RESEARCH PAPER ON

CORRUPTION SCHEMES
BY
CA ABHINEET MISHRA
+91 – 9523925672
aabhineet93@hotmail.com

Introduction
In general, corruption is a form of dishonesty or criminal activity undertaken by
a person or organization entrusted with a position of authority, often to acquire
illicit benefit, or, abuse of entrusted power for one's private gain. Corruption
may include many activities including bribery and embezzlement, though it may
also involve practices that are legal in many countries. Political corruption
occurs when an office-holder or other governmental employee acts in an official
capacity for personal gain. Corruption is most commonplace in kleptocracies,
oligarchies, narco-states and mafia states.
Corruption can occur on different scales. Corruption ranges from small favors
between a small number of people (petty corruption), to corruption that affects
the government on a large scale (grand corruption), and corruption that is so
prevalent that it is part of the everyday structure of society, including corruption
as one of the symptoms of organized crime. Corruption and crime are endemic
sociological occurrences which appear with regular frequency in virtually all
countries on a global scale in varying degree and proportion. Individual nations
each allocate domestic resources for the control and regulation of corruption and
crime. Strategies to counter corruption are often summarized under the umbrella
term anti-corruption.

Corruption schemes include:

• Bribery schemes, Bribery involves the improper use of gifts and favours in
exchange for personal gain. This is also known as kickbacks or, in the
Middle East, as baksheesh. It is a common form of corruption. The types of
favours given are diverse and may include money, gifts, sexual favours,
company shares, entertainment, employment and political benefits. The
personal gain that is given can be anything from actively giving preferential
treatment to having an indiscretion or crime overlooked.

• Bid-rigging schemes, which occur when an employee fraudulently assists a

vendor in winning a contract through the competitive bidding process
• Embezzlement, theft and fraud Embezzlement and theft involve someone
with access to funds or assets illegally taking control of them. Fraud involves
using deception to convince the owner of funds or assets to give them up to
an unauthorized party.
• Pyramid Schemes and Ponzi Schemes are illegal and very risky ‘get-
richquick’ schemes that can end up costing you a lot of money.
• Laundromats are complex systems for moving money that allow corrupt
politicians, organized crime figures, and wealthy business people to secretly
invest their ill-gotten millions, launder money, evade taxes, and fulfill other
goals.
• Graft: The political act of graft is when funds intended for public projects
are intentionally misdirected to maximize the benefits to private interests of
the corrupt individuals.
• Abuse of discretion refers to the misuse of one's powers and
decisionmaking facilities. Examples include a judge improperly dismissing a
criminal case or a customs official using their discretion to allow a banned
substance through a port.
• Favouritism, nepotism and clientelism involve the favouring of not the
perpetrator of corruption but someone related to them, such as a friend,
family member or member of an association. Examples would include hiring
or promoting a family member or staff member to a role they are not
qualified for, who belongs to the same political party as you, regardless of
merit.

Bribery Schemes:
Bribery is defined by Black's Law Dictionary as the offering, giving, receiving,
or soliciting of any item of value to influence the actions of an official or other
person in charge of a public or legal duty.
Forms of Bribery:
Many types of payments or favors can constitute bribes: tip, gift, sop, perk,
skim, favor, discount, waived fee/ticket, free food, free ad, free trip, free tickets,
sweetheart deal, kickback/payback, funding, inflated sale of an object or
property, lucrative contract, donation, campaign contribution, fundraiser,
sponsorship/backing, higher paying job, stock options, secret commission, or
promotion (rise of position/rank).
Bribery may also take the form of a secret commission, a profit made by an
agent, in the course of his employment, without the knowledge of his principal.
Euphemisms abound for this (commission, sweetener, kick-back etc.) Bribers
and recipients of bribery are likewise numerous although bribers have one
common denominator and that is the financial ability to bribe.
Overall, bribery is thought to be around one trillion dollars worldwide according
to BBC news UK.
Case of the Siemens’ Scandal, 2006 – Executive Summary
In November 2006, the German authorities revealed Siemens’ massive
corruption scandal. For about 7 years, the company had used illegal funds to pay
bribes of about 1.3 billion Euros in provisions form. The bribes were paid to
lower level governments’ offices, business partners and to also to the whole
governments; the bribes were paid by around 300 employees. The Siemens
bribery scandal is the greatest in German history and it caused damages of about
1.6 billion Euros (Stephen & Greyser. 2009, p.56). The company paid some
employees to spy on the trade union representatives. Members of the AUB
were also given payoffs for about 20 years, which were in the form of luxury
excursions and direct bribes among others.
Siemens started their internal inquiry when there were four international
investigations, Siemens began their internal inquiry. Their objective was to have
a system that will detect and prevent any illegal and unethical practices and be
an example to other companies on how to correctly manage a business. The
company appointed Debevoise & Plimpton, a law firm based in New York to
conduct an internal investigation. Some managers were alienated from the
investigation; however, the rigorous investigations convinced most sceptics in
the firm of the reforms pressing urgency; its thoroughness was a tangible
display of integrity and ability. The company appointed a new CEO who gave
employees a one-month amnesty to come forward, with the exception of former
directors. As additional evidence was corrected the previous management board
was held responsible for the scandal.
One factor that contributed to the scandal was the company’s growth strategy
which made managers pay bribes, to reach the performance target easily. In
addition, the company had a structure which was complex and decentralized;
this allowed divisions to run themselves effectively, with the headquarter having
minimal oversight. The set processes on balances, checks and accountability
made it ease for the payments to be done. Some people however argued that the
corporate culture of the firm appeared to tolerate the activities, making staff feel
that bribes were both encouraged and acceptable; this made them to be
complicit in the deceit. At the time of the scandal, giving and taking bribes was
commonly practiced in Germany and could also be deducted against tax.
(Onkvisit & Shaw, 2009, 71).

Bid-rigging schemes
Bid-rigging is a serious form of anticompetitive behaviour. It happens when a
number of suppliers come together and agree not to bid against one another for a
tender or contract. In these cases, the winning tender price may be higher than
the price that would be reached through competitive tendering. An open
competition means that firms reveal the lowest price at which they are willing to
do the job. Bid-rigging also reduces the range of goods and services that
consumers can choose from.
Competitive tendering is a system that awards contracts for public and private
services on the basis of competitive bids by potential suppliers. The system
promotes competition.

Types of bid-rigging
Collusive tendering can take many forms, however the most common types are
bid suppression, cover bidding, and bid rotation.
• BID SUPPRESSION Firms who would normally be expected to bid for a
contract agree not to submit bids or to withdraw their bids entirely. This
results in another party’s tender being selected instead. Removing
competitors also means that the incentive to go as low as possible in order
to win the contract is removed too.
• COVER BIDDING This is also widely known as protective bidding or
shadow bidding. In these cases, competitors agree to submit artificially
high tenders that cannot be selected. This allows for one of the other
firms to win the contract. They give the appearance of a genuine process
but it is never intended for these bids to be selected.
• BID ROTATION Firms continue to bid but agree to take turns winning
business and being the designated successful bidder. Competitors may
also agree to take turns according to the size of the contract. These
schemes need to be sophisticated in order to avoid detection and to ensure
that participants receive their agreed share of the value of contracts.
Case Study: Bid-rigging in Ireland – Executive Summary
Ireland’s first conviction for a bid-rigging offence came in May 2017. Brendan
Smith and Aston Carpets pleaded guilty to implementing and taking part in a
bid-rigging agreement in the procurement of flooring contracts for major
international companies between 2012 and 2013. The intention of this
agreement was to fix the price, indirectly, for the supply and fitting of floor
finishes and also to share the market by over-bidding on alternating tenders. The
CCPC uncovered collusion in respect of some 16 contracts during this time. The
case was brought before the Central Criminal Court by the Director of Public
Prosecutions (DPP), and followed an investigation by the CCPC. Information
had been received from a complainant who made an application under the
CCPC’s Cartel Immunity Programme. This Programme is operated by the
CCPC in conjunction with the DPP, and provides immunity to a member of a
cartel if they are the first member to come forward, reveal their involvement in
illegal cartel activity, and fully cooperate with the CCPC’s investigation. The
Central Criminal Court imposed a fine of €45,000 against Mr Smith who was
convicted of impeding a criminal prosecution, and was also disqualified from
holding a company directorship for five years in accordance with section 839 of
the Companies Act 2014.

Ponzi Schemes
A Ponzi scheme is a fraudulent investing scam promising high rates of return
with little risk to investors. The Ponzi scheme generates returns for early
investors by acquiring new investors. This is similar to a pyramid scheme in that
both are based on using new investors' funds to pay the earlier backers. Both
Ponzi schemes and pyramid schemes eventually bottom out when the flood of
new investors dries up and there isn't enough money to go around. At that point,
the schemes unravel. A Ponzi scheme is an investment fraud in which clients are
promised a large profit at little to no risk. Companies that engage in a Ponzi
scheme focus all of their energy into attracting new clients to make investments.
This new income is used to pay original investors their returns, marked as a
profit from a legitimate transaction. Ponzi schemes rely on a constant flow of
new investments to continue to provide returns to older investors. When this
flow runs out, the scheme falls apart.
Case Study: The Bernie Madoff Ponzi Scheme
The Madoff investment scandal was a major case of stock and securities fraud
discovered in late 2008. In December of that year, Bernie Madoff, the former
NASDAQ Chairman and founder of the Wall Street firm Bernard L. Madoff
Investment Securities LLC, admitted that the wealth management arm of his
business was an elaborate multi-billion-dollar Ponzi scheme.
Alerted by his sons, federal authorities arrested Madoff on December 11, 2008.
On March 12, 2009, Madoff pleaded guilty to 11 federal crimes and admitted to
operating the largest private Ponzi scheme in history. On June 29, 2009, he was
sentenced to 150 years in prison with restitution of $170 billion. According to
the original federal charges, Madoff said that his firm had "liabilities of
approximately US$50 billion". Prosecutors estimated the size of the fraud to be
$64.8 billion, based on the amounts in the accounts of Madoff's 4,800 clients as
of November 30, 2008. Ignoring opportunity costs and taxes paid on fictitious
profits, half of Madoff's direct investors lost no money, with Madoff's repeated
(and repeatedly ignored) whistle-blowers, Harry Markopolos, estimating that at
least $35 billion of the money Madoff claimed to have stolen never really
existed, but was simply fictional profits he reported to his clients.
Madoff's combined assets were worth about $826 million at the time that they
were frozen. Madoff provided a confidential list of his and his firm's assets to
the SEC on December 31, 2008, which was subsequently disclosed on March
13, 2009, in a court filing. Madoff had no IRAs, no 401(k), no Keogh plan, no
other pension plan, and no annuities. He owned less than a combined $200,000
in securities in Lehman Brothers, Morgan Stanley, Fidelity, Bear Stearns, and
M&T. No offshore or Swiss bank accounts were listed.

Embezzlement and theft

Embezzlement is the act of withholding assets for the purpose
of conversion (theft) of such assets, by one or more persons to whom the assets
were entrusted, either to be held or to be used for specific purposes.
Embezzlement is a type of financial fraud. Embezzlement usually is a
premeditated crime, performed methodically, with precautions that conceal the
criminal conversion of the property, which occurs without the knowledge or
consent of the affected person. Often it involves the trusted individual
embezzling only a small proportion of the total of the funds or resources they
receive or control, in an attempt to minimize the risk of the detection of the
misallocation of the funds or resources. When successful, embezzlements may
continue for many years without detection.
Case study: Embezzlement: 1MDB Scan
Originally 1MDB – an abbreviation of 1Malaysia Development Berhad (which
means limited) – was nothing more than a Malaysian state fund, set up in 2009
to promote development through foreign investment and partnerships. The then
prime minister, Najib Razak, was its chairman. The fund has since been at the
heart of one of the biggest corruption scandals in the world. The US justice
department believes more than $4.5bn was stolen and the resulting scandal has
been responsible for the toppling of a government and the arrest of Najib, his
wife Rosmah Mansor and a growing number of close associates.

Leaked financial documents allege that 1MDB was a hub of fraudulent activity
from the outset. Vast sums were borrowed via government bonds and siphoned
into bank accounts in Switzerland, Singapore and the US. Overseas, it is alleged
the money funded the ostentatious lifestyle of one of the consultants allegedly
brought in to oversee 1MDB, Malaysian businessman Jho Low.

Under Low’s watch, it is alleged the fund bankrolled purchases including tens of
billions of dollars’ worth of property in Beverly Hills and Manhattan, including
an apartment once owned by Jay Z and Beyonce; a $35m private jet; a $260m
yacht; a $3.2m Picasso given to Leonards DiCaprio; $85m in Las Vegas
gambling debts; a birthday party for Low where Jamie Foxx, Chris Brown,
Ludacris, Busta Rhymes and Pharrell Williams performed live and Britney
Spears jumped out of a cake; and $8m in diamonds for Australian model
Miranda Kerr.

How was the scandal uncovered?

The alleged embezzlement of 1MDB money between 2009 and 2012 went
unchallenged until 2015. That year, British journalist Clare Rewcastle-Brown,
who ran the website Sarawak Report, was handed 227,000 leaked documents
detailing the depth of fraud. The Wall Street Journal was also given documents.

The Malaysian anti-corruption agency (MACC) began investigating and was

about to issue a warrant for the prime minister’s arrest when Najib acted. During
the “week of the long knives”, Najib fired the attorney general, sacked deputy
prime minister and 1MDB critic Muhyiddin Yassin, and four other ministers
who had raised the scandal. The MACC offices were raided and four officials
arrested.

Najib was arrested in relation to money that had flowed into his personal bank
accounts from funds connected to 1MDB. He was charged with three counts of
criminal breach of trust and one of corruption. He pleaded not guilty to all
charges. He was arrested again, this time on 25 charges includes nine counts of
receiving illegal bribes, five counts of using illegal proceeds and seven counts
of transferring the proceeds to associates. He pleaded not guilty to all charges,
which cumulatively carry jail sentences of more than 100 years.

Laundromats
Laundromats are complex systems for moving money that allow corrupt
politicians, organized crime figures, and wealthy business people to secretly
invest their ill-gotten millions, launder money, evade taxes, and fulfill other
goals.

Case Study:

The Troika Laundromat What is the ‘Troika Laundromat’?

Essentially, it’s the name given to a collection of 70 offshore shell companies

whose controllers used them to move billions of dollars of private wealth from
Russia to the west. It was operated by staff at an independent arm of the Russian
investment bank Troika Dialog, which has now been merged with one of
Russia’s two big state-owned banks. Most of the money belonged to its clients,
families whose wealth it helped manage.
How did it work?
The network operated like a washing machine: money arrived from multiple
sources and was then “spun” between network companies and sometimes
between multiple bank accounts belonging to a single company. These
convoluted transactions mixed and blended the funds, so that legitimately
earned private wealth became impossible to separate from money that appears
to have come from major frauds. Most of the transfers took place at Lithuania’s
Ukio Bank, which was closed by the authorities in 2013 and is under
investigation.
How much money was involved?
About $4.6bn (£3.5bn) was paid into the Troika network, and a similar sum was
paid out of it. But the value of transactions between Troika-managed companies
was an estimated $8.8bn, suggesting money was spun around for a number of
cycles before exiting.
How was the money moved?
Ukio’s staff recorded the purpose of each payment. They had no staff, no offices
to put them in, and no visible presence online or in the business world. For
example, in May 2004, Ukio transferred $204,000 to an account in Latvia to pay
for “auto spare parts”. The money came from Industrial Trade Corp,
incorporated a year earlier in Panama. It had no obvious connection to the car
industry, and over the next six years, it went on to trade in everything from
“food industry equipment”, to “computers” and “building materials”. Such
transactions, along with loans and share deals, allowed Industrial Trade Corp to
become one of the biggest cash pipelines in the Laundromat, moving hundreds
of millions.
What do the banks say?
Ukio was declared insolvent in February 2013 and closed down by the
government. Its former owner had not responded to requests for comment by the
time of publication. Troika Dialog said it knew its clients and checked their
backgrounds. It pointed out it had never flouted any regulations and had always
operated in accordance with the rules of the day. Crucially, it relied on banks
such as Ukio to conduct their own due diligence.

Abuse of Discretion
The authority in which a discretion is vested can be compelled to exercise that
discretion, but not to exercise it in any particular manner. In general, a
discretion must be exercised only by the authority to which it is committed. That
authority must genuinely address itself to the matter before it; it must not act
under the dictates of another body or disable itself from exercising a discretion
in each individual case. In the purported exercise of its discretion, it must not do
what it has been forbidden to do, nor must it do what it has not been authorized
to do. It must act in good faith, must have regard to all relevant considerations
and must not be influenced by irrelevant considerations, must not seek to
promote purposes alien to the letter or to the spirit of the legislation that gives it
power to act, and must not act arbitrarily or capriciously. These several
principles can conveniently be grouped in two main categories: (i) failure to
exercise a discretion, and (ii) excess or - discretionary power. The two classes
are not, however, mutually exclusive. Thus, discretion may be improperly
fettered because irrelevant considerations have been taken into account, and
where an authority hands over its discretion to another body it acts ultra vires.

Conclusion
It can be concluded that those who are willing to commit fraud do not
discriminate between the size of organisation or its geographical location or the
industry. Frauds can result in huge financial loss, legal costs, and ruined
reputations that can ultimately lead to the downfall of an organization. As has
been proved in a number of studies in the past that the most cost effective way
of avoiding fraud is its prevention.
Thus having proper plans as discussed above in place can significantly reduce
fraudulent activities from occurring or cut losses if a fraud has already occurred.
Thus the organisation should invest it’s time & resources in implementing the
above Tools & Techniques to avoid becoming a victim of any kind of Fraud.

CA Abhineet Mishra
Membership Number 430048
FAFD Online Batch 8