Introduction
Construction and agriculture are often cited as the leading transformers of the earth’s surface. The significance of the US construction industry is noted in Hinze (2000) who posited that the industry accounts for 6-12% of GDP, employs between 5-6% of industrial work force, and is responsible for expenditure of over $800 billion annually. The financial aspect makes the construction industry lucrative and attractive to all manner of parties. Hinze (2000) observed that getting in and out of the construction industry in the US is easy. One can argue that this laxity in the law, where constructions companies obtain licenses with ease, or operate without licenses creates room for malpractices, notably bribery and corruption because third party companies can easily form legit alliances, obtain construction contracts, and disband on completion of the project making tracking difficult in cases where they are suspected of breaching legal provisions on construction contracts. According to Zaghloul and Hartman (2003), contractual relationships in the construction industry are defined by confrontational scenarios dictated by trust levels in the contracts. In cases where mistrust develops, bribery may ensure as one party seeks to solicit for favors. This paper examines the effects of bribery on construction contracts in the context of legal jurisdiction and the current trends of corruption in the construction industry.
The Foreign Corrupt Practices Act of 1977
According to Matthews, the executive director of CoST International Secretariat, the current value of output from the global construction industry stands at $9.5 trillion and is expected to rise by another $8 trillion to $17.5 billion by 2030. However, the value does not account for losses through corruption, which are estimated to be between 10% and 30% (Matthews, 2016), a significant amount by any standards. With the US annual expenditure averaging over $800 billion, it is likely that it shares a significant percentage of the losses. It is important to understand that losses of such magnitude cannot be tolerated in any given sectors, more so in infrastructure investment, which has signficant direct impacts on all aspects of human development and economic growth. Nevertheless, bribery and corruption, which are perceived to be synonymous to the construction and engineering projects, have pervaded the industry for long, highlighting the need for effective strategic measures to improve the situation.
Delegate your assignment to our experts and they will do the rest.
Henzie (2000) posited that the Foreign Corrupt Practices Act of 1977 (FCPA) is one such measure targeted at address the vice that has pervaded construction contracts negotiations. The FCPA, enforced by the Department of Justice and the Securities Exchange Commission (SEC), is a US federal law whose two main provisions are: to address the need for accounting transparency under the Security Exchanges Act 1934; and bribery of foreign officials. According to the Department of Justice (2017), the FCPA “was enacted for the purpose of making it unlawful for certain classes of persons and entities to make payments to foreign government officials to assist in obtaining or retaining business.” Since enactment, some issuers of foreign securities, all US persons, and other individuals and enterprises have been subject to the anti-bribery provisions of the act.
The events that led to the enactment of the FCPA as reported by the House Committee on Interstate and Foreign Commerce (1977), included the use of interstate commerce instrumentation such as mails corruptly in furthering any payment, offers, pledges, or authorization of payment, or any item of value to any person with full knowledge that all, or part of the money or item in the deal will be channeled to the foreign official to influence them into giving unwarranted favors in violation of lawful procedure with the objective of business retention. In the investigations by the House Committee on Interstate and Foreign Commerce, over 400 companies in the US admitted to conducting illegal payments in excess of $300 million to parties from foreign governments. The rampant bribery at the time was viewed as “greasing the wheels”, especially in countries where bribes were acceptable for favors to be given. For instance, Rich and Janos (1994) give the example of Lockheed bribery scandals, where officials of this aerospace company pain foreign official to influence favoritism for the company’s products. The applicability of the FCPA to the construction industry is informed by the fact that many projects in the industry are of immense scale and complexity, involving a number of parties, different geographical locations, and legal systems that make such projects vulnerable to bribery and corruption (Hinzie, 2000).
Effects of Bribes and Corruption on Construction Contracts
Hinzie (2000) defines construction contracts as an agreement of between two parties to carry out any construction related activities ranging from architectural designs and survey work to actual construction itself. In 2011, Trace International in its global enforcement report established that construction and infrastructure related bribery and corruption prosecutions constituted 11% of all law enforcement (Ernst & Young, 2012). A report by the global economic crime survey conducted by Price Water Coopers (2014) established that 49% of respondents report bribery and corruption as the main influencers of construction contracts. Through unlawful contracts insiders within the construction and engineering industry are able to perpetuate 70% of crimes in the industry, resulting to over 76% asset misappropriation (PwC, 2014). Such widespread malpractices due to corruption and collusion are likely to affect the project’s preparation, tender and selection, construction quality control, and maintenance phases. In most circumstances, the contractor fails to honor the contract resulting to substandard work and the aggravated party is incapacitated in instituting legal proceedings because of their involvement in bribery and corruption in the early stages of contract negotiations.
Bribery to win contracts and collusion to award contracts, , which usually take place at the tendering process to influence the process and letting a selected bidder win in return for part of the payment or a favor in another contract, are some of the vices targeted by the FCPA. The FCPA exists to ensure that contract negotiations and tendering are conducted through a legally approved protocol to avoid such instances (Hinzie, 200). However, the act has not deterred perpetrators of bribery and corruption in the industry because the law falls short of covering complex aspects of construction and engineering projects. For instance, Matthews (2016) and Ernst and Young (2012) observed that the prevalence of bribery and corruption in the industry owes to high risk jurisdictions, cultural differences influencing contract negotiations, limited regulation, limited competition, ease of concealment, uniqueness of projects, complex transaction chains, the scale of infrastructure investments, and bureaucratic processes. These challenges obscure bribery and corruption practices in obtaining contracts through breach of regulatory environment to obtain permits and licenses; interaction with government officials aiding facilitation of payment; illicit payments in the procurement process; issuing kickbacks to contractors; cost-cutting on construction materials; and involvement of intermediaries and third-party subcontractors. Henzie (2000) argues that these factors are detrimental to construction contracts.
Conclusion
The construction industry is a multi-billion dollar industry in most countries worldwide making it a lucrative venture not just for investors, but also for high profile bribery and corruption practices. The industry has been under the scope for high prevalence of bribery cases, similar malpractices that led to enactment of the FCPA, intended to curb making of unlawful payments to foreign government officials in return for favors. The practice has been rampant in construction contract negotiations and subsequent awarding of tenders. As a result, construction and engineering projects vulnerability to substandard quality work and illegal practices has a detrimental effect on construction contracts. Bribery and corruption continue to drain the industry of trillion of dollars worldwide, and the trend is exacerbated by the inadequacies in the law, which make it difficult to monitor all phases of projects where corruption occurs. Unless proper measures are instituted to counter the complexity of the industry’s projects, construction contracts’ predicament of vulnerability to corruption will continue unabated.
References
Ernst & Young. (2012). Managing bribery and corruptions risks in the construction and infrastructure industry.
Hinze, J. (2000). Construction contracts . McGraw-Hill Science/Engineering/Math.
House Committee on Interstate and Foreign Commerce (1977, September). H.R. Rep. 95-640 REPORT together with MINORITY VIEWS To accompany H.R.3815. Retrieved 27/03/2016 from: https://www.justice.gov/sites/default/files/criminalfraud/legacy/2010/04/11/houseprt-95-640.pdf.
KL & Gates. (2014). Biggest risk of corruption in the construction industry: The global picture. Retrieved 27/03/2016 from: http://documents.jdsupra.com/dc60b9c2-9705-4d42-9763-da80ab179cd6.pdf.
Matthews, P. (2016, February). This is why construction is so corrupt. World Economic Forum. Retrieved 27/03/2016 from: https://www.weforum.org/agenda/2016/02/why-is-the-construction-industry-so-corrupt-and-what-can-we-do-about-it/.
Price Water Coopers. (2014). Fighting bribery and corruption in the construction industry: Engineering and construction sector analysis of PwC’s 2014 Global Economic Crime Survey. Retrieved 27/03/2016 from: www.pwc.com/crimesurvey.
Rich, B. R., & Janos. (1994). Skunk works: A personal memoir of my years at Lockheed. New York: Little Brown & Co.
The U.S. Department of Justice. (2017). Foreign Corrupt Practices Act. Retrieved 27/03/2016 from: https://www.justice.gov/criminal-fraud/foreign-corrupt-practices-act.
Zaghloul, R., & Hartman, F. (2003). Construction contracts: the cost of mistrust. International Journal of Project Management , 21 (6), 419-424.
