Concerns about fraud and corruption continue to swirl around the construction industry. On November 28, 2021, the Financial Times reported that between 2% and 10% of all spending on the UK government’s £ 100 billion a year would be lost through fraud, collusion or corruption. But the vulnerability is not limited to the construction companies themselves. Banks and professional service companies are required to report reasonable grounds to suspect money laundering to the National Crime Agency. Where there are indications that a construction company is engaged in fraud or bribery, a report should be made by transaction lawyers, accountants, tax advisers and banks. This can result in the construction company and others turning a blind eye to a suspicious pipe in hot water.
For some businesses, strict financial crime controls and the allocation of sufficient resources to compliance may have declined during the pandemic. Movements in the labor market may also mean that new people unfamiliar with financial crime controls are now taking on key roles, including in contract negotiation. A prolonged period of leanness will furthermore make any business hungry for work. These broader factors inevitably increase a construction company’s exposure to fraud and corruption.
Any tendering process has a vulnerability. The temptation may arise to offer an incentive to a key decision maker … the incentive may not be financial
Any tendering process has a vulnerability. The temptation may arise to offer an incentive to a key decision maker. It will be important to recognize that the incentive may not be financial, but may also include an offer to do something in the future, favorable treatment, a large payment presented as something that seems legitimate, or excessive hospitality. The offenses under the Bribery Act 2010 are broadly drafted.
Generally, in a corruption case, there will be no payment under bright light. On the contrary, the bribe will be something more subtle that will be revealed on closer inspection, often long after the event when a fresh look arrives at the company. A construction company, regardless of its size, must also ensure that it has adequate procedures to guard against corruption. A central element will be the tailor-made training of personnel involved in tendering and negotiating contracts – the absence of which could constitute the corporate offense of not preventing corruption.
A shortage of skilled labor can indirectly lead to severe practices. In August 2021, the Construction Industry Training Board (CITB) suspended nine test centers over allegations that qualifications were improperly issued. Allegations of this kind are not new. In 2019, the CITB closed 17 test centers believed to be involved in delivering fraudulent qualifying tests, usually in exchange for grossly inflated test fees and other payments.
Another area where dishonesty can arise is in billing. The issuance of an entirely false invoice to be paid by an entity that is not, in fact, a legitimate third party is an established means of laundering the proceeds of crime. But just like corruption, fraud can be more subtle. Inflating, even by a small amount, the fees charged for the work performed or the materials used will amount to fraud. All invoices must be able to be duly substantiated.
A business that claimed leave payments or a bounce-back loan to which it was not entitled or did not use the funds as required will also be at risk.
Another problem is poorly characterized waste. The conduct itself may constitute fraud because it is a misrepresentation intended to provide a benefit, namely a saving on disposal costs. When tax breaks are available for greener waste, that will also lend itself to misleading HMRC. Paying or receiving funds off the books will raise the same issue whether or not it is done on a systemic scale.
A construction company, no matter how small, that claimed leave payments or a bounce-back loan to which it was not entitled or did not use the funds as required will also be at risk. While pandemic fraud prosecutions remain the exception rather than the rule, investigations are ongoing and are expected to accelerate following the National Audit Office’s announcement earlier in December 2021 than until £ 4.9 billion was lost to rebound-return loan fraud.
What can be overlooked is that signs of illicit activity will trigger the money laundering reporting obligation that applies to companies that are regulated for the purposes of anti-money laundering (AML). The construction industry is not AML regulated, so not subject to the law, but a company’s bank, accountant, transaction lawyer and tax advisor will be. The same goes for real estate agents and rental agents, including those involved in commercial rentals who may engage with construction companies.
A concern about money laundering may arise because, by definition, handling the proceeds of fraud or bribery will result in money laundering offenses. There is an incentive to report because it presents an iron defense against money laundering. The construction industry is already identified as a high risk industry in professional AML advice and an indication that it has engaged in corrupt or fraudulent acts or sent or received irregular or unexpected payments can attract an AML-regulated business to the reporting territory.
Warned is warned. Construction companies would be smart to not only strengthen their financial crime controls now, but also to ensure that they are robust enough to tackle fraud and corruption, even in its most subtle forms.
Anita Clifford is a lawyer at Red Lion Chambers