More voices are noting the need for arbitrators to be aware of and actively deal with signs of corruption. But how best to find and present evidence of corruption in arbitration proceedings?
One of the outcomes of expanded regulatory enforcement against corruption is the exposure of the many and varied forms of corrupt or fraudulent activity. Corruption is a broad concept that encompasses a multitude of improper practices, some of which we explore here.
Varying risk levels across regions and sectors
The risk of business transactions being tainted by corruption can vary across geographical regions and business sectors. For instance, operations in sectors such as healthcare, mining or construction that take place in countries with historically weak governance cultures and limited regulatory oversight or enforcement are especially vulnerable to corruption, particularly bribery and conflict of interest, and are more likely to give rise to tainted transactions. However, these transactions are often concealed by schemes or structures to avoid detection.
Typology studies of corruption schemes indicate just how broad the potential patterns of corruption can be. In some jurisdictions, corruption is typically focused on practices that benefit specific individuals, such as entertainment and gift giving, including lavish and repeat patterns of invitations to major sports or cultural events, medical congresses or golfing trips, and gifts of expensive jewellery or watches.
Often the pattern extends beyond target individuals to include spouses, friends and family. In some sectors, this behaviour has extended to hiring children of target individuals to roles that they would not otherwise be selected for, and in other cases through the setting up of marketing expense ‘slush’ funds outside of corporate boundaries but under the control of corporate managers to disburse as required.
Using corporate entities
In addition to these ‘people-focused’ transactions, corruption can also be structured through the use of corporate entities. This can involve the formation of joint venture arrangements, either incorporated or contractual, where procedures and controls are vague for all parties. Rights and participation can be gifted or provided at an undervalue to target parties.
Other examples have featured corporate structures where investment has been demanded at values manifestly in excess of that supported by the underlying business and assets. Further, shell companies can be set up and funds transferred, often using tax havens and offshore jurisdictions, in a manner that would not normally feature in a well-controlled international business environment.
Third-party intermediaries
One of the most common features in corruption enforcement cases is the involvement of third-party intermediaries facilitating commercial arrangements between corporates and state-owned entities. Third-party intermediaries can take the form of consultants, agents, local bidding representatives, distributors, etc., that charge commissions or fees in what appears to be a legitimate business transaction. Charging an inflated fee or commission allows the third-party intermediary to channel funds to decision makers so they can influence the granting of a public market, for example.
Using a third-party intermediary also assists with keeping the details of the illicit payment outside of the financial records of the company contracting with the third-party intermediary. Schemes can acquire additional layers of deception to avoid detection. For instance, kickbacks can be disguised through credit note issuance and reimbursement.
Creative channels
In addition to the use of direct payments to third-party agents and kickback loops with credit notes, corruption typologies can include other creative ways to channel illicit payments to decision makers. For example, a company pursuing a sales agreement or a tender may grant a loan to an entity whose ultimate beneficial owner is a decision maker in the award process, in exchange for a favourable decision. This arrangement is made with the understanding that the debtor never reimburses the loan and that the lender writes off the debt in its accounts at some stage, which effectively amounts to a cash gift.
Similar to loan forgiveness schemes, companies may agree to invest in corporations ultimately owned by decision makers in exchange for an undue advantage. The investment, often made at inflated values, is officially presented as a legitimate business venture but is then deemed unrecoverable and requires to be impaired on the investors’ balance sheet. Ultimately, this amounts to a cash gift to the beneficiary.
A helpful question to pose when hypothesizing how corruption might have occurred is to think of ways that value may have been transferred from one party to the other, and whether the overall pattern of transactions is commercially reasonable. Outlining your hypothesis will not only help shape any legal arguments but will also lay the path for how experts approach data collection and review.
Continue to the third and final part of this series: understanding red flags and preparing compelling expert reports.
