International corruption: What's your game?

Latest: Corruption and Money Laundering

International corruption: What's your game?

Brazil was the focus of the world's attention this summer and will be in the spotlight again in 2016 when Rio de Janeiro hosts the Olympic Games. For the World Cup, the government of Brazil committed itself to a stadium development plan worth $1bn, although more recent reports suggest that the final cost will be closer to $3.5bn.

The Brazilian public was so outraged by the rising costs that mass demonstrations took place, and the government responded by putting in place a Congressional investigation to examine the costs and any potential corruption involved.

In any instance requiring vast public funds to be spent on large infrastructure projects, it is ever more critical that governments and contractors are alert to the fraud and corruption risks they face and how these can be mitigated. This is particularly relevant to emerging markets, where the distinction between government and industry can become blurred. The Brazilian government has been working hard to put in place an infrastructure to support the economic growth that a resource-rich nation expects.

In 2011, the OECD reported over three decades of under investment in infrastructure by successive Brazilian governments. According to the International Energy Agency, Brazil is expected to become a net exporter of oil by 2015, which offers room for the Brazilian government to commit to new infrastructure projects.

Understanding how much will be invested in infrastructure projects is not an exact science; the numbers quoted in the two plans announced in 2010 and 2011 (PAC I and PAC II as they are known) detail as much as $1 trillion in planned expenditure. The final numbers are likely to be lower than this as Brazil historically delivers about onefifth of its planned spending. In 2013 just 17.6% of the budgeted annual infrastructure spending was delivered.

There is evidence that momentum for these projects is picking up, with the Finance Ministry Deputy Secretary, Leonardo Lima Machado stating that $49.7bn of tenders are planned for 2014. So what fraud and corruption risks in delivering such vast infrastructure projects should governments such as Brazil be aware of? Issues of corruption and money laundering are global, and not specific to one country. What is key from Kroll’s experience of investigating issues on behalf of governments and corporations is to properly understand the cultural nuances of how business is conducted and ensure that sufficient controls are in place to reduce risk and know where to focus your investigations. Take the well known case of Paulo Maluf, former mayor of Sao Paulo who had millions of dollars of assets frozen by the Courts of Jersey in the Channel Islands. In this scheme an original project worth $200m reached a final cost of $600m.

It says a lot about Brazil that in a country where there is a nickname for everything, they have one for money laundering. The Portuguese word for orange “Laranja” describes people who allow their personal information and bank accounts to be used to facilitate illicit activity.

Why is corruption so widespread surrounding sporting events?

Certain factors make the delivery of projects associated with major sporting events highly susceptible to fraud. These include:

• A sporting event has an immovable starting date = pressure to get the work done;
• The budgets for the sporting event are very large = opportunities to hide overbilling schemes;
• The host country will benefit by the delivery of a spectacular event = rationalisation for politicians to allow wasteful expenditure.

Sport can no longer be considered as just entertainment or recreation – it is a billion dollar industry which in the UK employs over 400,000 people and contributes over £20bn or an equivalent of 2% to the UK economy. In the US, which is one of the largest markets for sport related activity, over 1.3 million people are employed in jobs related to leisure and recreation.

There are ever more frequent reports of corruption in sport. Prominent examples include the International Olympics Committee Salt Lake City bribery scandal in 2002 and the betting syndicates whose corruption led to several international cricketers in the UK being given prison sentences. High profile sporting events bring with them great opportunity to the host city and country, and inevitably big budgets to be spent in relatively short periods of time by new, hastily put together committees and government bodies. Often, key decision makers have little experience of delivering such vast events and managing such large budgets. Inevitably the focus is around putting on the best show possible, therefore it is understandable that fraud and corruption may not be at the forefront of organisers’ minds. Fraud risk reviews that consultants like Kroll would typically be asked to undertake by corporates or investors taking on high risk, complex projects can sometimes be overlooked.

It is often only after the event or close to launch that issues come to the fore. Sochi received extensive negative publicity when hosting the 2014 Winter Olympic Games. London 2012’s Olympic Games was not immune either, with several allegations of impropriety surrounding ticket sales.

Are emerging markets like Brazil more susceptible to corruption?

Transparency International reported in its Corruption Perceptions Index that Brazil scored 72nd out of 177 countries with a score of 42 in 2013. It is worth adding that no country in the survey was given a score of 100. In Brazil’s case, the score of 42 points is below the threshold of 50 where Transparency International describes a country as having a serious corruption problem.

The truth is Brazil and other emerging markets are no more or less susceptible than western counterparts in delivering major infrastructure projects. What is key is how a country applies controls to mitigate risks at the outset. Even more crucial is tone from the top, in the way in which governments and corporates take a zero tolerance stance against corruption. Kroll is more typically called upon to investigate allegations of corruption in emerging markets; however this does not mean that such issues don’t exist in the developed economies. What it does reflect is how frequently corporations and governments seek the opportunity, without proper consideration for the risks associated with it. This is especially the case when operating in jurisdictions outside of a home territory without proper understanding of local culture.

There is no magic formula to investigating corruption. Each case has to be approached on its own merits. There are, however, some basic rules which apply to internal investigations, if suspicions of corruption arise:

• Checking overspends on original commitments on contracts or purchase order;
• Find out which suppliers have been hired without a tender process;
• Ensure the organisation has a robust compliance programme that can identify potential red flags of corruption.
• Ensure the organisation has a right to perform third party audits on suppliers;
• Oblige all employees to offer full cooperation on internal investigations.

For external corruption investigations, the key for the investigator is to follow the money. The exact methodology applied by an investigation team following the money trail will vary depending on the type of scheme. At times the clues available in interviews or paper trails will run cold using traditional investigation methods.

Kroll, in cooperation with legal counsel, have recently made successful applications to local courts to gain disclosure orders. A disclosure order is a useful tool to reveal the ultimate beneficiary of corrupt payments and help the injured party get one step closer to an asset freezing order.

How can sporting organisations ensure money is being spent legitimately around major sporting events?

The majority of sporting federations have their origins as custodians of amateur sports and have not caught up with the need to comply with modern corporate governance rules.

With the growth in interest in international tournaments such as the World Cup, which in 2010 generated revenues in excess of $3bn for FIFA, these organisations are now multinational corporations and they would be better served by subjecting themselves to the same scrutiny as any FTSE or NYSE public listed company.

Organisations such as FIFA should follow the example of the IOC and make votes on key decisions public. There should also be increased transparency around the bidding for media rights and corporate sponsorship deals, some of which have been subject to allegations of corruption in the past.

Whatever extra transparency sporting bodies can bring to their operations will allow them to improve the public’s perception of their actions and reduce the opportunity for rogue elements to engage in corruption schemes. Until they do companies like Kroll will still be busy chasing the bad guys.