An unweeded garden: Corruption and probity pitfalls
SCOTT AITKEN, special counsel at Madgwicks, provides advice on deterring corrupt procurement conduct.
Corruption is not the business norm in Australia. Therefore, when allegations of corrupt behaviour arise, the media gives those matters a high profile – whether that involves printing foreign currency notes for Southeast Asian countries or granting mining licences in New South Wales. Consequently, when investigations do occur, they significantly affect the day-to-day efficiency of the organisation and create a high emotional strain on its people.
Moreover, whether or not corrupt conduct is discovered, there is a risk that the investigation also results in loss of reputations for all concerned. Also, witnesses have a habit of lying to commissions of inquiry; which is an offence in itself.
For at least the past decade, governments around the world have made a great effort to educate those who may be tempted to act corruptly and to ‘weed out’ those that do. For example, we should note the anti-corruption laws recently introduced in Victoria and South Australia and the comparatively longstanding laws of New South Wales, Queensland and Western Australia.
Internationally, we have worked with the obligations imposed under the US Foreign Corrupt Practices Act and the UK Bribery Act for quite some time. One should also note the influence of the Commonwealth in this area via the development of its National Anti-Corruption Plan, which is underpinned by the Criminal Code Act, 1995.
Where actual corrupt conduct is exposed, invariably that conduct has caused a significant loss of property, money or value; and where the corrupt conduct involves granting approvals or licences for certain activities, then such behaviour runs the risk of compromising public health and safety too. Oh, and not to put too fine a point on it, but fines in the millions of dollars can be, and are, imposed and people can, and do, go to gaol.
What are the lessons for procurement professionals to learn?
Before we consider what can, and should, be done to avoid these risks, let me raise but then put aside, the steps one must take to deliver ‘best practice’ in respect of:
- identifying the risks of corruption occurring
- implementing strategies, policies and plans for preventing corruption occurring
- developing systems of work for detecting corruption, and
- responding to corruption.
These will vary from organisation to organisation and ‘one size’ will definitely not fit all.
There is a tendency for organisations, both domestic and international, to produce incredibly complex tomes outlining procurement ‘guidelines’. I am against these dense and impenetrable documents because, in my experience, they gather dust like no other.
For example, every organisation worth its ‘probity’ salt will have guidelines that include the creation of a conflicts of interest register and another in which gifts and benefits are declared. Some will even recommend a ‘whistle-blower’ system be put in place. However, how regularly are these registers and systems reviewed and the entries and disclosures considered?
For large individual procurement projects, these procedures are generally well-administered – there may even be an independent probity auditor. However, we should be just as concerned about day-to-day activities, which often fly under the radar.
Many organisations will proudly boast that they have such registers and a whistle-blower hotline. But, how often are entries recorded declaring conflicts, gifts or other benefits and how often does the phone ring? Put another way, how often does management actively consider the effectiveness of such measures by actually, and regularly, checking their use? I am not saying do away with these. I am saying make sure that they work.
This active management is part of building upon an organisation’s probity in procurement education and training, building upon the efforts of auditors and other specific checks and balances, and building upon management’s championing and promulgation of its compliance ‘culture’ such that it becomes firmly entrenched in the DNA of the organisation.
For an example of why an organisation should bother with that effort, look no further than the case of Morgan Stanley’s Garth Peterson. Though Peterson was sentenced to nine months in prison for his activities while employed by Morgan Stanley in China, the company escaped sanction under the Foreign Corrupt Practices Act because the US Department of Justice determined that: “Morgan Stanley’s internal policies, which were updated regularly to reflect regulatory developments and specific risks, prohibited bribery and addressed corruption risks associated with the giving of gifts, business entertainment, travel, lodging, meals, ￼￼￼￼￼￼￼￼￼charitable contributions and employment…
“Between 2002 and 2008, Morgan Stanley trained various groups of Asia-based personnel on anti-corruption policies 54 times. During the same period, Morgan Stanley trained Peterson on the FCPA seven times and reminded him to comply with the FCPA at least 35 times. Morgan Stanley’s compliance personnel regularly monitored transactions, randomly audited particular employees, transactions and business units, and tested to identify illicit payments.”
Of course, the best mousetrap in the world will not necessarily catch the determined mouse. This may range from Garth Petersons of this world to the opportunistic Strathfield Council community services manager who sought, and was paid, a corrupt payment of $10,000 cash because that was an idea and an amount that just popped into his head.
WHAT GOES WRONG?
What are some further practical steps that will actually help ensure compliance? The size of the organisation and its overall procurement needs, including its budgeted dollar spend, are relevant issues. These will determine such things as procurement team member numbers and which model is used – be that centralised, decentralised or a hybrid. However, there are a few simple measures that can be taken irrespective of organisational size that will have an immediate, and lasting, effect on the ‘best practice’ issues described above.
We all know the framework of what is required is comparatively simple – both in concept and in practice. Clearly, the procurement mantra is: obtain ‘best value for money’ in a fair, ethical, transparent and accountable process. This is achieved by first determining and defining the need, selecting a provider through a fair, transparent and accountable process, and ensuring the goods or services are delivered and operating against the original brief. So, why then does this process often fall down?
Frequently, it falls down where the one procurement officer is authorised to determine the procurement need, determine which supplier of goods or services will be awarded the contract and then also empowered with the authority to certify delivery and commissioning, as well as being in charge of conducting any ongoing operational review. In this scenario, procurement officers can get caught up in corrupt conduct even though they never set out to obtain improper benefits for themselves. It takes two parties to turn an attempt into a reality.
Recent cases include a number of suppliers determined to secure more than their share of the available contracts. Their method of corrupting procurement officers started by sending a case of beer or bottle of wine at Christmas and then, as sales increased, so did the gifts and benefits, which gradually escalated to an iPod, to an iPhone, to an iPad, to a holiday, to a swimming pool in your backyard!
At one point, invoice splitting resulted, not in a set of steak knives, but in the delivery of two flat screen TVs instead of one – a system of ‘marketing’ hopefully without peer. To ice the cake, not only were these corrupt benefits being conferred on procurement officers, but the quantity of materials ordered were significantly in excess of the organisation’s needs and, ultimately, resulted in false invoicing for goods and services not supplied at all.
New South Wales’ Independent Commission Against Corruption (ICAC) has identified IT as an area of operations that, because of huge changes in technology itself and the high degree of specialist expertise involved, may be prone to inappropriate arrangements. Accordingly, in August 2013, the ICAC published a paper titled Managing IT Contractors, Improving IT Outcomes.
The paper discusses the effective management of what it calls the ‘five key levers’:
- Linking of business case to project controls
- Separating design and build
- Guarding the ‘gateway’ through which contractors enter the organisation
- Managing the project management
- Ensuring a clear exit strategy
Finally, a word about sponsorship arrangements. In my experience, sponsorship can be used to make payments that are improper or, despite no intent to behave corruptly, appear to be improper.
Without management implementing a ‘watching’ brief, it is all too easy for sponsorship dollars to be directed, and accepted, in circumstances that are corrupt, or may inadvertently create that appearance.
In summary, merely being satisfied that guidelines have been put in place will not mean much if practical steps are not taken by management to prevent and detect corrupt conduct by actively checking the activities actually undertaken during the procurement process and enforcing the proper processes and procedures.￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼