Ever wonder what professional investigators bring to the table? This article in Sunday’s New York Times nicely illustrates where the investigative tools available to the merely curious (Google, public records on the Web) end and where the skills and training of professional investigators (in this case a journalist) must come into play to keep an investigation alive. Investigators have their own personal methods, contacts and approaches, but without their efforts the question of who funded a political ad posed by this article’s author would have no chance of getting answered.
Intermediaries are a broadly defined category of third parties related to a transaction, such as agents, middlemen, business consultants, JV partners and foreign subsidiaries. They are often used to bring together the public and private sectors, for a fee, with the private sector engaging intermediaries to pay bribes, often for benefits for which they already qualify, with much (but not all) of that money being passed on to public officials. The importance of intermediaries, in the grand scheme of corruption, is second to none.
There are many compelling points that can be brought forward to argue the case of intermediaries being the principal catalyst of corrupt transactions. As is often the case, the point is best made through simple observation.
Over the past couple of years, we have witnessed some record-breaking FCPA settlements: in 2008, Siemens agreed to the highest regulatory settlement in the history of the US Foreign Corrupt Practices Act, amounting to US$ 800 million. Regulatory action by German authorities brought the worldwide total cost to Siemens to settle its cases to US$ 1.6 billion. A year later, it was the turn of a Halliburton subsidiary, Kellogg Brown & Root, to top the charts for the largest FCPA settlement paid by US companies: a combined total of US$ 579 million in fines and disgorgements.
The corrupt practices underlying these regulatory actions are telling of the nature of corruption. In the case of Kellogg Brown & Root, the company’s CEO admitted to having “negotiated bribe amounts with the office holders’ representatives and agreed to hire the two agents to pay the bribes…approximately $132 million to the first agent, a consulting company incorporated in Gibraltar, and more than $50 million to the second agent, a global trading company headquartered in Tokyo, Japan.” This in exchange for the award of four contracts in Nigeria, valued at over US$ 6 billion.
In the case of Siemens, according to the SEC the company “made thousands of separate payments to third parties in ways that obscured the purpose for, and the ultimate recipients of, the money. At least 4,283 of those payments, totalling approximately US $1.4 billion, were used to bribe government officials in return for business to Siemens around the world.”
Numbers like these are, quite simply, staggering. Billions of dollars of bribes paid through intermediaries by just two companies not only demonstrates the size of the corruption problem, but also underlines the crucial role played by intermediaries: it would be reasonable to argue that without their involvement, such proportions of corruption could not be achieved.
It should therefore come as no surprise that intermediaries have caught the attention of regulators from the very genesis of anti-corruption legislation. When speaking about the origins of the FCPA, and in particular about the investigation by the SEC of illegal campaign contributions in the Watergate era, Stanley Sporkin, former director of the enforcement division at the SEC, recalled coming in one day and “asking Bob Ryan of the staff to go and find out from Gulf Oil how Gulf Oil made these payments and how did they book an illegal payment. And he came back within a day and had the whole case. They had set up two phony subsidiaries they called Bahama X and Bahama Y. They put $5 million into each one of them and took the money back to the companies’ offices and put it in the safe of the CEO, and that’s where payments came from.”
More recent anti-corruption enforcement, such as the cases mentioned above, confirm that the intermediary-centred corruption model continues to bear equal, if not greater importance. Further demonstration of the criticality of intermediaries to corruption comes from recent academic studies of anti-corruption reforms.
So what is it that makes intermediaries such a perfect fit for corruption?
There is a generalised perception that companies use intermediaries in order to avoid direct contact with corruption, essentially as facilitators of improper payments. This is obviously true, but also far too simplistic. Intermediaries interact with corruption at multiple levels and reducing their role to that of a mere conduit for bribes would equal to a gross underestimation of their importance.
Intermediaries are the meeting point between relevant parties of a corrupt transaction. They provide an informal forum for the discussion and pursuit of converging interests that, because of their illegal or improper nature, cannot be openly discussed. By virtue of such pervasiveness, intermediaries influence and define the very essence of a corrupt transaction often overlapping with every stage, or ingredient, involved in the process.
In my next few posts, I will be deconstructing the role of intermediaries touching upon the various levels and stages of their involvement with corruption. Ultimately, I hope that this analysis will help to better understand the nature of the beast and, by doing so, improve our ability to address the issues that arise from it. Be sure to stay tuned!
1 – “Intermediaries and corruption” by Kevin Hasker and Cagla Okten
2 – “How Middle-men can Undermine Anti-corruption Reforms” by Kjetil Bjorvatn, Gaute Torsvik and Bertil Tungodden
Information, information everywhere and not a drop to…
In my previous post, I touched on the evolution of the investigations industry, specifically the ways in which the Internet, by making so much information readily available, presents a certain kind of challenge to investigative professionals. Pre-Internet, the challenge was finding information; now, the challenge is sorting through it, deciding when you have enough, and determining what is good, bad, useful or distracting. We in the investigative and business intelligence sector are great at discovering information about people, companies, groups and organizations, but what separates good investigators from the pack is the ability to filter, focus, and stay on track.
My years of investigative experience have taught me that one of the most important ways to start a case is to set concrete goals. It seems obvious, but sitting down with your team and defining what you’re really looking for up front is vital to the success of a case. This discipline is particularly important nowadays, when search engines are so important to our process but inevitably suggest words and phrases that threaten to send investigators off in different directions and on unpredictable tangents. (It’s about to get harder, too: Google’s latest “real-time”search technology, while impressive and useful, has the potential to be hazardously distracting. Every letter you type reveals a new set of results, so by the time you’ve typed “John Smith”, you’ve had to avoid clicking on links about Jet Blue, Jones Beach, John Mayer, Jon Stewart, and Captain John Smith.)
Ok, I know — exploring those tangents and wandering off in different directions does get interesting at times, but we will talk about that in another post. Bottom line: if you don’t spend some time talking and thinking about search parameters and investigative goals, you may be unpleasantly surprised with the results.
The first filter we apply as results start to flood in is an analysis of sources – for example, we might glean some information about a subject’s business from Facebook, but it probably won’t be as reliable (hence as valuable) as a set of online SEC filings. In other cases, the opposite might be true.
We also need to question the information provider’s motivation. Who provided the data, and when? What was the ostensible purpose? This is not to say that you should discount apparently biased or distorted information — you just need to look at it more closely because it adds to the context of your search.
Even authoritative sources can lead to “false positives”, or complementary results that create the illusion of substantiation. In many cases, several independent sources will seem to separately confirm a piece of information, when in fact they have both relied on a single primary source. (Think about two news sites that base breaking news articles on the same erroneous wire report.) That’s why we at K2 Global spend so much time on deep analysis — it’s the only way to turn an ever-increasing abundance of raw information into useful knowledge.