Corruption in construction: it isn’t always obvious

Concerns about fraud and corruption continue to swirl around the construction industry. On 28 November 2021, the Financial Times reported that between 2% and 10% of all spending on the UK government’s £100bn a year infrastructure drive would be lost to fraud, collusion or bribery. But the vulnerability is not limited to construction companies themselves. Banks and professional services firms are under a duty to report reasonable grounds to suspect money laundering to the National Crime Agency. Where there are indicators that a construction company is engaged in fraud or bribery, a report must be made by transactional lawyers, accountants, tax advisers and banks. This can land the construction company and others that turning a blind eye to suspicious conduct in hot water.

For some businesses, strong anti-financial crime controls and devotion of sufficient resources to compliance may have slipped during the pandemic. Movement in the labour market may also mean new persons unfamiliar with anti-financial crime controls now hold key roles, including in contract negotiation. A sustained period of leanness will additionally make any company hungry to win work. These wider factors inevitably increase the exposure of a construction company to fraud and corruption.

Any tendering process presents a vulnerability. A temptation can arise to provide an incentive to a key decision-maker … the incentive might not be financial

Any tendering process presents a vulnerability. A temptation can arise to provide an incentive to a key decision-maker. It will be important to recognise that the incentive might not be financial but can also include an offer to do something in the future, favourable treatment, a large payment couched as something that appears legitimate or excessive hospitality. The offences in the Bribery Act 2010 are drafted widely.

Typically in a bribery case there will not be a payment in bright lights. Rather, the bribe will be something more subtle that will reveal itself on closer inspection, often well after the event when a fresh set of eyes arrives at the company. A construction company of any size must also ensure that it has adequate procedures to guard against bribery. A central component will be tailored training of staff involved in tenders and contract negotiation – the absence of which could constitute the corporate offence of failing to prevent bribery.

A shortage of skilled workers can indirectly lead to sharp practice. In August 2021, the Construction Industry Training Board (CITB) suspended nine testing centres due to allegations that qualifications were unjustifiably issued. Allegations of this kind are not new. In 2019 the CITB shut down 17 test centres said to be involved in the delivery of fraudulent tests of qualifications, typically in exchange for grossly inflated testing fees and other payments.

Another area in which dishonesty can arise is in invoicing. Issuing an entirely fake invoice to be paid by an entity that is not, in fact, a legitimate third party is an established way of laundering the proceeds of crime. But just like bribery, fraud can be more subtle. Inflating, even by a small amount, the fee charged for work performed or materials used will amount to fraud. All invoices must be able to be properly substantiated.

A business that has claimed furlough payments or a bounce-back loan to which it was not entitled or has not used the funds as required will also be exposed

Incorrectly characterised waste materials present a further issue. The conduct itself can amount to fraud as it is a false representation intended to deliver a benefit, namely saving disposal costs. Where tax benefits are available for greener waste, it will also lend itself to cheating HMRC. Payment or receipt of funds off the books will raise the same issue, regardless of whether it is done on a systemic scale.

A construction business, however small, that has claimed furlough payments or a bounce-back loan to which it was not entitled or has not used the funds as required will also be exposed. Although prosecution of pandemic-related fraud remains the exception rather than the rule, investigations are under way and can be expected to be accelerated in the wake of the National Audit Office reporting earlier in December 2021 that up to £4.9bn has been lost to bounce-back loan fraud.

What may be overlooked is that signs of illicit activity will engage the money-laundering reporting obligation applying to businesses that are regulated for the purposes of anti-money laundering (AML). The construction industry is not AML regulated, therefore not subject to the duty, but a company’s bank, accountant, transactional lawyer and tax adviser will be. So too are estate and letting agents, including those involved in commercial lettings which may engage with construction companies.

A concern about money laundering can arise because, by definition, handling the proceeds of a fraud or bribery will engage the money-laundering offences. There is an incentive to report because doing so presents a cast-iron defence to money laundering. The construction industry is already identified as a high-risk industry in professional guidance on AML and an indication that it has engaged in bribery or fraud or has sent or received irregular or unexpected payments can draw an AML-regulated firm into reporting territory.

Forewarned is forearmed. Construction companies would be wise to not just bolster their anti-financial crime controls now but also to ensure they are sufficiently robust to combat fraud and bribery even in its most subtle forms.

Anita Clifford is a barrister at Red Lion Chambers