Corruption and Financial Crime

There has been a significant increase in criminal law risks associated with the activities of joint ventures. The most significant among these are bribery, tax evasion, international sanctions and money laundering.

This module identifies best practice procedures to mitigate corruption and financial crime that can increasingly occur when joint ventures deliver complex global mega infrastructure projects.

Risk context

As markets face continued uncertainties over the impact of the pandemic, some key compliance themes emerge for large-scale and cross-border infrastructure projects - from risks posed within distressed projects that may require restructuring, refinancing and recapitalisation; to challenges thrown up by priority areas for new government-backed infrastructure investment as a direct consequence of Covid 19.

JV partners find themselves navigating new or heightened financial crime and compliance risks in unpredictable economic conditions in different markets across the world.

Where to focus anti-corruption and financial crime compliance work

Here are some key themes to inform anti-corruption and fraud risk assessments and other compliance programme enhancements:

• Governments and public bodies are increasing expenditure on essential infrastructure (hospital, schools, transport networks, telecommunications, digital transformation and equipment) at the same time as often relaxing public procurement rules to speed up contract awards. Amongst other compliance threats, this has led to organised crime groups targeting infrastructure related sub-contracts, as opportunities for corrupt deals and abuse of these government-back initiatives have become ever more attractive to these kinds of criminal enterprise and their associates.
• In parallel, there is also an increased risk of corrupt public officials seeking kickbacks or routes to secure sub-contracts for companies to which they are connected in return for favourable treatment of bidders. Because of the global pandemic, infrastructure sector businesses may encounter a relaxation of traditional vetting and controls in bids and tender processes – creating a risk of public sector corruption in these circumstances, unless compliance programmes step in to mitigate these. Due diligence and active oversight on tender opportunities remain of critical importance in these scenarios.
• In various markets across the world, government loan schemes to support businesses as well as employment grants have been introduced at rapid pace over the course of 2020 - due to macroeconomic necessity - but these have been left vulnerable to abuse by those seeking to access government-backed funding improperly or in breach of specific local tax or labour law rules. Fraud and corruption risks are heightened for mega JVs in this climate.
• For personnel related risks arising, a recent survey concluded that two thirds of furloughed workers in the UK, for example, had undertaken remunerative work in breach of furlough rules.
• Similarly, national tax agencies across the world are ramping up their efforts to investigate abuses of government recovery schemes, with a compelling case to prosecute offenders, given the public interest to treat any abuses of such schemes as a fraud against the state.
• Amnesties have been announced to encourage voluntary disclosures and self-corrections if abuses of state-backed schemes has occurred, prompting the need for corporates to undertake checks to ensure infractions are appropriately reported. The infrastructure sector is not immune - and amongst other steps, JV participants may need to consider a range of checks on their JV partners and others in supply chains to be satisfied a large-scale JV project has complied with any applicable funding or labour law requirements introduced as a consequence of Covid 19.
• In parallel to the financial crime risks posed by the pandemic and responses to it, national governments have needed to adopt localised responses - impacting supply chains, freedom of movement and introducing other restrictive measures that indirectly create opportunities for fraud and other abuses.
• In this environment, geopolitical tensions, trade and tech wars pose other sanctions risks for JV participants. In the context of digital transformation mega projects, for example, 5G infrastructure has become a major battleground between the US and China, with US sanctions and export controls directly impacting Chinese companies' ability to participate in the US and wider 5G supply chains.
  
  

Steps to mitigate risk

These developments have led to an increased financial crime risk for publicly procured large-scale infrastructure projects. Changes to sanctions regions have also impacted the sustainability of certain cross-border partnerships and investments.

Many of the risks can be effectively mitigated by the risk management steps set out in our Corruption & Financial Crime module [linked], which include the conduct of financial crime due diligence and risk assessments. In addition to standard anti-bribery due diligence, we recommend due diligence questionnaires enquire about a proposed partner's compliance with the rules of government COVID-19 support schemes, and for sight of documentation to evidence the approach taken. In projects accessing funding from multilateral development banks, continued compliance with the integrity standards of these funders is essential. 

The module recommends that compliance Key Performance metrics should be put in place for joint ventures to report on their performance in relation to compliance training, 3rd party due diligence, gifts & hospitality registration, and the conduct of internal investigations. In light of the developments noted, we recommend that joint venture partners also closely monitor a joint venture's compliance with tender, furlough and other government support rules. Internal investigations should be designed and scoped taking account of the expectations of funders, joint venture partners' external auditors, as well as national and international regulators. Where possible, harnessing technology as part of compliance programme enhancements can be used to mitigate the challenges posed by ongoing travel lockdowns or other restrictions arising from the pandemic – whether use of these tools is to carry out vetting of supply chains or for analytics to monitor financial transactions.