdsall Services Group sentenced to prison for evading pay-to-play law by using employees to make illegal political contributions. News release, April 22. Trenton.

USAO [US Attorney’s Office]–New Jersey. 2016. Two former executives of Louis Berger International sentenced in foreign bribery scheme. Press release, July 8. Newark.

USAO [US Attorney’s Office]–Southern District of New York. 2016. CEO of steel contractor on World Trade Center site convicted at trial of fraud in connection with program designed to encourage participation of minority and women-owned businesses. Press release, August 10. New York.

USDOT OIG [US Department of Transportation Office of Inspector General]. 2014. Seven Ohio businesses and individuals suspended for DBE fraud. Investigations, February 7. Washington.

FOOTNOTES

1 The ASCE Code of Ethics is available at www.asce.org/code-of-ethics.

About the Author:William P. Henry, PE, is a past president (2005) of the American Society of Civil Engineers.