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CEWAS 2014 Description Risks IM Toolbox SME
 international centre for water management services
Integrity Management
Toolbox for Zambian
Water Sector SME
Description Integrity Risks
Version 2.0
international centre for water management services
IMPRINT
© cewas 2014
cewas – international centre for water management services
Ettiswilerstrasse 24
6130 Willisau
Switzerland
www.cewas.org
WIN – Water Integrity Network
Alt Moabit 91b
10559 Berlin
Germany
www.waterintegritynetwork.net
WASAZA – Water and Sanitation Association of Zambia
Plot 5778 Junction of Great East Road and Lufubu Road, Kalundu
Lusaka
Zambia
http://www.wasaza.org.zm/
2 international centre for water management services
Contents
Contents ............................................................................................................................ 3 Glossary ............................................................................................................................ 5 List of Abbreviations .......................................................................................................... 7 A. Procurement and Contract Management ............................................................... 8 A.1. Collusion among bidders .................................................................................................................... 8 A.2. Bribery and/or collusion between bidders and project owner ........................................................ 10 A.3. Fraudulent contractor qualification ................................................................................................. 14 A.4. Inflated prices for services and material .......................................................................................... 15 A.5. Subcontract procurement ................................................................................................................ 15 A.6. Concealment of financial status ....................................................................................................... 16 B. Project Execution ................................................................................................... 17 B.1. False, duplicate or inflated invoicing ................................................................................................ 17 B.2. Overstating work, material or man-­‐day requirements ..................................................................... 19 B.3. Failure to meet contract specifications ............................................................................................ 20 B.4. Fraudulent variation claims .............................................................................................................. 21 B.5. Bribes to cover up project delays ..................................................................................................... 21 B.6. Bribes and interference to expedite and divert services .................................................................. 22 B.7. Delayed, reduced or refused payments ........................................................................................... 23 B.8. False rectification costs or passing on of costs ................................................................................. 23 B.9. Bribery and/or collusion between subcontractors and supervisors ................................................. 24 C. Administrative and Public Services ..................................................................... 25 C.1. Illicit practices regarding tax payments ............................................................................................ 25 C.2. Unethical practices to gain access to or to speed up public services ............................................... 26 D. Dispute Resolution ................................................................................................ 27 D.1. Speeding up judicial processes ......................................................................................................... 27 D.2. Manipulation of evidence ................................................................................................................ 27 D.3. Illicit practices by the legal representation ...................................................................................... 28 E. Customer Relations ............................................................................................... 29 E.1. Insufficient complaints management & customer orientation ........................................................ 29 E.2. Non-­‐cooperative customers ............................................................................................................. 30 F. Financial Management ........................................................................................... 30 F.1. Payroll fraud ...................................................................................................................................... 31 F.2. Falsification of financial documents and accounts ........................................................................... 32 F.3. Loan scam ......................................................................................................................................... 33 G. Governance, Management and Controls ............................................................. 34 G.1. Discretion in important decisions ..................................................................................................... 34 G.2. Misuse of key positions .................................................................................................................... 35 G.3. Use of staff, vehicles and assets for private purposes ...................................................................... 36 G.4. Unclear roles, responsibilities and processes ................................................................................... 36 3 international centre for water management services
H. Human Resources Management and Employment ............................................ 37 H.1. Theft of money or assets by staff ..................................................................................................... 37 H.2. Staff transferring knowledge to competition ................................................................................... 38 H.3. Staff colludes with customers .......................................................................................................... 38 H.4. Staff colludes with supplier .............................................................................................................. 39 H.5. Relatives and friends preferred in recruitment and promotions ..................................................... 39 H.6. Unsatisfying employment conditions ............................................................................................... 40 H.7. Lack of transparency in remuneration processes ............................................................................ 41 I. Framework Risks ..................................................................................................... 41 I.1. Lack of enforcement of integrity regulations .................................................................................... 41 I.2. Complex and fast-­‐changing regulatory framework ........................................................................... 42 I.3. High Level of Bureaucracy ................................................................................................................. 42 I.4. Illicit practices of foreign companies and companies owned by non-­‐indigenous Zambian communities ............................................................................................................................................... 43 I.5. Vandalism and theft by external actors ............................................................................................. 43 References ...................................................................................................................... 45 4 international centre for water management services
Glossary
This glossary defines some of the most important terms with regard to integrity. The list is not
exhaustive, but it helps to create common understanding of the listed terms among SME
implementing the IM change process.
Bid
Contracting: Complete proposal (submitted in competition with other
bidders) to execute specified job(s) within prescribed time, and not
exceeding a proposed amount (that usually includes labour, equipment
and material). The bid-receiving party may reject the bid, make a
counter offer or turn it into a binding contract by accepting it.1
Bidding documents
The published advertisement or written invitation to bid, instructions to
bidders, the bid form and the proposed contract documents including
any acknowledged addenda issued prior to receipt of bids (synonym:
tender documents).2
Bid price
Price offered by bidder (contractor, supplier, vendor) for a specific
good, job or service, and valid only for the specified period.3
Bribery
The offering, promising, giving, accepting or soliciting of an advantage
as an inducement for an action which is illegal, unethical or a breach of
trust. Inducements can take the form of gifts, loans, fees, rewards or
other advantages (taxes, services, donations, etc.).4 Clientelism
An unequal system of exchanging resources and favours based on an
exploitative relationship between a wealthier and/or more powerful
‘patron’ and a less wealthy and weaker ‘client’.5 In company relations,
clientelism entails preferential treatment of contractors and suppliers by
project owners as well as the preferential treatment of external
stakeholders by SME. Such preferential treatments aren’t linked to
higher quality work or qualifications, but result from vested interests of
individuals. Clientelism in company relations can lead to poor value for
money in construction of infrastructure, in the implementation of
maintenance contracts and in the supply of other services and goods.
Collusion
A secret agreement between parties, in the public and/or private sector,
to conspire to commit actions aimed to deceive or commit fraud with the
objective of illicit financial gain.6
Contractor
Independent entity that agrees to furnish certain number or quantity of
goods, material, equipment, personnel and/or services that meet or
exceed stated requirements or specifications, at a mutually agreed
upon price and within a specified timeframe to another independent
entity called project owner.7
Corruption
The abuse of entrusted power for private gain. Corruption can be
classified as grand, petty and political, depending on the amounts of
money lost and the sector where it occurs.8 Embezzlement
When a person holding office in an institution, organisation or company
dishonestly and illegally appropriates, uses or traffics the funds and
goods they have been entrusted with for personal enrichment or other
5 international centre for water management services
activities.9 Fraud
To cheat. The act of intentionally deceiving someone in order to gain an
unfair or illegal advantage (financial, political or otherwise). Countries
consider such offences to be criminal or a violation of civil law.10 Integrity
Behaviours and actions consistent with a set of moral or ethical
principles and standards, embraced by individuals as well as
institutions, that create a barrier to corruption.11
Integrity Risk
A risk is the chance of an event occurring that will have an impact on an
institution’s objectives. Integrity risks manifest themselves when an
actor exhibits behaviours or makes decisions that are not supported by
the institution’s values.12 The titles of the Integrity Risks in this IM
Toolbox often refer to the illicit behaviour itself.
Nepotism
Form of favouritism based on acquaintances and familiar relationships
whereby someone in an official position exploits his or her power and
authority to provide a job or favour to a family member or friend, even
though he or she may not be qualified or deserving.13 Petty Corruption
Everyday abuse of entrusted power by low- and mid-level public
officials in their interactions with ordinary citizens, who often are trying
to access basic goods or services in places like hospitals, schools,
police departments and other agencies.14 Procurement
A multi-step process of established procedures to acquire goods and
services by any individual, company or organisation – from the initial
needs assessment to the contract’s award and service delivery.15
Procurement
Manager
Person responsible for the procurement process. He or she can be the
project owner itself or someone hired to do this work.
Project Owner
Entity that initiates a project, finances it, contracts it out, and benefits
from its output(s)16. A project official is an individual that works for the
project owner.
Red Flags
Red Flags are generally defined as circumstances which could place a
reasonable person on notice that illegal or improper conduct has
occurred or may occur. A Red Flag does not mean that an action or
transaction should immediately be terminated. It does mean that you
should engage in an appropriate level of additional due diligence and
investigation before moving forward.17
Red Tape
Red tape is excessive regulation or rigid conformity to formal rules that
is considered redundant or bureaucratic and hinders or prevents action
or decision-making. It is usually applied to governments, corporations,
and other large organizations. Red tape generally includes filling out
paperwork, obtaining licenses, having multiple people or committees
approve a decision and various low-level rules that make conducting
one's affairs slower, more difficult, or both. Red tape can also include
filing and certification requirements, reporting, investigation, inspection
and enforcement practices, and procedures.18
6 international centre for water management services
Subcontractor
Junior or secondary contractor who contracts with a prime contractor
(and not the principal or owner of the project) to perform some or all of
the prime contractor's contractual-obligations under the prime
contract.19
Supervisor
In this context a supervisor is a person responsible to supervise the
project execution. Depending on his/ her specific task he/ she is
referred to as a certifying consultant, surveyor (e.g. a quantity
surveyor), etc. The various tasks can be done by different entities, e.g.
by an architect hired for the project.
Tender offer
Bid or offer submitted in response to an invitation to bid or request for
tenders.20
List of Abbreviations
BoD
Board of Directors (of Water Service Providers)
cewas
International centre for water management services
NGO
Non-Governmental Organisation
PF
Patriotic Front
SME
Small and medium-sized enterprise
TI
Transparency International
WIN
Water Integrity Network
W&S
Water & Sanitation
WSS
Water supply and sanitation service
ZMW
Zambian Kwacha
ZRA
Zambian Revenue Authority
7 international centre for water management services
A. Procurement and Contract Management
Fraud in bidding and awarding of contracts is a hotspot for corruption. Corrupt procurement can
take many forms, for example tailoring project specifications to a corrupt bidder, providing insider
information, limiting bid advertising, shortening bid periods and breaching confidentiality.21 It can
also be the case that bidders collude and submit complementary bids for example. A bidder can
as well include false statements in its bid or take advantage of information asymmetries and
charge inflated prices for services and material. The concealment of financial status by the
contractor or the project owner at the time of placing the contract can also be an integrity risk as
well as the subcontracting of other firms.
A.1. Collusion among bidders
Category
Description
Examples
for Red
Flags24
Procurement and Contract Management
Contractors and suppliers in a particular trade or geographic area can conspire
to rig bids or fix prices at artificially high levels. Where collusive bidding is well
established, prices can rise substantially, in some cases by as much as
several hundred percent.
The most common methods of collusive bidding are:22
• Complementary bidding: Complementary bids, also known as
“protective,” “courtesy,” or “shadow” bids, are intended merely to give
the appearance of a genuine bid and not to secure the buyer’s
acceptance. Under this scheme, cooperating bidders agree to submit
higher priced or deliberately defective bids to ensure the selection of
the designated winner at inflated prices. In exchange, the winner might
pay a percentage of its profits to the losing bidders, hire them as
subcontractors, or allow them to win other high priced contracts.
• Loser’s fee: Prior to tender submission, the competing contractors
secretly agree that they will each include in their bid price an agreed
additional sum of money representing the total estimated tender costs
of all the competing contractors (in this context tender costs refer to the
costs that arise from preparing a bid). Whichever contractor is awarded
the contract will then divide this sum of money between all the
unsuccessful contractors who will thereby recover their tender costs.23
• Bid Rotation: Participants in a bid rigging scheme often rotate winning
bids by geographic areas, by type of job or by time to give each
member a chance to share in the spoils.
• Bid Suppression: For bid rigging schemes to succeed, group members
must prevent outside companies from bidding. This can be
accomplished by paying off an interloper or by more forceful measures,
such as threats or violence. The collusive group also can submit
fabricated bid protests or coerce suppliers and subcontractors not to do
business with the outsider in order to protect its monopoly.
• Market Division: The cooperating companies may divide markets or
product lines and agree not to compete in each other’s territory, or to
do only so through collusive measures, such as submitting
complementary bids.
Pricing red flags:
• Persistently high or increasing bid prices compared to cost estimates,
price lists, previous prices similar jobs or industry averages
• Wide variation in line item bid prices between bidders, without apparent
justification
8 international centre for water management services
Examples
• Bid prices drop when a new or infrequent competitor enters
Bidding red flags:
• Rotation of winning bidders by job, type of work or geographical area
• The same companies always bid, the same companies always win and
the same companies always lose
• A bidder brings multiple bids to a bid opening and submits its bid only
after determining who else is bidding.
• Unusual bid patterns, e.g. identical or similar bids, bids with round
numbers, high price on one line item in one bid and a low price on the
same line item in another bid by the same bidder etc.
• Losing bidders are hired as subcontractors or suppliers
• Contractor includes subcontractors in its bid that are competing for the
prime contract
• Joint venture bids by firms that usually bid alone
• Qualified contractors fail to bid and become subcontractors, or one
bidder withdraws and becomes a subcontractor
• A significant number of bidders who buy bid packages do not submit
bids
• Losing bids do not comply with bid specifications, or only one bid is
complete and other bids are poorly prepared or defective
• Losing bidders are unknown in the industry or cannot be located in
business or telephone directories or on the internet
• A bidder makes any reference to industry-wide or association price
schedules or statements indicating that a particular customer or
contract “belongs” to a certain vendor etc.
Documentary red flags:
• Physical similarities in bids or proposals submitted by different bidders
indicating that all of the bids might have been prepared by the same
party, e.g. identical stationery layout, common addresses, personnel,
same calculations, same handwriting, etc.
• Bids or proposals contain white-outs or corrections indicating last
minute price changes
• Multiple losing bidders submit defective, forged or sequential bid
securities, or securities purchased at the same bank on the same day
etc.
• [I]n W&S service provision … field staff often pointed to the procedures
by which professional engineering staff award and implement
construction contracts with private firms. Two processes operate to
subvert fair and honest contracting in W&S services: contractor cartels
and political influence in contractor selection. […] One contractor
described the process as follows: ‘A group of [contractors] meet on the
weekend in the office. We have a list of contracts being offered by. We
draw names out of a bag to see who will be the winner for each
contract. That person decides what he will bid for the contract, and
everyone else bids something higher than that.’25
• It is also common for private suppliers of pipes, chemicals and other
inputs, consultants and contractors to collude among themselves, take
turns in bid-winning or to mark up pricing. Collusion and the falsification
of records are often known to the procurement official who receives a
kick-back for his/her silence.26
• A group of contractors who routinely compete in the same market
secretly agree to share the market between them. They will each
apparently compete on all major tenders, but will in advance secretly
9 international centre for water management services
agree which of them should win each tender. The contractor who is
chosen by the other contractors to win a tender will then notify the
others prior to tender submission as to its tender price. The other
contractors will then tender at a higher price so as to ensure that the
pre-selected contractor wins the tender. The winning contractor would
therefore be able to achieve a higher price than if there had been
genuine competition for the project. If sufficient projects are awarded,
each contractor would have an opportunity to be awarded a project at a
higher price. This arrangement is kept confidential from the project
owners on respective projects who believe that the tenders are taking
place in genuine open competition, and that they are achieving the best
available price.27
A.2. Bribery and/or collusion between bidders and project owner
Category
Description
Procurement and Contract Management
The bidder bribes or colludes with the project owner in order to obtain the main
contract award. The collusion can also be a result of clientelism – the
preferential treatment of partners.
The bribery or collusion of project owner and favoured bidder can lead to
different illicit practices by project owners in order to contract their favoured
bidder. The project owner can tailor bid specifications, leak confidential bid
information, manipulate other bids or start unnecessarily large projects in order
to award its favoured bidder. These practices result in sole source awards and
change order abuse (abuse of contract amendments).
• Manipulation of bid specifications: Project officials can tailor the
specifications in the requests for bids or proposals to favour a particular
bidder and to exclude others, often as the result of corruption.28
• Leaking of bid information: Project officials can leak confidential
information, including budgets and estimates, preferred solutions or
competing bids, to help a favoured bidder prepare its bid. Leaking of
bid information can be related to change order abuse.29
• Manipulation of bids: In a poorly controlled bidding process, project
officials can tamper with bids after receipt to ensure that a favoured
contractor is selected.30
• Initiation of large projects: Unnecessarily large or complex projects are
initiated by government officials or persons in authority in order to make
money by requesting favoured contractors to add percentages to their
contract sums (these additional percentages are given to the
government official when the favourite bidder wins the contract).
• Sole source awards: “Sole source award” means that there is only one
person or company that can provide the contractual services needed.31,
Improper sole source contract awards (also known as “direct contract”
awards) are commonly used to avoid competition and steer contracts to
favoured bidders. Such awards can be accomplished by simply
ignoring competitive bidding requirements, by falsifying sole-source
justification data or by splitting purchases to avoid competitive bidding
thresholds. Multiple sole source awards to the same company
(particularly such awards just below the competitive bidding threshold)
and sole source awards in contravention to the provisions of the
procurement plan are of special concern. The failing to develop
“second sources” for replacement items, spare parts or services that
must be purchased from the original supplier or a single source is
10 international centre for water management services
Examples
for Red
Flags
referred to as “hidden sole sourcing”.32
• Change order abuse: Contract amendments, also known as “variation
orders” or “change orders”, can be manipulated to facilitate corruption
or fraud schemes. For example, a contractor, acting in collusion with
project officials, can submit a very low bid to win a contract, knowing
that promptly thereafter the officials will approve a change order to
increase the price, allowing the contractor to recover its profit and fund
bribes.33
Red flags for manipulation of bid specifications:34
• Specifications are significantly narrower or broader than in previous
similar requests for bids
• Close similarity between the specifications and the winning bidder’s
product or services
• Project defines request by using brand name rather than generic
description
• Indications or allegations that the winning bidder prepared the contract
specifications
• Fewer than the normal or expected number of bids
• High number of contract awards to one bidder
• Complaints from losing bidders that the specifications are tailored to a
competitor
• Award to other than the lowest qualified bidder
Red flags for leaking of bid information:35
• Winning bid is just under the next lowest bid
• Bid is too close to budget, estimate or preferred solution
• Inadequate bidding procedures, e.g., acceptance of late bids, nonpublic bid openings, taking breaks during the bid opening (to provide
the opportunity to share the content of certain bids and to amend
others), etc.
• Late bidder is the winning bidder
• A questionable agent, “consultant” or “middleman” is involved in the
bidding process
• Project officials and a bidder communicate or meet during the bidding
process
Red flags for manipulation of bids:36
• Inadequate controls over the opening, recording and handling of bids
• Highly subjective or unbalanced evaluation criteria that can be used to
manipulate the bid scores
• Complaints of changes to bids after they are received
• Some bids are rejected because of allegedly missing components
• Unusual changes to or “errors” in the scoring of bid
• Missing or inadequate documentation to support the recommendation
for contract award, e.g., the failure to rank bid prices
• All bids are voided for “errors” in contract specifications and the job is
re-bid
Red flags for initiation of large projects:
• Complex project design
• Several contractors and/or subcontractors
Red flags for sole source awards:37
• Inadequate justification or documentation for sole source awards
• Sole source awards in contravention to the provisions of the
procurement plan
11 international centre for water management services
Split purchases to avoid competitive bidding requirements
Multiple sole source awards above or just below sole source limits to
certain contractors
• Awards below the competitive bid threshold followed by change orders
that exceed such limits
• Request for bids mailed to only one contractor
• Repair or maintenance contracts tied to the original bid winner or a
single supplier
Red flags for change orders:
• Poorly justified or documented change order requests and approvals
• A pattern of low bid contract awards followed by change orders that
increase the price of the contract
• A pattern of sole source contract awards just below the competitive
bidding threshold, followed by change orders that increases the price
above the threshold
• One or a few contractors receive a disproportionately high number of
change orders compared to other contractors or to prior similar
contracts
• Known culture of corruption among project officials and inspectors
• Weak controls and lax procedures regarding the review and approval of
change orders, e.g., the same official certifies the need for the change
order and approves it
• A former employee of an international IT firm reported that the
company had won a major contract because its agent had bribed
Project Officials to tilt the hardware and software specifications to
match the company’s products. In fact, the former employee said, the
Project team allowed the firm to draft the specifications itself, which the
firm had done with some care to avoid making the scheme too obvious.
To compound the fraud, the employee disclosed, the IT firm colluded
with its prime “competitor” to divide the work on the contract and to
submit collusive bids on successor projects. As a result of the various
manipulations, the firm was able to secure a contract for almost 30%
above the competitive price.38
• A project owner appoints an architect to design a project. One of the
competing contractors who is tendering for the project bribes the
architect to provide a design with which only that contractor can fully
comply. The bribe is the promise by the contractor of significant future
work for the architect. The architect provides an appropriate design.
The contractor submits a price that is higher than it would have been
had there been a genuine competitive tender, and higher than several
of the other tenders. The architect recommends to the project owner
that the relevant design was in the project owner’s best interests and
that the compliant contractor should be appointed, even though its
tender is not the cheapest, as only it fully complies with the tender
design. In fact, to the knowledge of the architect, one of the cheaper
tenderers bidding to an alternative design would have adequately
suited the project owner’s needs. The project owner follows the
architect’s advice and awards the contract to the compliant contractor.39
• A project owner intends to place a contract with a contractor which it
frequently uses. It wishes to ensure that the price obtained from the
contractor is a market price. It therefore requests quotations from two
other contractors. It leads these contractors to believe that they have a
chance of winning the project. However, the project owner always
•
•
Examples
12 international centre for water management services
•
•
•
intends to award the contract to its favoured contractor. The price of
one of the other bidding contractors is the lowest. The project owner
discloses this lowest price to its favoured contractor and requires it to
match the price. The favoured contractor does so and is awarded the
contract. The other contractors therefore waste their tender costs.40
During a special audit of the Utility’s procurement function, a losing
bidder reported that a junior member of the Bid Evaluation Committee
(BEC) told it that other members of the BEC had removed required
documents from its bid in order to disqualify the company. The bidder
claimed that other sources told it that the BEC did this in order to
facilitate the award of the contract to another firm as the result of
corruption. The bidder insisted that its bid was complete and showed
the auditors a retained copy of its bid which included all of the required
documents. The auditors reviewed the Utility’s procurement files and
Bid Evaluation Report, which indicated that the complainant and other
losing bidders were disqualified heir because bidding documents were
incomplete. The auditors contacted the other losing bidders who also
insisted that their bids had been complete when submitted. None of the
losing bids could be located in the procurement files. Finally, the
auditors discovered that the score of the winning bidder had been
arbitrarily raised to defeat the one remaining competitor. As a result of
their findings, the auditors recommended that the Utility adopt more
transparent procurement procedures, including public bid openings,
reading out the contents of bids at the opening and permitting a losing
bidder to be briefed on the reasons that its bid was unsuccessful.41
A senior government official who is in charge of the construction of new
infrastructure projects wishes to enrich himself. He/ she therefore
decides to initiate a project, which could conceal a major bribe for
himself. In order to maximise the bribe potential, he/ she ensures that
the design will result in a project, which is unnecessarily large and
complex. He/ she then informs a major contractor that he/ she will
ensure that the contractor is awarded the project on a non-competitive
basis if the contractor includes in the contract price a payment for him
personally of an amount equal to 30% of the contract price. The
contractor agrees. The contract is awarded and the contractor pays the
official.42
The head of corporate procurement for an international development
agency became progressively more concerned as she witnessed the
award of more than 20 sole source contracts for IT services to a small
start-up company, totalling more than $4 million over three years,
processed at the personal direction of a senior executive. Eventually
she reported the matter to the donor’s internal investigations unit, which
found the following. The first contract was for $49,000, just under the
$50,000 competitive bidding threshold, followed quickly by two other
sole source contracts for a little more than $100,000 each, well above
the threshold. These funds were paid for a report on the usefulness of
the internet, the contents of which, the investigation revealed, were
clipped entirely and verbatim from existing websites, except for minor
edits to remove the evidence of the actual source of the materials. The
investigators found that it took a little more than one day to locate,
download and print the documents, which were contained in two, oneinch ring binders. The IT firm, however, billed for three months of staff
time for what it claimed was “original research” on the topic. The IT
13 international centre for water management services
•
company then forwarded the entire proceeds for the internet study to
an account designated by the senior executive. Thereafter, the firm
received numerous additional sole source contracts for IT staffing
services, most well above the source threshold.43
A “representative” of a Project Implementation Unit (PIU) paid an
unannounced visit to a US company that was bidding for a $25 million
agricultural testing laboratory, and told it that it would win the contract if
it hired the rep as a “consultant” to help prepare its bid. The rep said his
consulting fee would be 20% of the contract value, which he admitted
would share with project officials. The US company was intrigued, but
was troubled by the size of the bribe request; more specifically, it
wondered how it could afford to pay a 20% commission and still be
lowest qualified bidder. The rep replied that the project would issue
change orders after the contract award to drop certain line items that
called for expensive humidity and temperature control equipment,
allowing the bidder to “low ball” this item in its bid, be the low bidder,
and still have sufficient funds to pay the bribe. Additional change orders
would be processed as necessary to cover the cost of bribes.44
A.3. Fraudulent contractor qualification
Category
Description
45
Examples
for Red
Flags46
Procurement and Contract Management
A bidder furnishes false documentation regarding plant and equipment, labour
and the company’s qualifications in order to win a contract.
Common false statements can include false statements regarding a firm’s:
• Financial condition (false financial statements, inflated sales amounts
or account balances, etc.)
• Prior experience and qualifications
• Employees’ educational or professional credentials
• Proposed consulting staff: A consulting or engineering firm can include
a highly qualified consultant or chief engineer in its proposal in order to
win a contract, then replace that person with a less qualified, much less
expensive person after the contract award. The savings can be used to
fund bribes. This is a very common scheme, and is often done with the
knowledge and approval of corrupt project officials.
General red flags of false statements and claims:
• Discrepancies between statements and claims and supporting
documentation or test and inspection results
• Absent, inadequate or apparently altered supporting documentation
• Contractor refuses or fails to provide supporting documentation
• Unreasonable claims or statements compared to observed
performance, prior contracts or industry standards
Red flags of false or forged bid securities or manufacturers certificates:
• Bid security or certificate is missing issuer’s signatures or reference
number
• Same security or certificate submitted several times for different bids
• Identical or similar securities or certificates are submitted purportedly
from different banks or companies
• Securities have different appearance (format, logo, quality of paper,
etc.) from known authentic document
Examples
14 international centre for water management services
A.4. Inflated prices for services and material
Category
Description
Examples
for Red
Flags
Examples
Procurement and Contract Management
The technical nature of the water sector, where companies with highly skilled
staff engage with public authorities that are frequently understaffed and lack
adequate capacities, results in significant asymmetry of information. The
technical complexity inherent to designing and constructing water infrastructure
makes it difficult for public officials to negotiate contracts or identify technical
deficiencies in bids for infrastructure and other projects. Companies can abuse
this lack of capacity, using their technical knowledge to manipulate contract
specifications or the quality of work required, in order to increase their returns.47
This is often the case, when there is no competitive tender. However, inflated
prices for services and material may be accepted because the bidder bribes or
colludes with the project owner (see A.2).
In competitive bidding inflated prices for services and material may be accepted
if staff and suppliers collude to exclude other bidders (for example because of
‘non-compliance’ or other reasons that are difficult to verify). During the design
stage, required materials for projects or repair contracts may be intentionally
estimated higher so that those involved can keep the extra money (see also
A.1).
• Prices paid for materials and equipment are above the prices at shops
and markets
• Prices paid for services are above the standard price
• Persistently high or increasing bid prices compared to cost estimates,
price lists, previous prices similar jobs or industry averages
• Wide variation in line item bid prices between bidders, without apparent
justification
• A project owner and a contractor are negotiating a design and build
contract. There is no competitive tender and the project owner is, to the
knowledge of the contractor, relying on the contractor to put forward a
reasonable proposal. In its written proposal to the project owner, the
contractor deliberately specifies an overly sophisticated design. The
contractor is aware that an alternative cheaper design would be
adequate for the project owner’s purposes but does not inform the
project owner of this possibility. The contractor’s intention is that the
project owner will accept the sophisticated design as it will result in a
higher overhead recovery and profit for the contractor. The project
owner places the contract with the contractor.48
• Another scheme involved an overbilling and kickback scheme, in which
a corrupt confederate would supply goods to the government at grossly
inflated prices and then kick back a portion to Abacha [Nigeria’s
president from 1993-1998] and his confederates.49
A.5. Subcontract procurement
Category
Description
Procurement and Contract Management
Subcontracts can be awarded as an exchange for bribes or other gifts.
Firms can also agree – before submitting bids for the main contract – that the
company with the winning bid will engage the other company as a
subcontractor. Subcontracting can also be a favour to another company in
exchange for submitting higher bids (see also A.1).
The subcontracting can also be a result of clientelism – the preferential
treatment of partners. It can be the case for instance that the procurement
15 international centre for water management services
Examples
for Red
Flags
Examples
manager/ project officer colludes with a subcontractor to recommend the latter
to the contractor (see also B.9).
• Award goes to other than the lowest qualified bidder
• Firms that have participated in the tender for the main contract are
subcontracted by the firm that submitted the winning bid
• Subcontracting can also facilitate collusion, for it can be a way of
dividing the profits realized from bid rigging. Testimony in a criminal
prosecution of collusion in roads contracting in Oklahoma revealed
such a scheme. Competitors of the Boce Company allowed it to win a
tender “without having to fight,” and in exchange Boce agreed to
subcontract all the work in one region to a competitor.50
• A procurement manager of a contractor is required to organise the hire
of cranes for one of the contractor’s projects. Crane hire companies are
at that time giving discounts of approximately 25% off their published
hire prices for long-term hires. The procurement manager and two
friends set up a company (‘Craneco’) which is registered in the names
of the two friends. Half the shares in Craneco are secretly held as
nominee for the procurement manager. Craneco obtains a quote
including discount from a crane hire company. The procurement
manager obtains the published rate sheets (excluding discounts) from
two other crane companies. Craneco supplies a written quote to the
contractor to supply the cranes at a rate slightly lower than the
published rates of the two other crane companies, but at a higher rate
than the rate quoted to Craneco. The procurement manager uses the
two rate sheets and the quote from Craneco as three competitive
quotes, and awards the contract for the supply of cranes to Craneco.
These documents are placed on the procurement file, creating the false
impression that there has been genuine competitive pricing, and that
the hire contract has been awarded to the cheapest supplier. Craneco
makes a profit. The procurement manager does not disclose to the
contractor his interest in Craneco. The contractor pays more for the hire
than it would have done if the contract had been awarded, including
discount, to one of the other crane hire companies.51
A.6. Concealment of financial status
Category
Description
Procurement and Contract Management
The project owner does not adequately disclose his/ her financial status at the
time of placing the contract. Financial statement fraud is deliberate
misrepresentation, misstatement or omission of financial statement data for the
purpose of creating a false impression of an organization's financial strength.
It includes:
• Falsification, alteration, or manipulation of financial records, supporting
documents, or business transactions
• Intentional omissions or misrepresentations of events, transactions,
accounts, or other significant information from which financial
statements are prepared
• Deliberate misapplication of accounting principles, policies, and
procedures used to measure, recognize, report, and disclose economic
events and business transactions
• Intentional omissions of disclosures or presentation of inadequate
disclosures regarding accounting principles and policies and related
16 international centre for water management services
Examples
for Red
Flags
Examples
financial amounts
Project owners might decide to conceal their financial status if they know that
otherwise, the contractor is unlikely to accept the contract or to begin works.
Although the project owner knows that he/ she is in financial difficulties and
knows that the project is likely to encounter financial difficulties, he/ she hides
this information from the contractor. It can also be the case that the project
owner runs into financial difficulties during the execution of the project without
notifying the contractor.
• Complaints from winning bidders
• Unfinished works
•
•
A project owner places a contract with a contractor. At the time of
placing the contract, the project owner is in serious financial difficulty. It
believes that it is quite likely that it will go into receivership prior to
completion of the contract and will therefore be unable to pay the
contractor in full for work done. The project owner does not disclose its
financial status to the contractor at the time of placing the contract. The
project owner is aware that if it does disclose its financial difficulties,
the contractor is unlikely to commence work.52
During a project, a project owner runs into financial difficulties and
realises that it will be unable to complete payment to the contractor.
The project owner nevertheless induces the contractor to finish the
works by falsely assuring the contractor that it will be paid.53
B. Project Execution
Corruption and fraud in project execution can take different forms. In the implementation process
contractors may ‘sweeten up’ the review committee (or staff in charge of the selection process)
with lavish entertainment in exchange for certifying their work or turning a blind eye to
construction shortcomings (TI & WIN 2008). Contractors may falsify invoicing or bribe in order to
cover up project delays. It can also be the case that customers or the project owner interfere to
expedite and divert services. The project owner may pass on costs, although the contractor has
met contract specifications. It also occurs that the contractor faces higher costs or receives low
value for money because subcontractors and supervisors collude. B.1. False, duplicate or inflated invoicing
Category
Description
Examples
for Red
Flags
Project Execution
In order to increase its profit, the contractor provides the project owner or the
subcontractor provides the contractor with false (invoices for goods or services
not rendered), duplicate (the good or service is repeatedly invoiced) or inflated
(the good or service is invoiced higher than it should be) invoices. In some
cases, the contractor might have to increase prices in order to recover the
money used to pay bribes.
General red flags:
• Weak controls over the review and payment of invoices
• Discrepancies between contract or purchase order, receiving
documents and invoices
• Discrepancies between contractor’s billings and supporting documents
• Invoice is in a round number amount if that is unusual
• Total payments to a contractor exceed total contract or purchase order
17 international centre for water management services
Examples
amounts
Red flags of false invoices:
• No receiving report for invoiced goods or services
• Invoiced goods or services cannot be located in inventory
• No purchase order for invoiced goods or services
Red flags of duplicate invoices:
• Multiple payments in the same time period in the same or similar
amount to the same or related vendors, on the same invoice or
purchase order or for the same or similar goods or services.
• Multiple invoices with the same description of goods or services,
amount, invoice number, purchase order number or with the same date.
• Total amount paid to vendor exceeds invoiced amounts.
Red flags of inflated invoices:
• Invoice prices, amounts, item descriptions or terms exceed or do not
match contract or purchase order terms, receiving records or inventory
or usage records
• An earth-moving sub-contractor signs a contract with the contractor to
remove unsuitable material from site and to replace it with suitable
material. The earth-moving sub-contractor will be paid by the load. The
contractor appoints a quantity surveyor to count on site the number of
loads removed and replaced by the earth-moving subcontractor. Each
load will have a written load certificate, which will be signed by the
earth-moving sub-contractor and counter-signed by the quantity
surveyor. The manager of the earth-moving sub-contractor agrees with
the quantity surveyor that the quantity surveyor will falsely certify more
loads than the earth-moving sub-contractor actually undertakes. In
return, the earthmoving sub-contractor will pay the quantity surveyor
30% of the payment received by the earth-moving sub-contractor for
each false load. The quantity surveyor certifies 20 false removals and
20 false replacements. The earth-moving sub-contractor submits both
its genuine and its false certificates to the contractor for payment. The
contractor pays in full, resulting in an illicit profit to the earth-moving
subcontractor. The earthmoving sub-contractor pays the quantity
surveyor his/ her share.54
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B.2. Overstating work, material or man-day requirements
Category
Description
Examples
for Red
Flags
Examples
Project Execution
In order to increase its profit, the contractor or the subcontractor overstates
work, material or man-day requirements of the requested good or service. Cost
engineers, commonly referred to as quantity surveyors, falsely increase the
quantities of certified works in order to obtain extra money from the contractor.
The project owner pays for the overstated materials or services. The contractor
provides only the necessary amount of materials or services and pockets the
payments for the overstated elements or shares it with the cost engineer.
• Costs are higher than indicated in the procurement bid or than the
estimated costs mentioned in the contract
•
•
•
•
In a repair contract, staff may report that 200 m of pipe need
replacement when only 100 m are actually faulty. Funds are budgeted
for the full length, and the cost of the extra 100 m of pipe can be
pocketed.55
A subcontractor is appointed by a contractor on a day-works basis to
undertake work, which the subcontractor knows, will take approximately
100 man-days to complete. The subcontractor informs the contractor
that the work will require 150 man-days. The subcontractor deliberately
over-states the man-day requirement in order to achieve a higher price
from the contractor. The contractor accepts the subcontractor’s estimate
of 150 days. The subcontractor completes the work using 100 mandays. The subcontractor invoices the contractor for 150 man-days of
work and attaches time-sheets for the work. 100 man-days of timesheets are correct. 50 man-days of time-sheets are falsified so as to
support the amount invoiced. The contractor pays the invoiced
amount.56
A plumbing sub-contractor is requested by the contractor to repair a
toilet. After inspecting the toilet, the plumbing sub-contractor ascertains
that the repair could be completed by the supply of a replacement
washer. The plumbing subcontractor, with the intention of securing a
higher price, falsely informs the contractor that several new parts are
necessary. The contractor agrees. The plumbing subcontractor replaces
the parts and invoices the contractor for the work carried out. The
invoice is higher than it would have been had only the washer been
replaced. The contractor pays the invoiced amount.57
A contractor is instructed by the architect appointed by the project
owner to carry out a variation to the works. The contract entitles the
contractor to an extension of time and additional payment in this
circumstance. The contractor submits a written claim in respect of the
variation to the architect, which deliberately exaggerates the manpower,
materials, equipment and time required to carry out the variation. In the
case where the architect indicates to the contractor that he/ she is
inclined to reduce the contractor’s claim, the contractor offers the
architect a bribe if he/ she will approve the full claim. The architect does
so.58
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B.3. Failure to meet contract specifications
Category
Description
Examples
for Red
Flags
Examples
Project Execution
A contractor can commit fraud by falsely claiming to have completed a contract
according to its specifications when it knows that it did not. In some cases, the
contractor might lower the quality of products. This practice is also called
product substitution. Substitution is particularly common and damaging in
contracts calling for expensive, high-grade materials that can be replaced by
less expensive, similar appearing products. The illegal substitutions can be
made by the contractor acting alone or in collusion with corrupt supervisors or
project owners.
Construction, operation and maintenance may be carried out by the contractor
or subcontractors. Both types of ‘investments’ carry integrity risks related to the
fulfilment of contract specifications:
• Staff may lack motivation to carry out their tasks (repair work, checks or
cleaning of pipes, etc.). To cover this up they may collude with
colleagues – e.g. with staff receiving complaints about service quality in
their work area – to avoid that their under-performance is noticed.
• Subcontractors on the other hand may collude with staff to cover-up that
they haven’t fulfilled their contractual obligations (e.g. that they have
only done parts of the repairs/measures/cleaning tasks/etc. that they
were supposed to do or even that they may not have done anything at
all). As a consequence of the collusion between the contractor and the
subcontractor, the insufficient quality of the work done may significantly
increase costs for operation and maintenance or, in the worst case, the
entire task and investment has to be redone.
• Discrepancies between contract specifications and invoices and
supporting documents or test and inspection results
• Absent, inadequate or altered supporting documentation submitted by
the contractor with its request for payment
• Apparently altered or fabricated test and inspection results
• Failed tests or inspections
• Contractor or project officials insist on choosing sites for inspections
• Inadequate testing procedures; contractor conducts its own tests
• Contractor resists inspection of its books and records
• Reports or history of corrupt payments or gifts by the contractor to
inspection personnel
• Discrepancy between product’s specification and actual appearance
(e.g. “new” product appears to be used)
• Apparent substandard goods or works
• Continued acceptance of poor quality of goods and services and
unfinished tasks
• Complaints from users and technical problems in certain parts of the
network
• Increased or accelerated product failures or repair costs
• Indications from the contractor’s records that it did not incur costs
necessary to comply with contract specifications, e.g. the contractor
failed to purchase materials, lease equipment or hire labour to do the
work for which it billed; or the contractors’ records indicate it purchased
products or raw material that was not compliant with specifications
• Oversight officials are bribed or extort payments to ignore instances
when specifications are not adhered to (e.g. depth of pipe work,
foundation materials) or works are not completed, or when lower quality
20 international centre for water management services
materials are used (e.g. type of pipes), and provide fraudulent
documentation. Typically these practices help contractors minimize
costs and result in sub-standard works, affecting sustainability and
quality of WSS service delivery.59
• A scaffolding sub-contractor contracts to provide a specified quantity of
scaffolding to a project for a fixed price and for a fixed duration. Before
the contract period for supply has expired, the scaffolding subcontractor, without the knowledge of the contractor, removes part of the
scaffolding. The scaffolding sub-contractor does not inform the
contractor that some scaffolding has been removed nor does it make
any deduction for the scaffolding removed. It invoices the contractor for
the full fixed price. The contractor pays in full.60
• A detailed review of several donor-financed health sector projects
revealed numerous instances of the substitution of substandard medical
equipment and materials used in the construction of hospitals. Previous
similar reviews and investigations revealed that such schemes are often
implemented through bribes of relatively small gifts and favours paid by
the suppliers to local inspectors to induce them to accept the
substandard equipment. In the most egregious cases of fraud, the
suppliers often are empty “shell companies” set up by Project Officials
for the sole purpose of obtaining the supply contracts and profiting from
the substandard goods.61
B.4. Fraudulent variation claims
Category
Description
Examples
for Red
Flags
Examples
Project Execution
The contractor can ask the certifying consultant to issue variation claims so that
work, which has initially not been included in the contract specifications is
added. These variation claims can be fraudulently increased by the consultant
(in collusion with the contractor) so that the extra money is shared between the
certifying consultant and the contractor.
• Alterations to initial contract specifications
• Works are later added to the contract
•
A contractor carries out work, which is not in compliance with the
contract specification. Under the contract, the architect is responsible for
issuing variations. The contractor offers the architect a bribe if he/ she
confirms in writing that the work was carried out pursuant to a variation
issued by the architect, and is therefore acceptable. The architect does
so.62
B.5. Bribes to cover up project delays
Category
Description
Examples
for Red
Flags
Examples
Project Execution
Project delays are often caused by delayed delivery of materials. In order to
avoid project delay penalties the contractor offers bribes to the project owner
for instance .
• The contractor is not billed for damages for delays in project execution
or completion
•
Fraudulent justification of delays: In this case the purchaser or
employer, in exchange for a bribe, ignores delays in delivery or
21 international centre for water management services
•
completion of contract execution and waives the penalties that should
have been applied.63
A contractor has been delayed in completing the project. Two reasons
could account for the delay. The first is the delayed delivery of materials
by one of the contractor’s suppliers for which delay the contractor is
responsible under the contract and for which he/ she would be liable to
pay liquidated damages to the project owner. The second is a change to
the specification for which delay the project owner is responsible under
the contract and for which the contractor would be entitled to receive an
extension of time and additional cost. The contractor is aware that the
whole or part of the actual cause of the delay is the supplier delay.
However, the contractor submits a written claim to the architect
appointed by the project owner which alleges that the whole delay was
attributable to the change in specification. The architect accepts the
contractor’s claim, and awards the contractor an extension of time and
additional payment. The project owner pays the additional payment.64
B.6. Bribes and interference to expedite and divert services
Category
Description
Examples
for Red
Flags
Examples
Project Execution
Bribes by customers are made to secure or expedite services, like household
connections, repair work, information or other.65 Bribes or acts of interference
by customers, project or public officials can also be made in order to deviate
services to which the interfering person is not entitled, e.g. in order to obtain
services that were initially planned for another purpose, typically for
development aid.
• Preferential treatment of certain customers
• Preferential treatment of public officials
• Preferential treatment of contractor who sites a water project in a public
official’s home area
• Public officials involve themselves in decisions related to W&S
provision so that projects are changed for their personal benefit
• Infrastructure projects do not cover the area initially designed to be
covered
• Complaints by customers that the works performed at their place takes
much longer than at other places
• In areas that are served by piped water systems, there are again
allegations of collusion between contractors and those with influence in
the community so that the water system passes near their homes.
Indeed there were cases of unnecessary deviations to accommodate
certain homesteads while no such favour is accorded to institutions and
other heavily populated areas.66
• A project that was meant to serve North Sakwa stalled after pipes had
been laid and the infrastructure was almost completely laid because of
political sabotage and due to interference by the local leadership who
wanted changes in design to serve their areas of interest.67
22 international centre for water management services
B.7. Delayed, reduced or refused payments
Category
Description
Examples
for Red
Flags
Examples
Project execution
The project owner knowingly and illicitly delays or refuses due payments to the
contractor. It can also be the case that the project owner intended to withhold a
part of the payment at the moment of placing the contract. The project owner
can also bribe the consultant to delay the issuance of a payment certificate
because they do not have sufficient funds at the time the claim for payment is
received. In some cases, a project or public official asks for a fee from the
contractor to ensure that payment certificates are paid quickly.
• Contractors complain about delayed or outstanding payments
• Contractors complain about delayed issues of payment certificates
• Contractor gets extorted to pay a fee in order to receive a payment
certificate
• The project owner offers the architect a future appointment on another
project if the architect delays the issue of payment certificates which
are due to the contractor. The architect agrees.68
• A contractor has properly completed the works and is entitled to
receive a final certificate. The engineer appointed by the project owner
refuses to issue the final certificate to the contractor unless the
contractor pays him 5% of the final certificate value.69
• A project owner owes a contractor payment of the contract price. The
contractor has completed the contract works to the correct specification
and within the allotted time. There is no dispute between the project
owner and the contractor. The project owner informs the contractor that
it will pay the contractor 80% of the contract sum immediately in full
and final settlement. The project owner further states that, if the
contractor does not accept this proposal and wants to recover the full
amount, the contractor will have to sue the project owner for payment
and the project owner will make the litigation as long and as costly as
possible. The project owner is a large company which could bear the
cost of protracted litigation. The project owner knows that the
contractor would be unable to do so. The contractor agrees to accept
the reduced payment.70
• A contractor is due the final payment on a project. The project owner’s
representative informs the contractor that he/ she will not authorise the
release of the final payment unless the contractor makes an extra
payment to the project owner’s representative personally. The
contractor makes the payment. The project owner’s representative
authorises the release of the final payment.71
B.8. False rectification costs or passing on of costs
Category
Description
Examples
for Red
Flags
Project execution
It can be the case that additional costs arise for the contractor although he/
she has met contract specifications.
The project owner for example imposes false rectification costs on the
contractor or tries to pass on the costs of delay in project execution or
completion to the contractor, even if the delay was caused by the project
owner.
• False accounting by project owner
• Contractor provides goods or services without delay, but is asked to
23 international centre for water management services
Examples
•
•
pay the project owner damages for delay
A contractor has completed the works and applies for final payment.
Under the contract, the architect appointed by the project owner is
required to specify outstanding defects. The project owner persuades
the architect to include, in the schedule of defects, additional purported
defects which in fact are not outstanding. The project owner then sets
off the alleged cost of rectification of these defects against the balance
due to the contractor. The contractor disputes the deduction. The
project owner informs the contractor that, if the contractor does not
accept the reduced sum, then he/ she will have to litigate or arbitrate to
get the remainder from the project owner. The contractor cannot afford
litigation, so he/ she accepts the reduced amount.72
A contract entitles the contractor to an extension of time and payment
of loss and expense in the event of specified delays caused by the
project owner. The contract also provides that the contractor should
pay liquidated damages to the project owner in the event of specified
delays caused by the contractor. Under the contract, the engineer
appointed by the project owner determines questions of delay and loss
and expense. The works are delayed by the project owner. The
contractor applies to the engineer for an extension of time and
ascertainment of loss and expense. The project owner and engineer
are aware that the contractor is entitled to both. The project owner
agrees with the engineer that the engineer should refuse the
contractor’s claim and should instead issue a certificate requiring the
contractor to pay the project owner liquidated damages for delay. The
engineer does so.73
B.9. Bribery and/or collusion between subcontractors and
supervisors
Category
Description
Examples
for Red
Flags
Examples
Project Execution
In some cases, certain aspects of the requirements for services (e.g.
installations, repair work, measurements, etc.) and goods (e.g. equipment like
pumps, pipes, etc.) might not be in the competence of the company, making it
necessary for them to subcontract other companies. Besides collusion between
the contractor’s staff and subcontractors (see B.3) it can also be the case that
the subcontractor bribes and/or colludes with its supervisor (e.g. a quantity
surveyor) in order to meet agreed standards of services and goods. As a
consequence of this fraud, the contractor does not receive value for money.
Insufficient quality may significantly increase costs for operation and
maintenance or, in the worst case, the entire task and investment has to be
redone.
• Continued acceptance of poor quality goods and services and
unfinished tasks by the supervisor
• Contractor complains about poor quality goods and unfinished tasks
• An earth-moving sub-contractor signs a contract with the contractor to
remove unsuitable material from site and to replace it with suitable
material. The earth-moving subcontractor will be paid by the load. The
contractor appoints a quantity surveyor to count on site the number of
loads removed and replaced by the earth-moving subcontractor. Each
load will have a written load certificate, which will be signed by the
24 international centre for water management services
•
earth-moving subcontractor and counter-signed by the quantity
surveyor. The manager of the earth-moving subcontractor agrees with
the quantity surveyor that the quantity surveyor will falsely certify more
loads than the earth-moving subcontractor actually undertakes. In
return, the earthmoving subcontractor will pay the quantity surveyor
30% of the payment received by the earth-moving sub-contractor for
each false load. The quantity surveyor certifies 20 false removals and
20 false replacements. The earth-moving subcontractor submits both its
genuine and its false certificates to the contractor for payment. The
contractor pays in full, resulting in an illicit profit to the earth-moving
subcontractor. The earthmoving subcontractor pays the quantity
surveyor his/ her share.74
A roofing subcontractor installs a waterproof roof membrane. The
membrane is accidentally perforated during installation, which means
that it could leak. The membrane needs to be approved by the
contractor’s supervisor before it is covered over. The membrane should
be rejected and replaced owing to the perforations. The subcontractor
offers to make a payment to the supervisor if he/ she certifies that the
sub-contractor’s defective membrane is watertight. The supervisor
accepts. The payment is made by the subcontractor to the supervisor
and the supervisor issues the certificate. The subcontractor submits the
certificate to the contractor, and obtains full payment for the defective
membrane. Neither the subcontractor nor supervisor discloses to the
contractor that the membrane is defective.75
C. Administrative and Public Services
SME often face corrupt requests by public officials when dealing with administrative and public
services. Unethical practices to gain access to public services, bribing for registration, permits
and licenses, as well as bribing at customs are very common. Regarding tax payments, SME
can be drivers of corruption as well as victims of tax preparers and inspectors.76 C.1. Illicit practices regarding tax payments
Category
Description
Examples
for Red
Flags
Administrative and Public Services
With regard to tax payments, SME can be drivers as well as victims of a lack of
integrity. Where SME are drivers of corruption, they can manipulate the tax return
or bribe tax inspectors in order to avoid tax payments. Tax preparers and
inspectors might take advantage of the complexity of the tax system to confuse
SME. Furthermore, a lack of accounting knowledge can (unintentionally) lead to
wrong tax declarations.
General red flags for avoiding tax payments:
• SME management lives above its income-standard
• SME makes profit above average
Red flags for manipulated tax returns:
• The tax return has too many rounded numbers (especially when itemising
deductions like business expenses, unreimbursed employee expenses,
job hunting costs, etc.)
• Not all taxable income is reported
Red flags for illicit practices of tax preparers and inspectors:
• The tax preparer convinces the SME to claim unreasonably high
deductions
25 international centre for water management services
•
The tax preparer reports income that doesn’t line up with SME reportings
Examples
C.2. Unethical practices to gain access to or to speed up public
services
Category
Description
Examples
for Red
Flags78
Administrative and Public Services
SMEs often face difficulties in the form of requests for unofficial payments from socalled natural monopolies or “network industries” or they pay bribes in order to
speed up administrative services or avoid customs. The following three forms are
common:
• Unethical practices to gain access to public services: SMEs confront
requests from private sector entities that provide public services, such as
the supply of electricity, water or gas. Since SMEs cannot run their
business without these services and lack bargaining power due to limited
consumption, they have to play according to the rules imposed on them.77
• Bribing for registration, permits and licenses: Bribes are paid in order to
speed up registration processes and the issuance of permits and licenses.
Payments can also occur in order to obtain unofficial permits and licences.
• Bribing at customs: Bribes are often paid in order to speed up services
from the customs division or in order to avoid levies on goods and tolls on
transport demanded by police, customs or local government officers at
roadblocks or at the border. In some cases, customs clearance agents
assist the company in clearing goods.
Red flags of unethical practices to gain access to public services:
• Undue delays in giving connections
• Unusually high connection costs
Red flags of bribing for registration, permits and licences:
• Registration process/issuance of permit or licence takes unusually short
time
• Registration costs/costs for issuance of permit or licence are higher than
usual
• Payments due to a public authority are issued to an individual
General red flags of bribing at customs:
• Misrepresentation or inconsistencies in the application or during the due
diligence process
• Unusually rapid border transit times
Red flags in case of assistance by a customs clearance agent:
• The agent has a bad reputation in the business community
• A customs official recommends the representative
• The agent makes unusual requests such as a request to backdate or alter
documents
• The agent asks for commissions that are substantially higher than the
“going rate”
• The agent asks for payment by unorthodox or convoluted means such as
through strange bank accounts outside the country where the services are
being offered
• The agent requests unusually large bonuses or substantial up-front
payments
• The agent appears to be unqualified or understaffed or has no
infrastructure and trained staff
26 international centre for water management services
•
Examples
•
•
The agent has a record of clearing goods through remote or notoriously
corrupt customs posts and overpromises on expeditiousness or promises
unusually rapid border transit times
The agent does not belong to relevant professional associations
The agent is unable to provide a verifiable company reference
D. Dispute Resolution
In Zambia companies often do not trust the judicial system, and the enforcement of contractual
and property rights by the judicial systems is not taken for granted. A survey published in the
World Economic Forum Global Competitiveness Report 2012-2013 revealed that the judiciary
system is sometimes influenced by members of government, citizens, or companies. SMEs may
offer bribes to speed up judicial processes, manipulate evidence or be victims of illicit practices
by their legal representation.79
D.1. Speeding up judicial processes
Category
Description
Examples
for Red
Flags
Examples
Dispute Resolution
SMEs offer bribes to court members so that they speed up judicial processes.
• Prompt settlement of judicial processes
• Judicial officers living above standard
D.2. Manipulation of evidence
Category
Description
Examples
for Red
Flags
Examples80
Dispute Resolution
Evidence can be manipulated in order to influence the judicial process. The
manipulation of evidence includes concealment of documents and submission
of false supporting documents, supply of false witness evidence, supply of false
expert evidence, bribery or blackmail of witnesses.
• Inconsistencies in submitted documents
• Incomplete documentation
• Contradictory witness or expert evidence
• Witness changes opinion or refuses to appear in court
• Submission of incorrect or misleading contract claims, pleadings or
particulars: In a contract claim, or during dispute resolution proceedings
(such as mediation, adjudication, arbitration or litigation), the claimant
submits claims, pleadings or particulars which he/ she knows to be
false, or does not believe to be true, or of which he/ she is reckless as
to their accuracy. For example a loss and expense claim where the
extension of time claim on which the loss and expense claim is based
is incorrect or the amount of loss and expense claimed is overstated.
• Concealment of documents: In a contract claim, or dispute resolution
proceeding, a claimant deliberately does not disclose to his/ her
opponent, or to the dispute resolution tribunal, documents which are, or
may be, damaging to the claimant’s case. Such documents include for
example timesheets, which would undermine the claimant’s case that
labour and equipment were working on a particular item of work.
27 international centre for water management services
•
•
•
•
•
Submission of false supporting documents: In a contract claim, or
dispute resolution proceedings, a claimant submits the following
supporting documents as genuine and accurate when he/ she knows
that they are false, or does not believe them to be true, or is reckless as
to their accuracy. For example cost records, which incorrectly state the
cost of items, or include items or work, which were not provided.
Supply of false witness evidence: In dispute resolution proceedings, a
witness as to fact gives evidence on behalf of the claimant (whether by
way of affidavit, witness statement or orally) that he/ she knows to be
false, or does not believe to be true. Such evidence by the witness
includes for example stating that a fact had been orally agreed between
representatives of the claimant and the opponent, when he/ she knows
that this fact had not been agreed, or is not sure whether or not it had
been agreed.
Supply of false expert evidence: In dispute resolution proceedings, a
claimant appoints an expert to provide an opinion on an aspect of the
claimant’s case. The expert’s initial report, prepared confidentially for
the claimant, is unsupportive of the claimant’s case. The claimant
makes it clear to the expert that his/ her appointment will continue only
if the expert amends his/ her report to make it favourable to the
claimant’s case. The expert does so. He/ she believes the amended
view to be arguable, but presents it in the report as his/ her most
favoured view, and as the correct view, when this is not his/ her belief.
The report is then submitted as expert evidence in the proceedings and
the expert witness gives oral evidence in accordance with it. Both the
expert and the claimant are aware that the expert does not believe his/
her evidence to be true. The success of the claim and counterclaim in
the proceedings depends on the outcome of the expert evidence.
Bribery of witness: A claimant offers a witness a percentage of any
future award by the arbitrator in the claimant’s favour if the witness
gives false evidence in support of the claimant in the arbitration. The
witness accepts, and provides a false witness statement and false oral
evidence both of which support the claim and undermine the
counterclaim.
Blackmail of witness: The respondent in an arbitration owes money to
the claimant. The respondent tells a witness that he/ she will be
dismissed as an employee of the respondent unless he/ she gives false
evidence in support of the respondent in the arbitration. The employee
gives the false evidence and as a result the respondent wins the
arbitration, and does not need to pay the claimant.
D.3. Illicit practices by the legal representation
Category
Description
Examples
for Red
Flags
Dispute Resolution
SME can be beneficiaries or victims of illicit practices by their legal
representation. The legal representation can take advantage of the SME by
over manning or excessive billing. On the other hand, lawyers might accept to
collude with the SME in exchange for bribes or other gifts.
Red flags for legal representation taking advantage of SME:
• Costs are higher than usual
• Number of lawyers working on the case is high compared to the level of
complexity of the case
28 international centre for water management services
Law firm asks for money to pay for works or research that does not
appear to be relevant to the case
• Legal representative living above standard
Red flags for collusion of lawyer and SME:
• Experts or witnesses complain that their statement has not been
accurately reproduced
• Over manning by law firm: A contractor appoints a law firm to act in an
arbitration on its behalf. The partner in the law firm who is head of
construction sees the arbitration as a major opportunity to make money
and allocates four lawyers to the arbitration when he/ she knows that
two lawyers would be sufficient. The partner advises the contractor that
this number of lawyers is necessary owing to the complexity of the
case and the volume of the work. The contractor accepts this advice.
The partner quotes the contractor an hourly rate for each of the
lawyers. Monthly bills are submitted by the law firm to the contractor
and these are paid by the contractor.
• Excessive billing by lawyer: A lawyer working on an arbitration for a
project owner bills more hours to the project owner than the lawyer
actually spent working on the case.
• Complicity by lawyer: The lawyer involved in drafting the witness
statement is aware that the witness does not believe his/ her evidence.
However, despite this knowledge, the lawyer continues to draft the
witness statement on the basis that it is true, and allows the witness
statement to be put forward in support of the claimant’s case.
•
Examples81
E. Customer Relations
Good customer relations can be of benefit as SMEs are highly dependent on its customers. It
can for example increase customer loyalty and allow businesses to obtain feedback on how to
improve their products and services, which in return can have good effects on a SME’s
reputation. Insufficient complaints management and customer orientation pose a risk when
failures, unethical behaviour or illicit practices don’t get reported to the ones responsible.
Customers may refuse to cooperate, however it can also be the case that customers accuse the
company of corruption in order to blackmail them.
E.1. Insufficient complaints management & customer orientation
Category
Description
Examples
for Red
Flags
Examples
Customer Relations
Without proper complaints management, SMEs lose their ability to control and
manage risks because failures, unethical behaviour and illicit practices don’t
reach those responsible. Furthermore, consumers are unable to seek redress
due to the lack of effective complaint mechanisms and lack of awareness about
the rights and responsibilities of providers and consumers.
• Low responsiveness of SME to customer complaints
• No regular reporting about complaints from customer care to
management
• Although many companies have received substantial funding and
capacity building […] they still fail to adequately respond to
complaints.82
• Without effective complaint mechanisms, and where awareness about
the rights and responsibilities of providers and consumers is lacking,
29 international centre for water management services
•
poor householders are unable to seek redress.83
Sydney Water’s ability to exert and control authority was obstructed by
a deficient complaint system and inadequate risk management
processes. Audit plans are influenced by the examination of existing
records. In the absence of a robust process of complaint capture,
Sydney Water Internal Audit was hampered in its development and
prioritisation of audit plans.84
E.2. Non-cooperative customers
Category
Description
Examples
for Red
Flags
Examples
Customer Relations
The responsibility of a SME in the water sector is the provision of goods or
services such as consultancies, engineering and construction. The customer
can be a water utility, a company, an NGO or a private person. In return, the
customers have responsibilities towards the SME, which include the timely
payment of bills or transparent tendering. Customers may not be willing to fulfil
their obligations towards the company if they are the drivers of illicit behaviour
or if they have a negative image of the SME (e.g. because of quality of
services, experiences in the interaction with the SME, negative reports about
the SME in local newspapers and radios, etc.). Furthermore a bad reputation of
the SME makes it difficult to tap into the potential for cooperation with clients
reporting illicit practices of staff.
However, sometimes, it can also be the case that customers use accusations of
corruption as a means to blackmail the SME.
• Unpaid bills
• Delay in paying bills
• Low cost recovery
• False accusations of corruption
• Tempering with equipment
• Forging of checks
• An undue payment, required in order to get an electricity supply
connection [or any other kind of good or service], is obviously a burden
[for the company].85
F. Financial Management
Efficient and effective management of money is important for the SME’s operations. There are a
number of integrity risks regarding financial management. Employees using different methods to
get higher checks and staff working in the payroll department manipulating the company’s payroll
account can have significant consequences for a SME. A common way to cover up fraud or theft
of money is to falsify financial documents and accounts. SME can also be victims of external
actors. As they are usually in a weak position to get loans it might be attractive for a SME to
respond to dubious loan offers.
30 international centre for water management services
F.1. Payroll fraud
Category
Description
Examples
for Red
Flags
Examples87
Financial Management
Large amounts of money flow through a company's payroll account. The
potential for fraud is significant, and the consequences can be devastating.
Employees can make use of payroll schemes by manipulating the amount on
their check or reproducing the check somehow to cash a check more than
once. Another concern for businesses is the employees who work in the payroll
department. If there are no controls in place, the payroll employees can not
only inflate their checks but also grant bonuses and extra vacation time. One
method of theft in the payroll department involves creating a “ghost” employee
on the payroll. This “ghost” doesn’t exist but the company will send checks that
are collected by the “ghost’s” creator.86
Red flags for falsified time sheets:
• Similar employee names entering and leaving the system at about the
same time
• More than one employee's hours increasing for no apparent reason
• More employees doing overtime for no apparent reason and with no
apparent result
Red flags for ghost employees:
• Employee files that have missing personnel file information
• A number of employees with the same mailing address, or using post
boxes as mailing addresses
• More than one employee using the same bank account for the deposit
of wages
• Employees with no withholding taxes, insurance, or other normal
deductions
• Payroll manipulation is common where pays are calculated on any
sliding basis, whether time or piecemeal work. The most common
example of this is employees clocking on early and clocking off late to
increase the number of hours for which they are paid. The fraud does
not need to be hidden as the payments are recorded as legitimate
expenses. Verification is often overlooked when more senior employees
are submitting claims, when it is less likely that the claim will be
questioned by a junior employee. The most common forms of the fraud
are: Falsifying time sheets to increase the hours 'worked'; have
someone else clock you in and out when you are not there, or simply
waiting around for some time before clocking off, to increase the
recorded hours 'worked'; physically adjusting the time on the clock when
you clock in and out; falsifying the type of work done to be paid a better
rate on the different work; and falsifying qualifications to be placed on a
higher wage rate.
• A ghost is a fictitious employee added to the payroll. Wages or salary is
paid to the ghost and is taken by the perpetrator. The larger the
company is, the more difficult it gets to detect ghost workers, particularly
when employees are spread over a number of separate geographic
locations and where the payroll function is centrally controlled. This
scheme is possible when the officer authorizing wage payments will not
recognize the ghost's name on the payroll list. Or that officer could be
the perpetrator. Hiding the fraud is not necessary as the payments are
made and recorded as legitimate operational expenses. By inserting a
ghost into the payroll system, that ghost will be paid a wage, and the
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wage can be collected by the perpetrator.
F.2. Falsification of financial documents and accounts
Category
Description
Examples
for Red
Flags
Examples
Financial Management
The falsification of financial documents (invoices, checks, expense reports etc.)
and accounts is common practice to cover up fraud and theft of money or
assets. Moreover, the falsification of financial documents is a typical example
of a means to circumvent procedures and delegated authority in order to
embezzle funds. Inappropriate billing and accounting systems make it easier to
cover up such illicit practices.
Fictitious invoices and over-billing are fraud schemes often appearing in the
company’s acquisition function. The purchasing function of a business includes
the acquisition of goods and services for the business. The acquisition function
is especially vulnerable to fraudulent transactions because it involves the
disbursement of company funds. It is where most cash leaves the company.
Purchasing fraud probably contributes the largest fraud risk to most
enterprises.
Using manual or inadequate electronic systems for accounting makes it easier
to manipulate data and embezzle funds. This is further aggravated if fraudulent
documentation, accounting and reporting by those managing finances aren’t
controlled and audited properly.88
General red flags falsification of financial documents:
• Questionable invoices
• Inadequate payment documentation
• Lots of corrections in manual cash books or pristine records – i.e. a
manual cashbook that looks as if they have been written on the same
day
Red flags for fictitious invoice / fictitious vendor:
• Photocopied invoices or invoices that have been tampered (e.g.,
sections have been "whited out" and typed over)
• Invoice numbers from the same vendor that occur in an unbroken
consecutive sequence
• Invoices from companies with a P.O. Box address and/or no phone
number
• Invoices from companies with the same address or phone number as
an employee
• The amount of each invoice from a particular vendor falls just below a
threshold for review
• Multiple companies that have the same address and phone number
• Vendor names that appear to be a "knock-off" of well-established
businesses (i.e., names spelled very similarly to well-established
businesses) Red flags of falsified accounts: • Records not being kept up to date
• Budget monitoring reports showing inconsistent behaviour between
line items
• Lots of corrections in manually written accounts • Another fictitious invoice scheme is for an individual to arrange for
invoices to be sent to and paid by a company but the invoicing
business does not exist. A bank's marketing and advertising director
allegedly arranged for another individual to submit bills for advertising
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•
•
•
•
that had been placed in a trade publication but the trade publication did
not exist. This type of scheme often involves collusion with the vendor
and purchasing or accounts payable personnel.89
Over-billing is a method where the individual submits an inflated or
altered invoice for payment. The overpayment is then diverted, paid to
the employee, or an accomplice. A 61-year-old employee of a national
retail chain was indicted for defrauding his employer of more than $2
million. He was an employee for more than 15 years and was
responsible for leasing building to house the company's stores. On 22
leases, he altered the documents, including the forgery of letters to the
company for fictitious legal and maintenance services. He also altered
the company's copy of the leases so that the billings for these services
would match the leases.90
Check tempering: This involves employees using company checks to
pay themselves. The simplest and most popular way this is done is by
employees simply writing a check to themselves and depositing it in
their account. Often this includes the employee forging the signature of
the person authorized to write checks. Another way employees tamper
with checks is by reissuing the company’s old outstanding checks but
altering the payee to themselves. The company in this case has
already recorded the check and deducted the cash accordingly so
when the check is deposited by the employee, there isn’t any good
indication that something has gone wrong.91
Manipulation of expense report: When an unscrupulous employee
submits his/her expense report, they may include additional expenses
that were either never incurred or not of a business nature, and be
reimbursed for those items.92
The invoices […], totalling $25,500, which Mr Makucha submitted to Mr
Harvey for payment by Sydney Water, were a ruse concocted between
Mr Makucha and Mr Harvey so that Mr Makucha could obtain money
from Sydney Water for his personal use. To the knowledge of both Mr
Harvey and Mr Makucha, the invoices falsely represented that they
were for the sale of buildings to Sydney Water.93
F.3. Loan scam
Category
Description
Examples
for Red
Flags
Financial Management
SME often rely on credits when the company is created, to expand the
business or to buy new equipment. However, it might be difficult for SMEs to
present the necessary guarantees to receive a credit from a reliable institution.
This might put SMEs in the need to responds to dubious credit offers.
A “loan scam” usually occurs when a person or enterprise replies to an advert
for a fast loan and will have their application approved regardless of their credit
history. Before they receive the loan, they are told they must pay an upfront fee
to cover insurance for the loan. Once this fee is paid, the victim does not hear
from the company again and the loan is never received.
Loan scams, however, can also consist of obstacles as to receive a loan such
as large amounts of documentation, unaffordable interest rates, or requested
bribes.
• The lender is not interested in the businesses credit history
• Fees are not disclosed clearly or prominently
• Lender is not registered
33 international centre for water management services
Examples
• A lender who asks to directly pay an individual
• Excessive requirements to obtain a loan
• Corrupt bank officials are often targeted to approve loans that do not
meet basic financial criteria, and therefore cannot be collected later
on.94
• As money floods into the city, many small businessmen in Bangladesh
cannot secure bank loans. They face what they say are unreasonable
demands from the state-owned banks for huge amounts of collateral,
masses of documentation, interest rates as high as 19 percent, and
finally “speed money” – a bribe for the bank official worth 10 percent of
the loan value. Meanwhile, corrupt bankers are funnelling loans worth
billions of taka to businessmen backed by the country’s political bosses,
accepting forged documents and waiving the collateral rules. In August
the central bank unearthed a 36 billion taka ($43 million) loan scam at
the country’s largest bank, Sonali Bank Ltd, where loans were granted
to a little-known business house without the minimum collateral required
as security. [...] Loan scandals like this rob banks of the profits and
capital needed to back fresh lending, and it is SME that pay the price.
As of June 30 unpaid or non-performing loans in the banking system,
called “classified loans” in Bangladesh, totalled 290 billion taka ($3.4
billion), and thousands of cases involving billions of taka were tied up in
the courts as the banking authority tried to recover money from loans
gone bad. […] Shahin said [SME] hardly ever default on loans, yet they
become the victims in the banking scandal. “Had the money (given to
Hallmark Group) been granted as loans to the SME, they could have
flourished as businesses and generated more employment. Corruption
is really undermining the future of the country,” he said.95
• The very top rung of some of India's public sector banks and financial
institutions have been arrested by the Central Bureau of Investigation
for allegedly sanctioning loans in return for bribes.96
G. Governance, Management and Controls
Good governance, management and controls are vital for the performance of SME because they
allow monitoring the actions of management and directors and thereby mitigating integrity risks.
Discretion in important decisions can for example generate loopholes for corruption on both
management and lower levels. Similarly key positions can get misused for corrupt practices and
have negative effects on the behaviour of staff. The authority of decision makers can also be
misused when utilising vehicles and assets for private purposes and delegating tasks to staff that
serve their own purposes. Generally speaking, unclear roles, responsibilities and processes
increase integrity risks.
G.1. Discretion in important decisions
Category
Description
Governance, Management and Controls
Corruption thrives in situations with important decisions (high volume of money,
decisions that affect people with different interests, etc.) being made and
uncontested discretion cover expenditures and reasoning from the eyes of
colleagues and the public. Such discretionary power can be used as an
opportunity and incentive to gain illegal benefits. Discretion in important
decisions generates loopholes for corruption at management levels but can
34 international centre for water management services
Examples
for Red
Flags
Examples
also jeopardise integrity at lower levels. Research shows that the higher the
degree of discretion, the higher the incidence of bribery.97
• Staff is informed only after important decisions have been taken
• Some staff can take important decisions (e.g. concerning investments,
hiring or procurement) without having to consult with colleagues
• Decision makers or powerful stakeholders seek to protect their interests
and maintain their positions of power by, for example, withholding
information and excluding other relevant stakeholders from dialogue
and decision making.98
• Corruption is about making choices: accepting a bribe, falsifying water
meter readings, allowing excessive abstraction of water, overlooking
wastewater dumping or the use of substandard material in dam
construction. Technical solutions and control decrease the discretion of
individual actors, thus making such choices more difficult and risky.
Although aiming for water integrity is more an ethical matter than a
technical, such solutions turn into a very efficient tool, which serve to
limit opportunities for unethical practices to arise.99
• Corruption will tend to emerge when an organization or person has
monopoly power over a good or service which generates rent, has the
discretion to decide who will receive it (thus on how rents will be
allocated), and is not accountable.100
G.2. Misuse of key positions
Category
Description
Examples
for Red
Flags
Examples
Governance, Management and Controls
Members of higher management levels have access to SME resources and can
take decisions fairly independently. Weak SME governance and the lack of
oversight, discretion in decision-making and collusion with procurement
officers, human resources or financial staff, are some of the factors that can
allow managers to siphon and embezzle funds or pursue private interest
through unethical decisions.
In institutions where corruption is rampant at the decision-making level, the
day-to-day behaviour of staff is also affected. Employment conditions (for
example salary or location of the SME) or inadequate selection procedures may
result in a lack of commitment and capacities of staff in management positions
(including the managing directors). Employees are strongly influenced in their
own behaviour by the way their managers and immediate supervisors behave.
Managers are in a particularly strong position to either encourage or minimise
corrupt conduct.
• Change of lifestyle of staff in key positions – spending patterns do not
match their income
• Lots of relatives of staff in key positions are employed by the SME or
work as contractors for the SME
• Chief Engineers might embezzle funds.101
• There is a risk that a commercial manager is influenced by external
stakeholders in negotiating agreements with customers e.g. on
repayment of arrears.102
35 international centre for water management services
G.3. Use of staff, vehicles and assets for private purposes
Category
Description
Examples
for Red
Flags
Examples
Governance, Management and Controls
Managers may misuse their authority to pressure staff to handle tasks that are
private business ventures or that are favours to friends and partners. Managers
and staff can also access SME assets like vehicles or land to use them to
support political campaigns, for private travel or to hold events, for example. It
might also occur that employees misuse company assets for secondary
employment.
• Vehicle log books not maintained in an appropriate level of detail
• Staff always claims to be busy with other tasks for the same person
•
[…] Directors pursue private interests in influencing operational
decisions: In one case, the BoD put pressure on the Management to
permit an ally to plant maize on the area of a treatment plant, arguing
this would not interfere with the operation of the treatment plant, 5) In
one case, a Director demanded from the technical manager to
reconnect a commercial customer due to vested interests/
relationships.103
G.4. Unclear roles, responsibilities and processes
Category
Description
Examples
for Red
Flags
Examples
Governance, Management and Controls
Clearly defined roles, responsibilities and processes (administrative,
management, supervision, operation, checks and balances, etc.) provide the
basis to hold those who engage in illicit practices responsible – this applies
particularly for boards and senior management. They provide guidance on
authorisation for decisions of staff in different positions within the SME or board
members as well as how and where others (e.g. colleagues) need to be
involved to take decisions. Gaps (e.g. how is the board accountable to the
shareholders, missing, unclear or double reporting lines, etc.) in the
governance of an SME provide opportunities for individuals to misuse their
positions for their personal benefit. At the same time such gaps can result in a
situation where individuals are not held accountable – e.g. if it is not clear who
needs to evaluate the sanctioning or not of somebody. The core problem of
utility governance is that these contracts or agreements are often violated or
incomplete. This provides leeway for opportunistic behaviour, i.e. actors may
maximise their individual benefit at the expense of the SME and/or the public.
• SME has no corporate governance guidelines
• Several processes are not clearly defined / no guidance or standard
operating procedures available for key processes
• Roles and responsibilities of several employees are not defined clearly
• Split supervision arrangements / responsibilities for supervision are not
clearly assigned to specific positions
• Poor governance, which continues to be experienced in the water
services sector, directly translates to poor management and
subsequently underperformance. The sector continues to be
characterised by inefficiencies in operations, poor customer service,
and low cost coverage. Thus, there is need to strengthen governance
with specific focus on leadership and management.104
• The core problem of Corporate Governance is incomplete/lack of
enforcement of contracts between stakeholders (BoD, employees,
36 international centre for water management services
•
management, suppliers, consumers, shareholders, etc.). Each
stakeholder pursues its own interests which are not necessarily in line
with the company/sector interest. Incomplete/not enforced contracts
provide leeway for stakeholders for opportunistic behaviour (i.e. corrupt
practices) to maximise their individual benefit at the expense of the
company/public. This leads to a deadweight loss and undermines
sector performance.105
Accordingly, rules of corporate governance have the objective to
reduce the leeway and motivations for opportunistic behaviour. A
strong corporate governance framework: 1. Provides proper incentives
for the BoD and management to pursue objectives in line with the
company’s and public interest, 2. Strengthens the accountability and
integrity of staff, suppliers and consumers on the day-to-day
transaction level, i.e. it makes it hard to give and receive bribes, 3.
Injects transparency and accountability at the decision-making level.106
H. Human Resources Management and Employment
The lack of human resources management and good employment conditions may affect the
performance of SME because staff is for example unqualified or lacks motivation. Theft of money
or assets by staff, staff transferring knowledge to competition, staff colluding with customers or
suppliers may be the result of bad human resources management. Unsatisfying employment
conditions as well as lack of transparency in remuneration processes may lead to further illicit
practices by staff. A SME’s performance may also suffer from poorly qualified staff owed to the
preferred recruitment and promotion of relatives and friends.
H.1. Theft of money or assets by staff
Category
Description
Examples
for Red
Flags
Examples
Human Resources Management and Employment
Unethical behaviour of staff can take many forms, such as theft of money or
resources. Embezzlement and other kinds of financial fraud are perhaps the
most common kind of employee theft. It can also occur that employees take
home company assets to resell them for his or her personal benefit. Small
businesses tend to fall prey to this swindle because they don't have the controls
(monitoring of company assets, inventory system) in place to prevent it.107
• Money, equipment or materials frequently disappear from within the
SME premises
•
•
Larceny is defined as the unlawful taking of personal property with
intent to deprive the rightful owner of it permanently. This is the type of
theft that involves an employee outright stealing cash or property from
the employer. It is differentiated from embezzlement by the fact that
embezzlement refers to theft by someone who is in a position of trust
and legally allowed access to the cash or items they are stealing. Both
of these types of theft are characterized by the fact that they occur after
money has been received by the business which is different from
skimming (see below).108
Skimming is another form of theft that can be cash or property, but
what makes is distinct is the point in time at which it occurs. Skimming
specifically refers to the removal of cash from an organization before it
has been recorded and is therefore referred to as an, “off-the-books”
crime. Skimming can be done by any employee that has access to
37 international centre for water management services
incoming cash before it is recorded and this often includes salespeople,
tellers, and cashiers. From a business perspective skimming can be far
more impactful than larceny or embezzlement. This is because it is
much harder to detect missing cash that has never been recorded.109
H.2. Staff transferring knowledge to competition
Category
Description
Examples
for Red
Flags
Examples
Human Resources Management and Employment
For almost every successful SME, its competitiveness is tied to one or more
types of intellectual property, whether as technological inventions, creative
expressions, corporate identity and brand recognition, proprietary know-how, or
in some other form.
Theft of confidential information and trade secrets by staff and its transfer to
the competition can be just as damaging to a business as embezzlement or
other employee fraud.110
Examples of intellectual property that is at risk of being transferred to the
competition include:111
• Customer lists
• Industrial designs
• Permits, mineral rights, licences
• Environmental studies
• Agreements and contracts
• Patents, know-how, trade secrets
• Trademarks and brands
• Business processes
• Product pricing models
• Meetings of staff with members of competing companies
• Competing companies release similar product/services after company
staff left the SME and started to work for the competition
•
Disgruntled former employees can hurt their former employers in many
ways […]. The business world is full of tales of ex-employees going off
to found new companies: Intel Corporation and SAP AG, for example,
were founded by former employees of Fairchild Semiconductor and
IBM, respectively.112
H.3. Staff colludes with customers
Category
Description
Examples
for Red
Flags
Examples113
Human Resources Management and Employment
An employee colludes with a customer (who owes money to the company) and
receives money in exchange for discounts or lower bills.
• Low levels of cost recovery
• Questionable invoices
• Inadequate payment documentation
• Where colluding parties are external to, rather than employed by, the
defrauded entity, these are most commonly suppliers (48 percent) and
customers (22 percent), according to the 2011 analysis. Consultants
and subcontractors make up the majority of the balance.
• An individual, in his late 20s, committed a fraud worth over $25 million.
He worked for a minerals company for more than four years, gaining the
trust of senior management to such an extent that he was given
responsibility for both hedging the price of minerals in the market and
38 international centre for water management services
accounting for it in the back office. As a policy, the company did not
seek to make a profit from hedging, but rather to guard against losses in
a turbulent market. The fraudster, deemed a very smart, hardworking,
and honest employee, colluded with the company’s customers and
passed discount to them. He covered the discounts passed to
customers by transferring profits from his illicit market speculation
activities, accruing huge sums for himself as a ”kick-back”.
H.4. Staff colludes with supplier
Category
Description
Examples
for Red
Flags114
Examples
Human Resources Management and Employment
Suppliers invoice for more goods or services than were delivered or supplied,
or invoice at a higher price than originally quoted. The employee authorises
payments for overpriced and/or non-existent goods or services and receives a
‘kickback’ (such as a cash payment) in return from the supplier.
The collusion can also serve the purpose of covering up the supply of lowquality material.
• Questionable invoices
• Inadequate payment documentation
• Mismatch between documented and actual assets
• Purchasing agent handles all matters related to a vendor even though it
might be outside or below his or her normal duties
• Vendors who receive an inordinate amount of business from the
company for no apparent business reason
• Vendor salesmen make frequent, unexplained visits to purchasing
personnel
• Prices from a particular vendor are unreasonably high when compared
to others
• Quality of goods or services received from a vendor is low
• Tips or complaints from other employees or honest vendors
• Key contracts awarded with no formal bid process
• Purchase of excess goods
• Consider a long time employee who is suddenly struggling with making
ends meet at home. Through many years of service in the procurement
department, he/ she has gained the trust of co-workers, established
personal relationships with vendors, and has an intimate knowledge of
the controls system and any gaps that may exist. Almost effortlessly, he/
she could approach a vendor to inflate invoices and direct surplus
payments to his/ her personal bank account. Such collusion is common
in procurement frauds.115
H.5. Relatives and friends preferred in recruitment and
promotions
Category
Description
Human Resources Management and Employment
If nepotism and favouritism are entrenched in human resources management,
decisions won’t be merit based or driven by qualifications of staff/applicants
anymore. This could for example mean that BoD members, management or
Human Resources staff are exploiting their positions to award jobs and
promotions, or to provide favours to friends or family members, even though
they may not be qualified or deserving. This results in poorly qualified staff
39 international centre for water management services
Examples
for Red
Flags
Example
and/or overstaffing and, in some cases, this may go as far as the hiring of
‘ghost workers’ (friends or relatives who do not work in the SME but are on its
payroll).
• No guidelines or recruitment procedures in place
• Several staff from the same family
• Poorly supported disqualifications of job applications
• Lots of staff that does not meet job requirements
• Lack of or non-compliance with HR guidelines
• An employee (convenor/panel member/other) manipulating selection
procedures to secure the appointment of a close friend or family
member.116
• A selection panel member failing to declare a conflict of interest and
acting to advance the interests of an applicant who is a close friend or a
relative.117
• The convenor of a selection committee appointing members to the
selection panel whom they can influence in order to ensure their
favoured candidate will be selected.118
• Staff, including senior managers, are often selected because of their
political connections rather than their management abilities or technical
skills.119
• Managers often do not have the skill to manage, even if they had
autonomy and authority to manage, which often they do not.120
H.6. Unsatisfying employment conditions
Category
Description
Examples
for Red
Flags
Examples
Human Resources Management and Employment
Lack of motivation of staff makes them prone to engage in corrupt practices. If
there is no reward for good performance, staff may seek to ‘reward’
themselves. The same applies for insufficient salaries that do not allow staff to
cover living costs. As a consequence staff may look for opportunities to ‘top-up’
their salaries. Inadequate employment conditions can foster corrupt behaviour
among staff.
• Frequent complaints of employees
• No system to deal with complaints
• No system for rewards and incentives in place or lower level staff is
excluded from rewards and incentives
• Low salary levels
• Lack of motivation of staff makes them culpable to corrupt practices.
There is no system in place to reward exceptional performance over
and above their monthly dues. There is no bonus for meeting targets
say in connections or revenue collection. The attitude of most of the
staff has not changed from that of public service making it even more
difficult to operate at optimal levels.121
• Payments are not simply made at the end of each two- to three-year
posting. As one staff member explained: If I want your position I can
get help from someone to have you transferred out, even if you have
been there less than two years. You will be told that ‘‘someone’’ wants
your post and is willing to pay a certain amount for it. If you can pay
more than that, you will keep your post.122
40 international centre for water management services
H.7. Lack of transparency in remuneration processes
Category
Description
Examples
for Red
Flags
Examples
Human Resources Management and Employment
In the context of a pay system, transparency means providing enough
information for employees and managers to understand how the pay system
operates. But some organisations, especially those in the private sector,
provide employees with little or no information.
A lack of transparency in remuneration processes can lead to discretionary
payments to staff or management and makes it difficult to detect such
practices. If remuneration does not depend on staff or management
performance, this can also lead to lower motivation and employee morale.123
• No remuneration guidelines
• Unmotivated personnel
• Unjustified variations in remuneration of staff members having a
comparable position
• Unjustified variations in the remuneration of men and women having a
comparable position
• Poor management, overstaffing, and promotions based on seniority or
political connections ensure that it is very difficult to recruit good staff,
and if some do join, it is equally difficult to retain them because of lack
of job satisfaction, poor working environment, and absence of incentives
for good performance.124
• Despite a move toward greater transparency of executive remuneration,
workers are becoming more dissatisfied, not less. The Association of
Mineworkers and Construction Union’s (AMCU) recent demand for
double pay reflects the reality of this statement. The gap between high
income and low income earners has widened according to the 2013
Executive Directors: Practices and Trends report released by
PricewaterhouseCoopers. The lack of legislative regulation on how
executive remuneration is calculated could be one of the reasons why
this gap continues to grow in the face of severe economic instability.
The report highlights the fact that the new Companies Act does not
specifically outline how directors should be remunerated.125
I. Framework Risks
Lack of enforcement of integrity regulations, complex and fast-changing regulatory frameworks
as well as high levels of bureaucracy complicate a SME’s work and pose different integrity risks.
It can for example drive SME to work in the informal sector where they are more vulnerable to
unethical behaviour. Illicit practices by foreign companies and companies owned by nonindigenous Zambian communities may also pose an integrity risk to SME. Besides these
framework risks SME might be victims of vandalism and theft by external actors.
I.1.
Category
Description
Lack of enforcement of integrity regulations
Framework Risks
The regulatory framework defines and regulates how SME are supposed to be
governed and operated to provide goods and services. While a sound,
transparent, integrity-related regulatory framework offers guidance for SME,
lacking clarity and gaps in water sector and other (e.g. procurement) policies,
regulations and guidelines open loopholes for illicit practices and undue
influence of sector institutions and third parties that affects service providers
41 international centre for water management services
Examples
for Red
Flags
Examples
I.2.
Category
Description
Examples
for Red
Flags
Examples
I.3.
Category
Description
Examples
for Red
Flags
negatively.
Even if a regulatory framework is existent, it needs to be effectively enforced.
Otherwise the incentives to implement the legal requirements remain low and
illicit behaviour is not prosecuted.
• Illicit behaviour such as bribery or corruption is considered to be normal
business behaviour
• Low confidence in regulatory and enforcement bodies
• Tackling corruption and strengthening business integrity when large
parts of important economic activity are carried out outside officially
regulated structures is vexing for governments, especially since the
relationship between corruption and the informal sector is ambivalent.
Corruption nurtures informality. Excessive regulation and the entry
points for corruption that it provides further exacerbate arbitrariness in
regulation and entry costs and drives economic activity into informality
[according to MGCD 2012, 89% of employed persons in Zambia were
in informal employment in 2008]. At the same time, the lack of legal
protection and the desire to dodge regulations makes the informal
sector a particularly easy prey for extortion and solicitation of bribes by
corrupt officials, thereby helping to sustain petty corruption among tax
collectors, local police, environmental inspectors and other officials.
Where the informal sector competes with formal businesses, this also
may encourage others to follow suit in order to reduce regulatory
burdens and compete on an equal footing.126
Complex and fast-changing regulatory framework
Framework Risks
If the regulatory framework changes fast, it can happen that SME are unaware
of new laws and regulations they are supposed to implement. Complex and
fast-changing regulatory frameworks can also lead to confusion among public
institutions or officials, providing loopholes for illicit behaviour.
• Many companies operate in the informal sector
• Unclear or patchy policy formulations
•
Evidence was gathered from SMEs engaged in the following sectors:
Irish potatoes, dairy, fishing, pineapples and oranges, to build the
evidence base. It emerged that current challenges include poor
coordination of the SMEs activities; inadequate private and public
dialogue at the county level; poor enforcement of regulatory
legislations; and knowledge gap about national and county-level
policies’ interface.127
High Level of Bureaucracy
Framework Risks
Long and complicated administrative procedures can lead SME to operate in
the informal sector. Companies of the informal sector are not protected by the
law, which makes them more vulnerable to illicit practices.
• Transition from an older water policy to a new one on-going (major
shifts of responsibilities planned but not yet implemented fully)
• Lots of laws and regulations finalized but not gazetted
42 international centre for water management services
Examples
•
Tackling corruption and strengthening business integrity when large
parts of important economic activity are carried out outside officially
regulated structures is vexing for governments, especially since the
relationship between corruption and the informal sector is ambivalent.
Corruption nurtures informality. Excessive regulation and the entry
points for corruption that it provides further exacerbate arbitrariness in
regulation and entry costs and drives economic activity into informality.
At the same time, the lack of legal protection and the desire to dodge
regulations makes the informal sector a particularly easy prey for
extortion and solicitation of bribes by corrupt officials, thereby helping
to sustain petty corruption among tax collectors, local police,
environmental inspectors and other officials. Where the informal sector
competes with formal businesses, this also may encourage others to
follow suit in order to reduce regulatory burdens and compete on an
equal footing.128
I.4. Illicit practices of foreign companies and companies owned
by non-indigenous Zambian communities
Category
Description
Examples
for Red
Flags
Examples
I.5.
Category
Description
Examples
for Red
Flags
Examples
Framework Risks
Foreign companies from non-OECD countries increasingly investing in Zambia,
particularly China but also India, are not constrained by domestic anticorruption legislation and codes of conduct. When investing in Zambia, they are
often willing to engage in bribery and other corrupt practices, particularly in the
procurement and natural resource sector, in order to secure market access, win
concessions and secure tenders for large-scale infrastructure investments.129
Illicit practices of businesses owned by non-indigenous Zambian communities
are also common.130 These practices pose a direct risk to Zambian SME, as
they perpetuate corruption and lead to contracting of foreign businesses rather
than Zambian.
• Contracts going to foreign rather than Zambian businesses
Vandalism and theft by external actors
Governance, Management and Controls
Theft and vandalism of assets and material by external stakeholders can have
severe impacts on the performance of an SME.
• Frequent instances of theft and vandalism
•
•
Challenges in low-income areas are vandalism and the theft of
hardware (often carried out by informal water vendors fearing
competition).131
As droughts become more frequent and water shortages worsen, Kenya
is seeing an increase in water thefts and other water-related crime,
police records show. The most common crimes are theft, muggings and
illegal disconnections of water pipes by thieves who collect and sell the
water. Many of the crimes occur in urban slums, which lack sufficient
43 international centre for water management services
•
piped water. […]Police statistics show that in Kibera – Nairobi’s largest
slum with over one and a half million inhabitants – there are as many as
75 reported incidences of water-related theft daily.132
A water company has lost pipes and valves worth more than Sh200
million to vandals. The thieves are making a fortune by selling the pipes
to unscrupulous scrap metal dealers. Last year the Mombasa Water
Supply and Sanitation Company lost hundreds of pipes, valves, bolts,
manhole covers and a large volume of water, all valued at Sh200
million. Managing director Alome Achayo said on Thursday that this
year alone the vandals had struck 10 times, causing damage to
infrastructure worth Sh10 million and water losses of Sh10 million. In the
recent incidents, pipes covering six kilometres in the upmarket Nyali
suburb had been stolen. The vandals also made away with pipes
covering one kilometre along the Makupa Causeway.133
44 international centre for water management services
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46 international centre for water management services
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47 international centre for water management services
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48 
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