Corruption: A bad reflection of the industry

Despite tougher new legislation in the form of the Bribery Act 2010, one in five believes the level of fraud and corruption has increased in the construction industry in the last five years, driven by recession. Almost a third have come across cartel activity in the UK construction industry on at least one occasion. Of those, 29% have witnessed it over the last 12 months.

Moreover, despite the scandal over the exposure of cover pricing in the sector following an investigation by the Office of Fair Trading in 2009, one in five said cover pricing wasn’t corrupt. The CIOB carried out the survey to get a picture of whether corruption – defined in its broadest sense – is perceived to be a problem within the UK construction industry, what practices are deemed to be corrupt, and which parts of the construction process may be susceptible to corruption. It also sought to gauge awareness of anti-corruption legislation and training, as well as gathering views on whether industry and government are doing enough to tackle corruption and how attitudes have changed since the first survey in 2006.

Overall, very little has changed. The perception of how widespread corruption was had fallen by just 2%.

Michael Brown, CIOB deputy chief executive, says: “Our findings reveal that little progress has been made since our first piece of research. What we have found is that cultural practices and the consequences of the recession have placed a greater strain on companies to sometimes engage in adverse practices as a survival mechanism.”

Those in the sector who have been given a preview said they found the results surprisingly bleak. The CIOB itself is offering a note of caution too. As Brown points out, the respondents were self-selecting, and those who have seen corruption at first hand are perhaps more likely to have responded to the survey, skewing the figures.

Respondents were certainly very experienced. Nearly half (45%) described themselves as senior managers or directors with 42% working in large companies with more than 500 employees and 36% described themselves as working in contracting or construction management.

Another issue to bear in mind in analysing the results is that corruption is loosely defined – it could mean anything from colluding to fix prices, inflating invoices for work or materials, bribes for winning contracts or stealing materials from sites.

Also, as the results show, essentially what is corrupt to one person might be considered common and acceptable practice to another, such as cover pricing, which some respondents might not see as corrupt because there is no money changing hands and it part of a culture of the industry. This subjectivity means the survey can only be a guide to the scale of the problem – but could mean the results cannot be considered absolute, and that fraudulent practices could be higher. For example, 6% thought that production of fraudulent invoices wasn’t corrupt, with a similar number saying that billing for unperformed work wasn’t either.

Pre-qualification risk

What is undisputed, though, is the huge opportunity for corruption to flourish in construction because of its size, culture and its fragmented nature. Most of the work is subcontracted, supply chains are long and there are often many companies competing for high-value contracts.

Almost half of respondents perceived that the whole construction process is susceptible to corruption (43%) although the pre-qualification and tendering phase is particularly at risk, according to 35%.

Indeed, as the report points out, Transparency International’s 2011 Bribe Payers Index report indicates that the construction industry is the most corrupt sector around the world.

The results indicate that respondents feel corruption is more likely to occur on an individual rather than a corporate level. 30% also suggest that corruption is most likely to occur at senior management level.

But while there is ample scope for corruption and a clear indication it is still common, prosecutions are few. That might be because companies choose not to prosecute if they find out it’s going on, or because the way the industry operates is hard for enforcement agencies to fathom.

Graham Hand, coordinator of the Anti-Corruption Forum, says the police authorities responsible for investigating corruption, such as the Serious Fraud Office, will certainly take note. The Forum is an informal industry pressure group set up to reduce wrongdoing across the construction and engineering spectrum in the UK and overseas, and comprises 30 organisations. Hand says: “There will be enormous interest in this report from the police because any research on corruption is rare.” The CIOB is due to present its findings to the Forum in a few weeks.

But at first glance, Hand says he is not surprised by the report’s overall finding about the frequency of corruption because the survey also shows that procedures to protect companies against fraud appear to be woefully lacking.

Nearly half of the respondents were unaware whether their firm had a whistle blowing policy, for example. More than half (54%) were unable to estimate the annual cost of fraud or corruption to their organisation despite the fact that so many worked at senior level. “That’s certainly not good enough,” says Hand. “It’s not rocket science – it’s about good, efficient management.”

Nearly 10% of respondents indicated an annual loss totalling £1m or more as a result of fraud and corruption.

Respondents suggest that embedded cultural practices and the economic climate are the main reasons for the prevalence of corruption, noting squeezed tender margins and reduced workloads have pressurised some professionals into corrupt practices as a means to survive.

This certainly chimes with the experience of Jim Gee, director of counter fraud services at BDO and visiting professor and chair of the Centre for Counter Fraud Studies at the University of Portsmouth. Gee is one of the leading authorities in the world on forensic accounting and has researched into the cost of fraud across all industries.

What are your perceptions of the following practices?

His new report, The Financial Cost of Fraud Report 2013, calculates the cost of fraud globally at £7.2 trillion, with losses averaging 5.47% of expenditure. “The cost of fraud has increased over the last five years since the start of the recession from 4.57% to 5.47% (a near 20% increase),” he says. Turning to the UK specifically, a report by the National Fraud Authority (NFA) estimates that fraud costs the UK £73bn a year, with the construction industry losing £3bn.

As Gee points out, the cost of fraud always increases in a recession. But there is also potentially a problem when the economy comes out of recession – especially for construction firms which have to develop and grow business as rapidly as possible. “That’s when you need to be thorough,” says Gee.

“Increasingly it’s all about being fraud resilient. Fraud is like one of those medical viruses, continually mutating and changing. You have to put controls in place and then continually adapt them.”

He says the biggest area of fraudulent activity tends to be payroll and subcontracting and involves high-volume, low-value materials that can be harder to keep track of. He recently did an audit for a large organisation buying £40m worth of high-volume goods, to find they were losing 11% of the value.

Jason Farnell, a director of CR Management, has been involved with investigating fraud cases in construction firms over the years and like Gee points to the high-volume, low-value work where it’s easy for managers to drop their guard. In a recent case he was involved in, a surveyor signed off work to a higher value than it was worth.

“When I used to work for a large construction company, they were paranoid about this sort of thing,” says Farnell. “Those who placed the order weren’t allowed to administer it. Now it’s often the same person, who might be a young surveyor who might be intimidated by a more experienced subcontractor.”

Companies, however, often have triggers in place that alert management if invoices are more than originally agreed.

Farnell says that in his experience fraud tends to be more widespread on residential sites, where valuable white goods go missing, or another common scam is the same truck either taking or delivering muck to site getting signed off several times and the subcontractor being paid for more than they are entitled to.

However, he says he is surprised by the perception of the high levels of corruption that the survey has thrown up. His view is shared by Taylor Wessing partners David Quinlan and David De Ferrars. Both say that blue chip firms take their obligations under the Bribery Act 2010 very seriously and the law firm has been involved putting in new auditing and whistleblowing procedures in place across a number of them. They say that when it comes to procuring contracts, the public sector appears to be more aware of the pitfalls concerning bribery and corruption than the private sector.

“One observation I would make, though, is that many of the standard contract forms like JCT and NEC3 have yet to expressly embrace the act in a meaningful way,” says Quinlan.

The Bribery Act formally came into force on 1 July 2011 and there has only been one prosecution so far. That said, De Ferrars, who heads up fraud at Taylor Wessing, says it is early days. However, the distinct lack of prosecutions under the Act has raised questions from some industry figures about how it is enforced by the Serious Fraud Office (SFO). However, De Ferrars says it is unlikely to be changed just yet.

Respondents acknowledged that the UK construction industry (50%) and the UK government (55%) are not doing enough to prevent corruption and the CIOB has made several recommendations in the report to push the agenda forward.

One of its recommendation is more investment in CoST – the newly launched Construction Sector Transparency Initiative, a framework for driving transparency and efficiency. It also wants a more coordinated approach from the government to tackling corruption and more investment for training.

But one thing is certain: how can the industry change its image in the eyes of the public – one of the key planks of the new industrial strategy – if it has such a low opinion of itself?

Corruption case studies

In an industry as big and as broad as construction where billions are spent on services and goods every year, subcontracting is the norm and supply chains are long, there is certainly ample opportunity for fraud. Here are some recent activities that have been exposed.

The ghost worker’s wages
Balfour Beatty operations manager Sean Sullivan was jailed for three years in October 2012 after he and two other managers defrauded the company out of £165,000 by authorising payments to two bogus workers who were not employed by the company. The fraud ran over five years from November 2005 to March 2011 and involved creating “ghost” employees and putting their personal details put on the payroll. Time sheets were then created and signed off by the managers.

False identity
CITB has been working with the London Metropolitan Police to investigate suspected fraudulent CSCS card offences. In July 2012 a man was found guilty of impersonating candidates at 48 Health Safety & Environment tests, and in March 2013 a man was arrested for using a fraudulent HS&E pass report to obtain CSCS and Construction Plant Competence Scheme cards.

Public sector procurement
Falsifying payments is reckoned to be one of the most common types of construction fraud and can include everything from inflating the cost of work done to billing for unperformed work. An investigation by Department for Communities and Local Government auditors, released to the BBC under the Freedom of Information Act and reported in August this year, criticised three building projects run by Stoke-on-Trent City Council, which were funded by more than £16m of taxpayers’ money. It was found that “fraudulent activity” was probable.

The investigation came after an allegation made to Staffordshire Police in 2010 over the tendering processes at the council. The DCLG report added that “procurement documents were falsified” to increase the cost of the work. A false invoice was also produced for demolition work.

Rail contracts
British Transport Police are carrying out a fraud inquiry over alleged corruption in the procurement of rail construction contracts in London. Network Rail confirmed to Building in July that the inquiry is centred on its £250m upgrade of Farringdon station for Thameslink, with the investigation leading to the arrest of three senior figures at Alandale Rail. A fourth person arrested is connected to the Laing O’Rourke and Costain JV. British Transport Police said the individuals had been rebailed until October, adding that no charges have been brought and the investigation continues.