Industry Insight No. 8: Ethics in the construction industry part 1

June 23, 2016

 

This article was first published by LexisPSL on 18 May 2016

 

Construction analysis: Sarah Schütte of Schutte Consulting Limited sets out the first five of her ten industry ethics issues for construction professionals, looking at issues under the Bribery Act 2010 (BA 2010), the Modern Slavery Act 2015 (MSA 2015), anti­corruption initiatives around the globe, working in developing countries and EU procurement regulation.

 

Background

It is said that the UK has one of the most stringent compliance and regulatory frameworks in the world, and that it leads the way in anti­-corruption initiatives. As such, the UK is in a place of great responsibility as a role-­model, and yet the reputation of the construction and engineering industry has been affected by corruption and anti­-competitive practices over the years. Struggles remain globally as economic difficulties, combined with a rise of merger and acquisition activity, reduced natural resources, and increased populations continue to impact.

 

As the extent of the leak of the Panama Papers sinks in around the world, and following a global anti­corruption summit held in London and hosted by the Prime Minister, David Cameron, on 12 May 2016, now is a good time to round up the latest news on ethics in the construction industry. In this and my next article, I will set out my top ten current industry ethics issues for construction professionals, plus my tips on how those working in procurement, compliance, risk and legal can navigate through this territory.

 

1. Prosecution of a corporate body—application of BA 2010

In February 2016 the professional services firm, Sweett Group plc (Sweett) was convicted of bribery and fined £1.4m, plus £850,000 by way of confiscation order, plus £95,000 by way of contribution to the Serious Fraud Office’s (SFO) legal costs. The SFO had investigated a contract for project management and costs consultancy services relating to the building of a hotel in Dubai, which was awarded to one of Sweett’s subsidiaries. The SFO investigation started in July 2014, after year-­long internal investigations, and culminated 18 months later in December 2015 in Sweett’s admission of the offence of failing to prevent an act of bribery. Sweett admitted that its subsidiary had paid an official at the hotel developer £680,000 in bribes to secure the award of the contract. This was the first corporate conviction under BA 2010, s 7.

 

Notes for construction professionals:

  • Behaviour towards investigators—Sweett was told by the court that its unhelpful attitude to addressing issues raised during the investigation and lack of self­-reporting counted against it, which increased the fine imposed

  • Deciding whether to prosecute—other organisations were invited by the SFO to enter into deferred prosecution agreements (DPA) meaning that no prosecution is ever brought. Sweett's conduct put the offer of a DPA out of reach

  • Far-­reaching effect—BA 2010 has extra-territorial effect, so the measurement of corporate behaviour in relation to corruption is not limited to UK operations and activities

  • Impact of conviction on financial position:

    • Sweet's share price plummeted after the fines were announced

    • The fines were significant so they hit the bottom line immediately, although Sweett has been given time to pay in instalments

  • Impact on reputation:

    • Many senior executives left the company

    • Sweett is now working to rebuild its image but it has a difficult path ahead

  • Global operations—there is a need for strong oversight by a UK company of its overseas associated activities, ideally by a dedicated compliance function

  • Training—individuals at every level of the organisation should be routinely trained on corruption issues in order to bed in policies and processes

  • Whistleblowing—it is essential that there is a mechanism for an individual to safely report worrying concerns without fear

2. MSA 2015

Just one year old, MSA 2015 has had big impact and raised important philosophical questions on the use (and abuse) of people by other people and by businesses. Since October 2015, an organisation with a turnover of more than £36m must report annually on the transparency in supply chain provisions (although transitional measures meant that organisations with a year­-end of 31 March 2016 were the first required to publish a statement).

 

MSA 2015 is aimed at human trafficking, but the implication and logic is that businesses should conduct vigorous due diligence to trace supply from one end to the other, since people are necessarily involved and impacted. The new reporting requirements are still in their infancy, clearly, and their usefulness is yet to be tested, but it is hoped that they will raise issues and awareness about the human resources used to produce goods and services around the globe, as well as force companies who come under scrutiny to improve their purchasing practices.

 

To my mind, for those businesses who choose to self-­report (ie are not obliged to), MSA 2015 gives them a platform to show their credibility and integrity transparently. It should boost market confidence in responsible organisations, their suppliers and their purchasing methods. It could foreseeably act as a new catalyst to sustainable practices as well (see my article: Industry insight: Cash gridlock issues in the construction industry).

 

Notes for construction professionals:

  • If your organisation hits the turnover threshold, you need to be ready to prepare the report and seek data from the business—this may uncover uncomfortable truths in business practices, or an excellent culture to tell to the world

  • Smaller businesses, which are confident about their supply chain practices, can profit from MSA 2015 by volunteering their own stories and statistics

  • Procurement should actively take MSA 2015 into account when developing contracting strategies, e.g. scoring criteria

3. New anti­corruption initiatives around the globe

Almost every country in the world is wrestling with anti­-corruption initiatives and how to tackle a persistently difficult problem, both practically and culturally. A few examples of the more interesting activities include:

  • In Australia, the Senate has been hearing arguments in favour of a ‘national integrity commission’, which has been proposed by two journalists who found evidence of bribery on government-­funded infrastructure projects

  • Japan has introduced new governance laws aimed squarely at breaking a generations-­old cultural reluctance to speak out against those higher up the hierarchy, and with one eye firmly on attracting foreign investment—although it is notable that their application has not been without difficulty

  • Nigeria elected a new president on the back of his anti­-corruption manifesto—this country is consistently at the bottom of league tables on corruption so this is a welcome development. It remains to be seen what he will be able to achieve in practice but he will have the support of the EU and individual countries

  • An International Anti­-Corruption Court was proposed in summer 2014 and while commentary has been active there is no real take­up of the idea right now (yet). Nonetheless, it reflects a desire to see more streamlined and integrated ‘global’ solutions to bribery and corruption, which can only be a good thing for industry

Notes for construction professionals:

  • Be aware of the countries in which your organisation operates, since you will need to comply with their laws and rules—failure to do so puts individuals and the organisation at risk of prosecution and corruption. Take advice from local law experts

  • Having a presence on the ground is not always possible, or required, but a responsibility for the country should be in the organisation’s matrix, so that a named individual can direct queries and take appropriate advice

4. The G20’s input—the high-­level reporting mechanism
Despite the fact that only four paragraphs (77–80) of the G20 Leaders Declaration, 2012 report were devoted to anti­-corruption, a number of commitments were made which link the consequences of unethical practices to continuing poverty, inequality and global economic instability. The G20 group of countries is working out how these high-­level statements will flow down into national compliance efforts—that is the biggest challenge.

 

It was emphasised that trans-national corruption, ie the ‘first world’ bribing the ‘developing world’, has had a devastating effect on the ability of poor countries to fight and eradicate corruption and instil public confidence in government. The corrupt actions of officials—trusted with their people’s taxes and authority—can be particularly difficult to understand in countries where there is deep poverty. While trite to say, it is true that every action counts in the fight against bribery and corruption. Every organisation engaging in providing works and services in developing countries is at risk of bribery and corruption, and UK companies can be prosecuted at home (see issue 1 above).

 

While there is an urgent need to assist such countries to develop infrastructure and build systems, homes and schools for growing populations, they are not always easy places to work, as cultural differences and sentiments about ‘colonialism’ sometimes run deep. As such, robust risk management strategies for operating in such countries must be developed and implemented. Using an independent expert service to help you identify trends could be a sound investment. Such a service can also assist in extracting individuals from the risk of dangerous situations, such as hostage-­taking.

 

Notes for construction professionals:

  • Keep an eye on the latest political situation through an alert service (usually subscription-­based)

  • Maintain local experts where possible, or at least a chain of trustworthy contacts

  • Regularly review the corporate risk management strategy to ensure risks are encapsulated accurately and adjustments made to respond to changes

  • Ensure you know how to look after, and extract, your people on the ground if a situation becomes dangerous for them.

     

5. The EU’s efforts to curb corruption in public procurement

It is five weeks until the UK’s ‘in/out referendum’ on EU membership takes place on 23 June 2016. Putting the technicalities of the vote aside, as a member of the EU the UK must abide by the EU’s procurement rules, notably Directive 2014/24/EU (the Public Contracts Directive), which was implemented via the Public Contracts Regulations 2015, SI 2015/102 which came into force on 26 February 2015. The EU’s stated aim is that public contracts are awarded through fair competition—this usually means competitive tender, although there are a few exceptions.

 

It is generally estimated that 20% of the total EU budget is spent directly and indirectly on public projects, a total of circa €240bn per annum. The construction and engineering industry takes a significant chunk of this sum, and UK companies have long been successful in procurements due to their technical expertise, longevity in engineering and top­quality professional services.

 

However, the EU has consistently identified that corruption is present in the form of bid-­rigging, kickbacks, conflict of interest and contract mismanagement, to the tune of up to 13% of the sum spent. As such, the EU is constantly pushing for wider use of open-­book accounting and more frequent independent audit of companies and their practices. Both of these methods check for ‘taxpayer value for money’ and anti­-corruption initiatives.

 

UK companies are likely to be more familiar than organisations in other Member States to open-­book and audit, because the UK government’s guidelines on public contracts mandate such methods of measurement as standard. Forms of contract such as NEC3 are in a good position to respond because they also include them as standard. NEC3 is not used widely within the EU—although there is no reason why not since it is easily adaptable for a non­-UK jurisdiction.

 

Notes for construction professionals:

  • Procurement agents need to be up to speed on the Public Contracts Regulations, whether as employer or potential contractor/ supplier

  • Procurements are costly to run, so:

◦ if you are an employer, ensure your process, including scoring criteria, stands up to scrutiny, since it is embarrassing and costly to have to scrap a competition and start again, or be taken to court by unsuccessful tenderer, as well as wreaking havoc on your planned build timetable

◦ if you are a contractor/supplier, think carefully about which competitions to pursue

  • Don’t be tempted to cut corners, seek insider information on other tenderers or give different information to one tenderer (whether for a benefit or not), since this activity and behaviour puts at risk both individual and corporate reputations. 

Next month, Sarah will present part 2 of her Ethics in the construction industry round up.

 

    

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