International Fraud Expert and Man of Action Sample fraud awareness presentation Combating Corruption and Fraud in WBG projects Nigel Savage, JD, CFE International Fraud Expert and Man of Action SavageFraud.com

Categories of corruption and fraud schemes Bribes and kickbacks Hidden interests in contractors by project officials Bid rigging Rigged specifications Unbalanced bidding Leaking of bid information Change order abuse Fraud False statements and claims False and inflated invoices Failure to meet contract specifications Product substitution Collusive bidding by contractors Agreements by bidders to inflate bid prices, rotate winning bidders, divide markets, etc.

The schemes often are linked… A BRIBE is offered or demanded in exchange for the promise of a contract award or other favor, which leads to… Some form of BID RIGGING to exclude the other, often more qualified and less expensive bidders, and finally… FRAUD in by the bribe payer, to cover the cost of the bribe and exploit the corrupt relationship. The fraud can take the form of: False, inflated or duplicate invoices Failure to meet contract specifications Substitution of cheaper inferior materials or products Fraud is the most costly and disruptive stage.

Corruption Bribes & kickbacks Conflict of interest

Bribes and kickbacks To influence a contract Giving a “thing of value” award or execution: S selection P price Q quantity Q quality D delivery…and F facilitate fraud Giving a “thing of value” “Gifts, travel & entertainment Sexual favors “Study tours” Rental of properties, etc. Cash payments Payments thru subs, local partners, consultants, etc. Hidden interests Lessons GTE etc recorded GTE inspections Cash INVOICES Siemens Liechtenstein Detect with Audit rights NEED DOWNSTREAM AUDIT RIGHTS Not detect with standard audits Direct or CE SPQQD link by CE or direct CHRONO key

Why were bribes paid? To be short listed For a contract award To expedite the payment of invoices For contract amendments and extensions To influence inspectors to accept sub-par work or goods To compromise auditors and NGOs To avoid cancellation of the contract for poor performance

Corruption case example West Africa Road - red flag To house try to trace directly – contact sellers To WDC circumstantial proof

Where the money ended up in the US… Use Google Earth Circumstantial and direct proof refer to step 7

Conflicts of interest For example, an employee: Secretly owns a supplier or contractor, or Sets up a “shell company” through which he or she purchases supplies at an inflated price, or Has an undisclosed interest in property sales or leases, etc. MIDDLEMAN KEY Eg Cameroon InterFace $45,000 Require that DISCLOSE name fee agreement eg Tomen IDENTIFY not listed no website ELIMINATE

Front company addresses Empty Lot Rice Trader Shop House Auto Repair Shop

Iraq UN “Oil for Food” case

Corruption red flags Complaints from losing bidders “SPQQD” factors Unjustified sole source awards Multiple awards just under procurement thresholds Pressure to select an unknown or unqualified contractor Pressure to select a particular subcontractor or agent Long delays in contract negotiations or award Involvement of unnecessary broker or questionable agent Undisclosed agent fees and commissions Questionable contract amendments and extensions Procurement staff live beyond their means

Bid rigging Unbalanced bidding Rigged specifications Excluding qualified bidders Leaking bid data Manipulation of bids after receipt Unjustified sole source awards Split purchases Change order abuse

Bid rigging red flags Repeat [sole source] awards to the same bidders Multiple awards just under thresholds (followed by change orders or contract extensions) Bids just at or close to budget or estimate Narrow specifications Ambiguous specifications Unreasonable pre-qualification procedures Short or inadequate notice to bidders Fewer than the average or required number of bidders Low bid awards followed by change orders

Collusive bidding People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices. Adam Smith, The Wealth of Nations, 1776 15 15

Collusive bidding: cartels Cost Estimate: 104(1)d Embankment 191,930 m3 at 265.17 (unit price) = 50,894,239.32 1 percentage point steps variance from ABC Bidprice difference to the designated winner ascends in 10 mio CU steps Strange and unnatural final bidprice numbers Companies B, C and F are disqualified Severely overpriced earthworks component Evidence Indicators 16 © INT, The World Bank Group Reproduction and further distribution requires INT’s prior consent 16

Collusive bidding red flags Connections between bidders, e.g., common addresses, fax numbers or personnel; assignment of contract to losing bidder, etc. Persistent unexplained high prices Unusual bid patterns; e.g. bids an exact % apart Rotation of winning bidders Same bidders bid; new bidders excluded Losing bidders become subcontractors False or forged bid securities 17 17

Fraud Delivery of expired, fake or adulterated drugs Reporting of exaggerated cure rates and project results False CV’s and company histories False and plagiarized feasibility studies and reports Forged performance documents Forged bid securities & manufacturer’s certificates Delivery of substandard goods or equipment False and inflated invoices

Aid-financed rural “school” 19 19

New aid-financed hospital 20 20

“New” hospital equipment 21 21

Narrow road Road 30% narrower than specifications No road surfacing, contrary to specifications The contract was paid in full

‘’Ten Year” urban road Thirteen months after completion 23 23

Construction and billing fraud Design of spa for ecotourism center Status after >50% disbursed with 30 days left to completion

Construction fraud Poor quality concrete in slabs, beams and columns with extensive honeycombing can result in - a reduction of compressive strength - a route for ingress of moisture to reach and corrode the steel reinforcement Poor quality concrete in slabs, beams and columns with extensive honeycombing (air entrapment due to insufficient vibration when poured) Plastered with cement to fill in the air holes at the surface (This merely hides the visible honeycombing and adds nothing to structural strength). Extensive honeycombing at concrete surfaces often extends into the core of a unit and can result in a reduction in compressive strength of the concrete a route for ingress of moisture to reach and corrode the steel reinforcement. Plastered with cement to fill in the air holes at the surface. The concrete mix itself appeared weak in cement content, both visually and to the touch. At least two columns were rotated a few degrees out of true in plan view. This could result in additional torsional stresses at the junctions between columns and other structural units. Fixing of steel reinforcement within the formwork was of a poor standard (e.g. dimensions of some reinforcement cages were irregular and, in places, would not have provided sufficient concrete cover between main tension reinforcement and the concrete surface). Removal, re-assembly and re-installation would have been the right course of action in several cases. Plastered with cement to fill in the air holes at the surface The concrete mix itself appeared weak in cement content, both visually and to the touch Columns were rotated a few degrees out of true in plan view which can lead to additional torsional stresses at the junctions between columns and other structural units Fixing of steel reinforcement within the formwork was of a poor standard

Fraud red flags “Outliers,” “mismatches,” etc. Poor quality goods or works Missing or altered supporting documents Inconsistencies between contractor’s claims and inspections Culture of corruption of inspectors No costs booked by contractor for work claimed Complaints from users