Rotten to the core

I flagged up in my last column the robust action taken by the Manhattan District Attorney’s office against fraud and corruption in the New York City construction industry. Other jurisdictions have been taking similar robust action - in Queensland, for example, the Federal Court imposed penalties on three construction companies and two individuals who were knowingly concerned in “cover pricing” in excess of $1.3m plus costs. The fines were at a lower level because the companies involved were small operators and the projects were small. It was clear that larger companies would have faced far higher fines with the legislation permitting penalties up to $10m. 

Of course, the Office of Fair Trading (OFT) here has also attacked “cover pricing”. The watchdog fined 103 construction companies a total of £129.5m over allegations of cover pricing on bidding between 2000 and 2006 but the Competition Appeal Tribunal cut the fines of those companies who appealed in 2011 saying that the original penalties had failed to recognise “perceptions of legitimacy of that practice in the construction industry”.  Hardly a robust approach and not very joined up government as the UK Bribery Act 2010 came into force in July 2011. 

The Chartered Institute of Building (CIOB) has, for a long time, energetically pursued the issue of corruption in the construction industry and it published its second report in September 2013 which did not, perhaps, attract the recognition it deserved. By way of background, it noted that Transparency International’s Bribe Payers Index indicates that the construction industry is the most corrupt industry sector. 

49% of Respondents believe that corruption in the UK construction industry is either fairly or extremely common

The European Commission estimates the economic costs incurred by corruption in the EU amount to €120bn per year representing around 1% of total EU GDP. The CIOB notes the extensive legislation against anti-competitive/cartel activities - the Competition Act 1998, the Enterprise Act 2002 as well as the Bribery Act.  But it is the issue of lack of enforcement which the CIOB highlights - referring to a poll by Deloitte which indicated that 57% of respondents were not worried about the possibility of enforcement action given the limited activity of the various authorities involved.

The CIOB’s survey sampled 701 construction professionals, the majority of whom described themselves as working at a senior management level in the industry. 49% of respondents believe that corruption in the UK construction industry is either fairly or extremely common and identified the main drivers in order of priority as being cultural reasons (the practice is embedded and now the norm for how business is done), economic reasons (the need to engage in tax evasion to make savings in recession), and lack of enforcement of anti-corruption and anti-bribery policies by organisations (staff not disciplined in-house for corrupt activity). 38% noted that they had come across cartel activity. 35% indicated that they had been offered a bribe or incentive. 40% were not aware if their company had a whistleblowing policy. It is a bleak, depressing picture of an industry plagued by corrupt practices and dishonesty. 

The CIOB flagged up research carried out at the University of Portsmouth which indicates that, though companies have been measuring and reducing business costs for decades, they have not been doing this in respect of the cost of fraud. Hence the huge difficulty in calculating the true cost of corruption to the industry.

More encouragingly, when asked how important they believed it was to tackle the issue of corruption, the CIOB’s respondents, by an overwhelming majority of 77.27%, believed it was very important. So it seems the industry wants to change and the majority feel that, while the industry is not doing enough to prevent corruption, the government is not doing enough either. Robust legislation is in place but implementation has suffered because of law enforcement agencies having insufficient resources to operate effectively. 

So the CIOB demands:

• That the industry show leadership
• That the government, instead of allowing a plethora of bodies and agencies to tackle corruption, provide an institutional focal point and a coherent strategy. This should then be properly funded
• Proper research and training.

And how has the industry/government responded to the CIOB’s challenge? 

Ann Minogue is a partner in Macfarlanes