How They Do It: Bribery and Corruption Through Agents and Intermediaries

Involvement in bribery and corruption is a risk for every organisation, regardless geography and industry. Although some industries or geographies are more prone to bribery and corruption risk, it is something that happens everywhere. Bribery and corruption cause enormous harm to both societies and economies, undermining the trust that sustains them. In societies, bribery and corruption practices erode the foundation of justice, perpetuating inequality and hindering social progress. The corrosive effects extend to institutions, breeding a culture of impunity that erodes citizens’ confidence in governance. Economically, bribery distorts fundamental market dynamics such as competition and innovation. It exacerbates income inequality, creating an uneven playing field where success is determined not by merit but by illegal activity. Moreover, corruption impacts economic growth, and diverts resources away from essential public services into the hands of criminals. Ultimately, the impact of bribery and corruption jeopardises the long-term stability and development of societies, hindering their ability to thrive and prosper.

In our opinion, way too little attention is devoted to the severe consequences of bribery and corruption. The coverage in the media is what we typically see with white-collar crimes; corporate penalties, deferred prosecution agreements, non-prosecution agreements, and occasionally an individual that goes to jail. The disparity between the coverage and the extensive damage inflicted upon societies and economies is striking in our view. However, this misalignment is a topic for another blog. This blog aims to unveil the mechanics of how bribery and corruption works in practice. Understanding the mechanics is a critical step in preventing and detecting bribery and corruption.

In particular, the focus of this blog is bribery and corruption through intermediaries and agents. In following blogs we will cover other forms of bribery and corruption. While the use of intermediaries and agents is a customary and generally legitimate practice, particularly for organisations operating in foreign or unfamiliar markets, the channelling of bribes through these intermediaries is a prevalent aspect of bribery schemes. A quick look at FCPA cases show that the majority of bribery and corruption settlements involved bribery cases which were done through agents and intermediaries, so lets start unravelling how it works.

Step 1: Select agent or intermediary

The selection of the agent or intermediary is the first step in setting up a successful bribery and corruption scheme. If you do not want to get caught bribing, you ideally select an agent or intermediary which seamlessly integrate into legitimate business operations, concealing their true role. Many organisations manage the risk of bribery and corruption by performing due diligence on third parties they do business with. This especially includes due diligence on agents and intermediaries given the risky nature of such third parties. When selecting an agent or intermediary for bribery and corruption purposes, it is imperative to subject these parties to the same meticulous due diligence procedures that are applied to regular third parties. Instances where due diligence is either absent or expedited within an unusually short timeframe create red flags as these indicate potential internal control deficiencies or override of internal controls.

For an added layer of sophistication to the bribe scheme, organisations use intermediaries with professional backgrounds, such as lawyers, accountants, or bankers. This not only creates an appearance of respectability to the transaction but also acts as a shield against suspicion.

A common ‘misstep’ in bribery schemes is the use of agents and intermediaries in situations where their presence is unexpected or unnecessary. For instance, employing sales agents in regions where the organisation already has a professional sales department can raise eyebrows. Similarly, introducing multiple agents or incorporating new ones in situations where a single or existing agent suffices can expose the scheme.

Step 2: Create slush fund

There are many manoeuvres that organisations can use to create a slush funds to discreetly finance payments to agents. Some organisations use funds outside the purview of an organisation’s official financial records, avoiding routine internal controls. However, this is not always possible. Another common tactic involves fraudulent invoices or inflating billing, acting as a covert conduit for directing funds to agents. In such case the invoiced amounts often surpass the value of services rendered and thus provides a red flag for individuals with a sharp eye.

Organisations typically establish limits on the percentage of commissions that agents are allowed to receive. However, such limits are sometimes circumvented by categorising payments differently, e.g., labelling payments as marketing expenses, education expenses, or consulting fees, effectively disguising the true nature of the transactions.

Furthermore, internal controls often dictate that agents receive their commissions only upon the organisation’s receipt of the payment for goods or services from the client. In instances of bribery and corruption, the chronology of payments can be different. I.e., agents receive their commissions even before finalising the deal between the organisation and its client. Such chronology issues result from the agent’s need for funds to facilitate the bribe.

In more intricate schemes, the creation of slush funds incorporates complex payment structures, including layered transactions and obscure routing. Such schemes are deliberately designed to bypass internal controls and creating a distance between the payer and receiver. The utilisation of shell companies stands out as a prevalent strategy to mask the true nature of financial transactions. Funds are discreetly channelled through these entities, serving as a smoke and mirrors to conceal both the ultimate destination and purpose of the payments.

Step 3: Cover up payments

The Foreign Corrupt Practices Act section 13 details the books and records provision. This provision mandates that organisations must maintain accurate and reasonably detailed records of their transactions. Specifically, organisations covered by the FCPA are required to devise and uphold a system of internal accounting controls to ensure the accuracy and reliability of their financial records.

Many organisations that entered into settlement agreements with United States authorities regarding allegations of bribery and corruption have, at their core, allegedly violated the books and records provision rather than the act of bribery and corruption per se. This distinction underscores that the focus of such allegations often resides in the violation of the aforementioned books and records provision, rather than actual bribe payments. It highlights the importance of meticulously documenting transactions, substantiate the rationale behind such transactions, and ensure that the value aligns with the corresponding services or goods received. Additionally, the existence of proper documentation verifying the receipt of said services or goods is key.

The cultivation of transparency in financial transactions necessitates the routine examination and supervision of financial records. Consequently, organisations must institute robust accounting and financial reporting processes, particularly within the purchase-to-payment process.

In conclusion, by explaining how bribes are paid we shed a light on how involvement of bribery and corruption can be prevented or at least can be detected in an early stage. In subsequent blogs, we shall expand upon other forms of bribery and corruption as well as on the design and implementation of anti-bribery and corruption frameworks.

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