Corruption in Construction

The construction sector is rife with corruption. Global civil society organization Transparency International gauged in 2011—the last time it published its Bribe Payers Index—that the public works contracts and construction sector ranks at the bottom of the list of bribery-prone sectors. Corruption in the sector can include everything from fraud, to extortion, embezzlement, and other abuses.

How can government organizations and financial institutions mitigate corruption risks when funding or supporting infrastructure projects? How can they detect suspicious transactions? View the Institute for Financial Integrity’s recorded webinar that focuses on this critical issue to gain valuable insights into the unique challenges faced by financial institutions and practical solutions for ensuring compliance and reducing risk.

The global construction market is vast and growing, estimated to grow to nearly $14 trillion by 2037, according to economists at Oxford Economics. Because of the size, uniqueness, high costs, and numerous phases and complexities of construction projects, construction is more prone to corruption than most other economic sectors.

USAID highlighted that corruption often involves not just elected officials and public sector employees, but also private sector entities and corporations, financial institutions, service providers, citizens, and even external foreign actors. Financial institutions play a critical role in funding construction projects. As of the end of 2023, the five banks in the United States that have funded the most construction projects by the end of the fourth quarter—Wells Fargo, JPMorgan Chase, Bank of America, Bank OZK, and U.S. Bank—have combined construction loans of more than $72 billion, according to American Banker.

So what should financial institutions know when funding construction projects?

How can corruption undermine not just good governance, but endanger lives and threaten the reputation of any financial institution involved in construction projects rife with fraud and abuse?

How can banks and government agencies that fund construction and infrastructure projects spot indicators of corruption and mitigate their risks?

For construction-related payroll tax evasion and insurance fraud in the United States, the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN) flagged several indicators which financial institutions should closely examine, including:

• The use of shell companies in the construction sector—especially small construction companies that specialize in one type of construction-related trade (e.g., framing, drywall, stucco, masonry, painting, etc.) with minimal to no online presence and with indicators of shell company activity.
• U.S. banks should also closely examine any individual or entity that opens an account related to construction work that has no known prior involvement in the construction industry, have prior convictions involving fraud, or present non-U.S. identification to open an account.
• A customer who receives weekly deposits that exceed normal account activity from several construction contractors involved in multiple construction trades, such as framing, drywall, stucco, or masonry, should also be scrutinized.

More generally, major red flags associated with bribes and kickbacks include:

🚩 Noncompetitive selection of contractors for infrastructure or construction projects

🚩 Approval of unusually high prices

🚩 Unnecessary middlemen involved in construction-related transactions

🚩 Collusive bidding by contractors

In the UK, for example, an investigation by the Office of Fair Trading in 2008 uncovered widespread collusion among companies bidding for government contracts. The office named 112 companies that conspired to inflate costs for construction contracts, including tenders for schools and hospitals. The companies would secretly agree on the prices they would submit during the tender process, with firms that did not actually want the contract submitting artificially high prices, giving those deciding on the award a false impression of the level of competition and pricing for the project.