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Efforts at international and national levels are being made to curb corruption in construction and to promote transparent public contracting processes. Presented below is a selection of resources on this.

Part 1 looks at international standards and
recommendations aimed at preventing corruption in the industry.

Part 2 provides a collection of practical tools that can be applied to minimize the risks and prevent opportunities for corruption in construction.

Part 3 lists further recommended readings on the topic.

Annex - TI introductory report: Anti-Corruption Initiative in the Construction and Engineering (C&E) Industry

Construction remains one of the sectors most affected by corruption, which can occur throughout the whole cycle of contracting processes from procurement and contract award to execution and evaluation. Given the vast opportunities for corruption in the sector, it is not uncommon for corrupt officials to direct social and economic resources and development towards large capital-intensive infrastructure projects that provide fertile ground for corruption. This will often be done at the expense of under-spending and under-development in such essential sectors as health and education. In addition, corrupt contracting processes can leave developing countries saddled with sub-standard infrastructure and excessive debt.

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Part 1 - International standards and recommendations

Business Principles for the Construction Sector
A document setting out key principles for countering bribery in the construction sector was endorsed under the auspices of the 2004 World Economic Forum in Davos by 19 leading international construction firms with annual revenues in excess of $70 bln (the initiative has been facilitated by the WEF, Transparency International and the Basel Institute on Governance) in attempts to bolster transparent and ethical business conduct in the industry. The companies have committed to fundamental principles, such as zero tolerance policy on bribery and development of practical and effective programmes of internal systems and controls for implementing that policy. The document is attached to this U4 reply.

TI Minimum Standards for Public Contracting
The Standards provide a global baseline for public contracting rules that meet minimum international standards. These will be launched with the Global Corruption Report 2005 in March 2005 (see below for more information on the GCR 2005, its contents and the launch date).

Recommendations for Multi-Stakeholder Action
This is a set of recommendations that lists measures that can be taken by the various actors and stakeholders (such as governments, companies, IFIs, banks, export credit agencies, etc.) to prevent corruption in the construction sector. These recommendations will be presented by TI in the GCR 2005. The recommendations build on an earlier document by TI UK - Proposed Actions to Eliminate Corruption in Construction and Engineering Industry (annexed).

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Part 2 - Practical tools

There are tools designed to assist in the prevention of corruption in construction and public contracting. One such example is the use of integrity pacts (IPs) - for background information on integrity pacts see TI website. TI UK has designed three integrity pacts for use specifically in the construction and engineering (C&E) sectors at the various stages of contracting, including execution. They are intended for use in both the public and private sectors. They contain enforceable sanctions and their effectiveness is assured by an independent assessor.

• IP Sector: An agreement between C&E companies working in the same sector to act with integrity when they compete against each other in tendering for any project anywhere in the world.
  
  
• IP Project - Pre-qualification and Tender: An agreement between the client, designer (if applicable) and all bidding C&E companies to act with integrity in relation to the pre-qualification and tender process for a specific project.
  
  
• IP Project - Execution: An agreement between the client, certifier (if applicable) and the selected C&E company to act with integrity in relation to the execution of a specific project.

Other tools and measures designed to prevent corruption in construction include:

Agency Due Diligence
This is a pro-forma questionnaire and assessment sheet in relation to agency agreements. It is designed to be used by banks, export credit agencies and auditors to assist them in assessing whether an agent appointed by a C&E company is a legitimate agent appointed to undertake genuine services for a reasonable fee, or whether the agent has been appointed to act as a conduit for the payment of a bribe.

Business Partner Due Diligence
This document suggests actions which should be taken by C&E companies to try to ensure that their business partners (e.g. agents, consortium and joint venture partners, and major sub-contractors) do not engage in corrupt activities in connection with the C&E company's business.

Claims Management Code
This is a code of conduct relating to contract claims designed to be entered into by companies operating on the same project, or which frequently undertake business with each other. The code aims to eliminate deceptive practices in relation to contract claims. It obliges claimants to take reasonable steps to ensure that all claims submitted by it are genuine and accurate, and are supported by proper evidence. The recipient would be obliged to take reasonable steps to review the claim diligently, objectively and in good faith, and to pay promptly any amounts due.

All of the above tools and the supporting documentation can be found on TI UK's website.

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Part 3 - Recommended Reports and Literature

GCR 2005
The 2005 edition of TI's Global Corruption Report (GCR) focuses on the issue of corruption in the construction sector. It features articles, case studies and recommendations for action. The GCR 2005 will be launched by TI on March 16, 2005.

Reports of the Anti-Corruption Initiative in the Construction and Engineering Industry
The following reports, produced by TI UK, are available for downloading at this site.

Report 1 - Introductory Report
The report provides information on the problem of corruption in the C&E industry, the damage which corruption can cause, examples of corrupt practices, the law in relation to corruption, and proposed actions which could be taken by the various participants in the industry to eliminate corruption.

Report 2 - Examples of Corrupt Practices
The report provides 15 examples of corrupt practices in the C&E industry. It is intended to highlight the wide scope of corrupt practices, and to alert people to these practices.

Report 3 - Frequently Asked Questions about Corruption (for Contractors and Consultants)
The report provides information and advice on corruption to C&E companies. Some of the issues examined are whether a C&E company can be liable for bribes paid by agents, joint venture partners and sub-contractors; the consequences of corrupt actions for both C&E companies and individuals; and whether an employee can be personally criminally liable if he was obeying the instructions of his employer. The report also recommends actions which C&E companies can take to eliminate corruption. It is designed to help both C&E companies and the individuals who work in such organisations (as corruption carries both a corporate and a personal risk).

Report 4 - Corrupt Practices on Construction Projects - The Business Risk to Banks, Export Credit Agencies, Auditors and Shareholders
The report gives an example of a project which is procured by a bribe, and which is terminated by the client for illegality once the bribe is discovered. The resultant business risks to the C&E company's shareholders and auditors, and to the relevant export credit agencies and banks, are then assessed. Proposals are put forward as to how these parties can minimise the resultant risks to themselves by undertaking greater due diligence.

Report 5 - The Prevention of Bribery through Agency Commissions
The report is designed to assist banks, export credit agencies and auditors in preventing or identifying the use of agents' commissions to pay bribes. It provides an example of how an agency agreement is used to conceal the payment of a bribe, summarises the damage and risks which result from bribery, and provides recommendations as to increased due diligence which could be undertaken.

Report 6 - Integrity Pacts
The report examines the use of enforceable agreements between companies to behave with integrity in relation to C&E projects. This type of agreement is commonly known as an integrity pact, and has been used in varying forms on projects in a great number of countries. The following aspects are examined:

1. specific integrity risks in relation to a C&E project which should be covered by an integrity pact,
2. reasons why all parties to an integrity pact can benefit from the use of the pact,
3. types of integrity pacts, and their key components,
4. role of an independent assessor in policing the integrity pact,
5. sanctions for breach of the integrity pact.

Managing Integrity and Striving for Excellence - Corruption Prevention Package for Construction Industry, ICAC Hong Kong, 1998
This publication, which can be used as a reference by managers of construction firms, lists out examples of corruption cases in the industry, traces their causes for happening and explains the core elements of a corruption prevention strategy.

Corruption in the Construction Industry: Forms, Susceptibility and Possible Solutions, Winston M.W. Shakantu, University of Cape Town, 2003
This paper reviews construction industry related corruption literature. It shows that corruption flourishes in virtually all phases of the construction process and that participants at every level engage in it. At one point or another some form of corruption such as extortion, bribery, theft, fraud, collusive bidding/bid rigging etc takes place within the confines of the construction project. Areas of prevalence and susceptibility are discussed. The objective of the paper is to show the effects on the construction process and offer possible solutions. Cases identified within Southern Africa and beyond are outlined.

Additional work in progress on Corruption and Public Contracting

Handbook on fighting corruption in public contracting (this is an upcoming resource, expected to be available in a few months' time).

TI Discussion Paper on Disaster Reconstruction (the paper discusses the risks of corruption in public contracting step by step and offers some recommendations for action. Although framed in the context of relief efforts, it also assesses risks relevant to public contracting in general.

The above two resources can be accessed through contacting TI programme manager on public contracting, Juanita Olaya.

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Annex

Anti-Corruption Initiative in the Construction and Engineering (C&E) Industry
PROPOSED ACTIONS TO ELIMINATE CORRUPTION

From: Introductory Report (Report One - full text)
By Neill Stansbury, Transparency International, UK, September 2003

The following proposed actions have been divided between different principal categories of participant in the C&E industry. These proposed actions are recommendations only, and are not regarded as complete or exhaustive. They are included below in outline only. It is anticipated that, during the course of the initiative, modifications and enhancements will be made to the proposals, and that additional proposals will be developed by the participants. It is acknowledged that these recommendations would need to be tailored to the different needs of participants, and that some participants will already have sophisticated and effective integrity programmes.

Actions Proposed for C&E and Consulting Organisations
46. C&E companies, and consulting organisations, to undertake the following actions:

• adopt and comply with a written set of business principles which expressly excludes corrupt practices;
  
• increase awareness amongst staff of corruption and its consequences through training and publicity;
  
• improve their internal controls and audits so as to maximise the chance that corrupt practices are discovered and prevented;
  
• encourage staff to report corrupt practices, and protect them from consequent retribution;
  
• discipline staff who engage in corrupt practices;
  
• exercise sufficient control over subsidiary and associated companies and joint ventures so that they do not engage in corrupt practices;
  
• undertake effective due diligence on agents, business partners, sub-contractors and suppliers so that they do not engage in corrupt practices in connection with the organisation's business;
  
• exclude "facilitation" payments;
  
• ensure that contract claims accurately reflect contractual entitlements, and are not exaggerated or falsified;
  
• develop and enter into the appropriate business sector agreements and codes of conduct referred to in paragraphs 50 to 52 below;
  
• in the case of consultant engineers or architects, avoid undertaking the dual and potentially conflicting roles of designer and certifier in relation to a construction project;
  
• report corrupt practices to the authorities, and to any applicable trade or professional association.

47. TI and Social Accountability International have, with several leading companies, developed Business Principles for Countering Bribery for this purpose. These principles aim to create an internationally acceptable business model.

Actions Proposed for Trade Associations (associations of C&E and consulting organisations)
48. Trade associations to undertake the following actions:

• adopt and publicise a written code of conduct which expressly excludes corrupt practices;
  
• increase awareness of corruption and its consequences through training and publicity;
  
• discipline member organisations who do not comply with the code of conduct (including fines, suspension and strike-off);
  
• report member organisations who have engaged in corrupt practices to the authorities;
  
• encourage equivalent industry associations in other countries to undertake similar actions in those countries (so as to contribute to an international consensus);
  
• establish a mechanism to receive, and to pass on to the authorities, reports from member organisations about other organisations who are alleged to have engaged in corrupt practices.

Actions Proposed for Professional Associations (representing individual engineers, architects, quantity surveyors, lawyers and accountants)
49. Professional associations to undertake the following actions:

• adopt and publicise a written code of conduct which expressly excludes corrupt practices and which imposes a high ethical standard on its members;
• increase awareness of corruption and its consequences through training and publicity;
• discourage their members from carrying out the dual and potentially conflicting roles of designer and certifier in relation to a construction project;
  
• discipline members who do not comply with the code of conduct (including fines, suspension and strike-off);
  
• report members who have engaged in corrupt practices to the authorities.

Proposed Business Sector Agreements and Codes of Conduct

50. Sector-wide non-bribery agreement

• Organisations operating in the same business sector to enter into enforceable undertakings with each other not to pay bribes in their business sector. This type of accord will probably only be achievable in high entry-cost sectors in which there are a relatively limited number of major competitors (e.g. dam civil contractors, turbine manufacturers, deep water marine dredging etc.).
  
• The enforcement of the agreement would be assisted by implementation of the proposed actions to be taken by export credit agencies and financing organisations referred to in paragraphs 56 to 59 below, and by the introduction of the independent assessor referred to in paragraphs 60 to 62 below.
  
• Organisations which are found to have breached the accord would automatically be reported to the authorities for investigation and prosecution. The accord could also contain additional penalties (for example payment of a fine).

51. Project-specific non-bribery agreement

In relation to a specific project, the client, the client's consultants and all bidding organizations should sign an agreement under which they commit not to bribe, and to operate in a transparent environment. This agreement could include the following main features:

• an undertaking by the bidders not to offer or pay bribes or to collude with other bidders;
  
• an undertaking by the client not to demand or accept bribes, and to prevent extortion and the acceptance of bribes by its staff;
  
• sanctions by the client against any of its staff or consultants violating the non-bribery
  commitment;
  
• sanctions by the client against any bidders who violate the non-bribery commitment (e.g. forfeiture of the bid or performance bond, cancellation of the contract, blacklisting from future contracts, payment of damages to the client, and payment of a penalty to all competing bidders);
  
• disclosure by the bidders of all proposed and actual payments to agents and other third
  parties;
  
• disclosure by the winning bidder to the client of its project accounts;
  
• an undertaking by all parties to handle contract claims and payments in an ethical manner;
  
• an undertaking by any party which is handling a certification function to act impartially and diligently.
  
• Where the client is a government agency, the agreement would have the following additional features:
  
• an undertaking by the government to prevent extortion and the acceptance of bribes and
  facilitation payments by all government officials;
  
• a mechanism under which the bidders and winning organisation could report officials who demand bribes and facilitation payments;
  
• sanctions by the government against any of its officials violating the non-bribery
  commitment;
  
• the involvement of an independent assessor in monitoring the bid process, the bid evaluation, the award decision and the implementation of the contract (see paragraphs 60 to 62 below for details of the role of the independent assessor);
  
• public disclosure of the award decision, including the major elements of the evaluation and the reasons for the selection of the successful bidder;
  
• public disclosure by the winning bidder of its project accounts.
  
• TI has developed a model agreement incorporating many of the above features (an Integrity Pact), derivations of which have been used with success on specific projects in several countries, including Argentina, Colombia, Ecuador, Mexico, Pakistan, Korea and Italy. This is an important initiative by TI in promoting transparent procurement practices by public agencies. The pact contemplates a role for civil society or an independent assessor in monitoring the project and preventing corruption.

52. Agreement to handle contract claims in an ethical manner

• Organisations operating in the same business sector, and which frequently undertake business with each other, to agree with each other a code of conduct in relation to contract claims which aims to eliminate deceptive practices.
  
• The code of conduct would oblige a claimant and its professional advisors to take reasonable steps to ensure that:
  
• the claimant only submits an allegation to the opponent or to the dispute resolution tribunal:
  
• which it honestly believe to be true; and
  
• which can be reasonably substantiated by accurate written or oral evidence;
  
• evidence contrary to the allegation is disclosed to the opponent alongside evidence in favour of the allegation;
  
• the claimant has a bona fide legal or contractual entitlement to the matters claimed by it;
  
• the quantum of the claim has been accurately calculated in accordance with the contract requirements;
  
• the amount claimed has not been artificially marked up to include a "negotiating margin" or other illicit gain.
  
• The code of conduct would oblige the recipient of the claim and its professional advisors to take reasonable steps to ensure that:
  
• it reviews the claim diligently, objectively and in good faith;
  
• it promptly pays any sums, and awards any extensions of time, which it believes are due under the claim;
  
• it promptly provides full reasons in relation to any items of the claim which it refuses to accept;
  o it complies with the obligations imposed on the claimant referred to above in relation to any allegation which it raises as a reason to reject the claim, or by way of set-off or counterclaim.
  
• If the recipient of a claim has prima facie evidence that the claim is incorrect due to the deliberate or reckless act of anyone associated with its submission, the recipient may report the matter to the authorities, and to any applicable trade or professional association.
  
• Nothing in the above proposals is intended to limit the conscientious and vigorous pursuit of legitimate claims. The aim is to eliminate false or inflated claims.

Proposed Changes to the Rules of Dispute Resolution Tribunals
53. The rules which govern adjudication, arbitration and litigation should require the following parties to sign enforceable and meaningful statements which confirm the truth of their submissions:

• an authorised signatory of an organisation submitting a claim, defence or counterclaim;
  
• a witness submitting a witness statement;
  
• an expert submitting an expert report.

54. The rules which govern adjudication, arbitration and litigation should require participating organisations to submit evidence not only which supports their own position, but which supports the opponent's position, so that the tribunal has full access to all relevant information.

55. If the dispute resolution tribunal believes that there is prima facie evidence that a person is in breach of the undertaking contained in a statement of truth, or that an organisation has concealed evidence which supports the opponent's case, the tribunal should be obliged to report the matter to the authorities, and to any applicable trade or professional association.

Actions Proposed for Export Credit Agencies and Financing Organisations
56. Export credit agencies and government sponsored financing organisations to ensure that tenders for projects funded or guaranteed by such agencies and organisations are:

• publicly advertised in advance;
  
• opened at a public meeting;
  
• available for public inspection.

57. Export credit agencies and government sponsored financing organisations to ensure that projects funded or guaranteed by such agencies and organisations:

• are subject to a competitive tender process (negotiated contracts should not normally be accepted);
  
• have an independent assessor appointed to verify as far as possible that the tender and project is undertaken in a corruption-free environment (see paragraphs 60 to 62 below);
  
• have detailed project accounts published on the internet.

58. Export credit agencies and financing organisations to undertake the following actions:

• increase their vigilance and due diligence so that corrupt practices are identified;
  
• take reasonable steps to ascertain that agency commissions reflect the value of legitimate services provided (the percentage of the commission is not relevant - it is the actual amount of the commission which is relevant when assessing reasonableness of the commission);
  
• publish more detail of project costs, showing separately details of any agency commissions;
  
• operate and comply with effective black-lists which bar companies which have engaged in corrupt practices, and their parents, subsidiaries and associates, from publicly financed projects for a specified length of time;
  
• refer corrupt practices to the authorities, and to any applicable trade or professional association.

59. Anti-money laundering mechanisms to be developed and enforced, so as to identify bribes paid in relation to C&E projects.

Proposed Appointment of an Independent Assessor
60. Any project which is in any way funded or guaranteed by public money should have an independent assessor appointed. An independent assessor is recommended as part of the supervisory process in relation to project-specific non-bribery agreements (see paragraph 51 above). However, even if such a non-bribery agreement is not signed, the presence of an independent assessor should be an automatic requirement in relation to any publicly funded project.

61. The role of the independent assessor would be to ensure as far as is reasonable the following:

Pre-contract award:

• That any pre-qualification is fair and at arms-length.
  
• That the design and specification for the project do not unreasonably favour certain bidders over others.
  
• That the design and specification for the project appear to be reasonable and consistent with the objectives of the project (i.e. that the design and specification are not unduly inflated).
  
• That the tender exercise is fair and at arms-length.
  
• That tenders are received sealed, and are only opened at a public opening exercise at which the assessor and all tenderers and other interested members of the public are entitled to be present.

Contract award:

• That the main contract has been placed in accordance with competitive, fair and arms-length procedures.
  
• That no illicit commissions or bribes have been paid.
  
• Post-contract award:
  
• That major sub-contracts have been placed in accordance with competitive, fair and arms length procedures.
  
• That, at both main contract and major sub-contract level, project claims (for additional costs, extensions of time etc), and project certifications and payments are handled expeditiously, openly, fairly and at arms-length.
  
• That no illicit commissions or bribes have been paid.

62. The independent assessor to:

• be appointed from an accredited independent institution;
  
• have relevant experience;
  
• be paid as a project cost for a pre-agreed fee, or at a pre-agreed rate;
  
• be answerable to no individual party involved in the project;
  
• issue reports to the client, contractor, export credit agencies, financing organisations and any other relevant party simultaneously;
  
• have free and unfettered access to all parties' books, records and staff;
  
• be informed of and be entitled to attend all meetings between the project participants;
  
• be obliged to hand over evidence of suspicious activities to the relevant authorities, and to any applicable trade or professional association.

Actions Proposed for Enforcement Agencies
63. A specialist adequately resourced corruption investigation and prosecution unit to be established which:

• is staffed by personnel with experience of the C&E industry;
  
• is multi-disciplined, containing engineers, forensic auditors, quantity surveyors, programmers and lawyers;
  
• has jurisdiction throughout the country;
  
• has powers of search of premises, seizure of documents, and interview of witnesses;
  
• co-operates with the enforcement agencies of other countries;
  
• co-operates with money laundering authorities;
  
• investigates all cases upon receipt of compelling evidence from organisations, individuals, NGO's and dispute resolution tribunals;
  
• prosecutes cases where the investigation results in sufficient evidence.

64. Corruption is frequently a sophisticated and multi-national venture. Consideration should be given to the establishment of:

• a central body to which suspicions of corrupt practices can be reported;
  
• a specialist international corruption investigation unit.

Other Participants
65. The above proposed actions involve the key participants in the C&E industry. TI(UK) will also be entering into discussions with other participants who have a role to play in preventing and detecting corrupt practices in the C&E industry, including:

• auditors;
  
• shareholders;
  
• trade unions;
  
• insurers;
  
• government departments.

DISCLAIMER
66. The comments in this Report on the law and its consequences are neither comprehensive nor complete, and should not be relied on. They are intended merely to give indicators as to possible consequences. Independent legal advice should always be obtained. The proposed actions referred to in this Report are suggestions only, and will need to be adapted to the specific circumstances of each case. Neither TI(UK) nor the author can accept responsibility for the consequences of any action claimed to be taken in reliance on the contents of this Report.