Corruption Kills

Construction projects are especially vulnerable to corruption because of their complexity, high price tags, and the number of intermediaries and other parties involved. Corruption in the construction sector does not merely result in financial losses, environmental destruction, and inequality, but it can also result in loss of life.

The True Cost of Corruption

An earthquake in early February 2023 in Türkiye resulted in the deaths of more than 53,000 people, with more than 107,000 injured and roughly 1.5 million left homeless, according to the United Nations (UN) Office in Geneva. In Adana, a large city in southern Türkiye saw 12 buildings collapse, and across the Adana Province 59 buildings, 1,274 apartments, and 2,952 houses were destroyed, severely damaged, or required demolition, according to government estimates.

Experts highlight corruption in the construction sector as being partially responsible for the extraordinary damage in Türkiye. The country, after a deadly earthquake in 1999, passed stricter building codes that were not consistently enforced. Press reporting notes that Ankara in 2018 issued a zoning amnesty that allowed property owners to register illegally constructed buildings for a fee. About 1.8 million applications were approved, and the Turkish government received more than $3 billion in taxes and registration charges from the amnesty scheme. The report assesses that about half of Türkiye’s 13 million buildings do not meet construction codes, including earthquake-resistant construction regulations.

• Researchers in 2011 calculated that 83% of all deaths from building collapses resulting from earthquakes during the previous 30 years occurred in countries with high levels of corruption. Türkiye has been declining in Transparency International’s Corruption Perceptions Index (CPI), with the latest score showing Türkiye having declined by two points since last year and by 11 points since 2014, reaching its lowest score to date on the CPI.
• Media reporting in January 2024 noted that corruption on the part of some officials in China resulted in the illegal construction and collapse of a residential building in Changsha, Hunan province, resulting in 54 deaths in April 2022. The building was owned by Wu Qisheng and his son Wu Zhiyong, who in 2012 constructed a five-story building and in 2018 expanded it to eight stories using unqualified workers and without obtaining any approvals from relevant authorities.
• In Bangladesh, the Rana Plaza garment factory collapse in 2013 was the result of construction on unsuitable land, disregard for regulations, and bribery of public officials who were paid to ignore violations, according to Transparency International. More than 1,100 people were killed when the eight-story building housing five garment factories collapsed. A former chief engineer of the state-run Capital Development Authority said the owner of the building had not needed authorizations and that an extra three stories were added illegally.

An International Monetary Fund working paper in 2023 assessed that corruption undermines the quality of public infrastructure, the effectiveness of emergency responses and healthcare services after a natural disaster, and the adherence to building codes, which results in increased deaths.

What can financial institutions do to mitigate their vulnerabilities to corruption?

Guidance and Red Flags for Financial Institutions

The Wolfsberg Group in 2023 published its updated Anti-Bribery and Corruption (ABC) Compliance Program Guidance to help the financial services industry develop, implement, and maintain effective ABC compliance programs.

The guidance listed a non-exhaustive selection of red flags, which may warrant enhanced due diligence by financial institutions, including:

🚩 Use of consultants or vendors who serve no clear purpose, or a forced or strongly recommended use of a vendor who would not meet procurement standards.

🚩 Close business, personal, or family relationship with a Public Official or third party who has discretionary authority over the business or transaction at issue.

🚩 Use of a shell company or some other non-transparent corporate structure or nominees or proxies with no obvious commercial purpose.

🚩 Requests for payment of a commission or a significant portion thereof, before, or immediately upon award of the contract.

🚩 Requests for unusual contract terms such as deviation from progress payment models for construction contracts.

Many of the typologies described in Wolfsberg’s guidance are common methodologies used in other financial crimes, such as sanctions evasion and money laundering. The Institute for Financial Integrity’s proprietary DOLFIN platform features a resource on corruption that includes strategies, case studies, and key considerations for financial institutions.

Recorded Webinar

In addition, the Institute for Financial Integrity offered free webinar on corruption in the construction sector on June 27, 2024. Explore corruption challenges in the construction and infrastructure sectors. Gain insights into the unique challenges faced by financial institutions that fund construction projects and learn strategies to mitigate the risks of funding projects that may be connected to corrupt public officials.