Lax rules boost risk of organised crime snaring government contracts

Four Corners this week revealed more about how criminals may be able to access political favour via political donations in Australia, but that is only part of the picture.

New research suggests more work needs to be done to prevent criminals from subverting government procurement processes and funding their illegal activities by winning tenders to supply goods and services to the government.

How to make crime pay

There are many ways for a criminal to secure a tender. He may receive favourable treatment at the tendering process after a generous political party donation. She may bribe or intimidate a politician or procurement official. Procurement officials may award the contract to a business not knowing that it is controlled by criminals. Criminals may, of course, also gain such control of a supplier after the contract is awarded.

The risk of criminals controlling businesses is real. The Australian Crime Commission’s May 2015 Organised Crime in Australia report identified the abuse of legitimate business structures as one of the key enablers of organised crime in Australia.

Sole proprietorships, companies and trusts are, for example, used to hide who owns and controls a firm. Such business structures can also be abused to fund crime and and launder the proceeds of crime – or even facilitate terrorist financing. The US Special Inspector General for Afghanistan Reconstruction investigated US Army procurement practices in Afghanistan and found more than US$150 million in contracts had been awarded to companies with ties to terrorists.

In an effort to disrupt the money flows of criminals and terrorists, governments worldwide have adopted laws based on standards set by the Financial Action Task Force, an inter-governmental body that aims to combat money laundering and terrorist financing.

A key plank of the standards requires countries to compel banks to adopt “know your customer” due diligence practices to identify criminals and keep their transactions out of the banking system. Banks must take reasonable steps to identify and verify all customers and controllers (called beneficial owners) of customers. To guard against laundering risks linked to corruption, they must also identify customers who hold senior public offices (so-called Politically Exposed Persons), their family members and close business associates. Identity particulars must be verified using reliable, independent source data or documents.

But do governments apply the same due diligence measures when they do business?

More to be done

We conducted a study, recently published in the Sydney Law Review, into whether Australian governments take similar care to “know their suppliers”. The procurement spend of Australian governments exceeds A$110 billion per year and presents a rich target for criminals.

We focused on the type of identification and verification measures that a range of Australian government departments and agencies undertake in relation to prospective contractors.

In general, we found that standard procurement practices fall well below the standard of the “know your customer” checks required of banks.

General government procurement practices, for example, do not consistently identify the directors and the controllers of corporate suppliers. It is not routine for procurement officials to check consistently if tender candidates have a criminal history or whether they are controlled by public servants or serving politicians.

Suppliers are not generally checked against blacklists maintained by other governments or the World Bank or even against Australia’s own foreign sanctions list.

Where information is collected, it is generally not independently verified. In essence, the government accepts the word of the supplier.

Reducing risk

Such practices expose Australian public procurement to criminal risk. Australia has been rocked by enough procurement scandals to show that there is little justification for complacency.

Victorians recently witnessed the very public picking apart of the Department of Education and Training, as stories of Nino Napoli diverting public funds through dodgy contracts hit the headlines.

And earlier this year, charges were laid against nine people following an investigation into alleged serious corruption in the transport sector. That case focused on the procurement of infrastructure works at Public Transport Victoria and the former Department of Transport.

In NSW, ICAC’s inquiries into former ALP minister Eddie Obeid turned up various cases where he is alleged to have attempted to influence decisions of public officials favouring certain companies, without disclosing his or his family’s interests in those companies.

Headlines such as these saw Australia falling out of the top ten countries in Transparency International’s annual global Corruption Perceptions Index.

The failure to properly vet suppliers not only increases the vulnerability of procurement processes to corruption and abuse, but also undermines the effectiveness of Australia’s anti-money laundering and counter-terrorism financing laws. It enables criminals to use tax dollars to fund criminal activities and provides them with an appearance of public respectability that may facilitate their access to formal financial and professional services.

This problem can be fixed. As a starting point, government procurement processes at all levels should be amended to include standardised, risk-based supplier integrity checks.

Trained procurement officials should be given access to the data that bank compliance officers use to perform their integrity checks on customers. Harnessing the power of Big Data will be crucial in the long run.

Governments say they have declared financial war on crime, corruption and terrorism but this battle cannot be fought by the private sector alone.

Governments need to do better, and join the private sector in the economic battle. The current gaps pose a risk to Australian national security that should not be ignored.

Louis de Koker received funding in the past from international institutions such as the World Bank and from Australian bodies for research on national money laundering and terrorist financing risk assessment and for the design and auditing of of appropriate due diligence measures.

Kayne Harwood does not work for, consult to, own shares in or receive funding from any company or organisation that would benefit from this article, and has no relevant affiliations.