Forensically analysing grand corruption in PNG

Making the invisible, visible

The problem with corruption in PNG, at its most grand levels, is that it is everywhere and nowhere. Its morbid symptoms are apparent for all to see, but the particular mechanisms through which the disease of corruption infects governments and markets, and disables the body of the nation, proves difficult to observe, owing to its secretive nature.

Yet in order to fight corruption effectively, we need to answer elementary questions relating to its core characteristics. For example, what type of corrupt transactions are most common and damaging in PNG, who are the participants, what motivates them, how do they make their illicit gains, what do they spend it on, and which institutional structures permit these illegal activities to take place?

Despite the difficulties associated with observing corruption, we can still pull together enough credible data from the civil and criminal courts, commissions of inquiries, national audits, public account committee hearings, Ombudsman Commission reports, and independent research, to formulate hypotheses on these different dimensions of the corruption problem, for testing and refinement.

Sham fronts, illicit ends

And, in this respect, there is one general thread that runs through a vast range of corrupt schemes observable in PNG, whether it be rigged tenders, land fraud or sham litigation – they employ, on the surface, a range of legitimate commercial/legal transactions, to cloak what is in fact crude theft from the public purse.

Often a real service is provided, for example a road is built, or expert advice is provided to a government department. However, the primary commercial motivation of the corrupt parties involved in these transactions is not to profit from providing the contracted good or service, at say a 10% rate of profit. The real motivation is to use the contract as a front, behind which a deal is rigged, that allow costs to be inflated well beyond market value, leading to substantial returns.

In this context the 10% rate of profit is small potatoes, when rigging the deal can allow parties to set a price 4 or 5 times higher than the market rate when providing goods and services, or at a much reduced rate when the contract involves the acquisition of a state asset.

Indeed, contracts with government can be rigged by businesses in many ways, to achieve the same end.

For example, government agencies, such as the National Housing Corporation, the Lands Department or State owned corporations, can part with their assets at an illegally discounted rate. The private beneficiary of the contract gets a block of flats, or a major piece of land, for say 1/10^th of the market price, while kick backs are paid to government officials who approve and organise the transactions (10% of the asset value is often pointed to as the approximate commission paid to corrupt officials). The private beneficiary can then flip the asset on the market for a quick profit, which can be augmented further through improvements to the illegally acquired asset.

A similar logic could be observed during the Commission of Inquiry into the Department of Finance. Here legitimate and illegitimate claims for damages against state agencies, were grossly inflated by lawyers and private consultants, who then secured government settlements, with state officials receiving kick-backs from the litigants.

Here the cloak of a legitimate civil action, was used to do something illegitimate, namely inflate damages, to in effect steal from the public purse.

Arguably, goods and services contracts are the most overt example of this commercial logic. Rigged contracts are awarded to construction firms and consultants, who provide often substandard deliverables – or no deliverables in the case of ghost contracts – at rates far in excess of market price.

No area is off limits. Hospital construction, drugs for patients, handling deceased estates, building schools, these have all proven fair game for corrupt schemes – unlike the Mafia, no “gentleman’s” code of conduct exists, declaring certain social sectors off limits.

The consequence of this is we have economic actors ostensibly engaged in providing goods and services, ranging from construction of infrastructure, through to legal services, whose primary motivation is not offering a great product, at a competitive price. To the contrary, its about providing a substandard product (cheaply!) as a necessary condition for obtaining the main prize, a grossly inflated contract price.

Accordingly, we often find the epicentre for these rigged transactions are Supply and Tender Boards, where tenders and subsequent awards are deliberated on (in the case of state land, it is Land Boards). Boards can fix tenders, to ensure a certain party with inflated prices wins the contract, or they can allow the improper use of certificates of inexpediencies, which permits contracts to be awarded without tender, owing to an emergency situation. Although such situations are strictly circumscribed in the Financial Instructions, certificates of inexpediency are serially abused by government departments to rig large scale public contracts.

Most often, these rigged contracts are pushed from up high, by Ministers and senior officials. This has a debilitating effect on government business.

State officials and policy makers are not motivated by an ambition, for instance, to achieve development strategy outcomes or to oversee the sound administration of public policy – both are mere tools through which to gain kick-backs, or indeed partake in illicit deals through proxies (or even without proxies, so brazen is the execution of corruption in notable instances).

In other words, the provision of health services, or the construction of infrastructure, are not tools for achieving policy outcomes – they are the setting for netting kick-backs and rigging inflated contracts. Accordingly, these services are not based on need or quality, they are inspired by the private commercial and political interests of conspiring parties.

So looked at concretely in PNG, corruption inspires substandard markets activity and failed public policy. Meanwhile, the revenues earnt by the state through taxation – often through exploiting non-renewable resources – and receipts on state assets, are stolen through an edifice of legitimate commercial deals that conceal a rotten core.

Tracing the proceeds of crime

It is less clear what happens to these revenues once stolen.

Certainly some of it we know is spent by beneficiaries on houses, cars, travel, posh meals, jewellery, and the finer things in life.

There is also evidence to suggest some of it is used as seed capital for business ventures.

However, it would be overstating matters to suggest that stolen proceeds play a positive economic role, because they provide a source of capital for business people.

The fact remains, when market activity is serially rigged, seed capital is best spent in propagating further criminal enterprises – acting through legitimate commercial fronts – because the rates of profit is so much higher, than the returns promised through conventional business models.

Indeed, in many sectors, failing to participate in the cultures of corruption, would mean bankruptcy.

We also know from shards of evidence that kick-backs and illicit profits are also being funnelled into the political process.

Fire sales of state assets, kick backs for rigged tenders, and misappropriation of funds through nepotistic awards, create sizable slush-funds.

Indeed, often there is a wave of illicit activity in the year leading up to elections, which is a clear signal on what is to come – namely, bribing electoral officials, voters, and attracting independent MPs into the party structure, through direct and indirect fiscal “incentives”.

Its an expensive business (and likely getting more expensive each electoral cycle), but winning high office is not just about enjoying political power, it in effect means successful MPs become a fixer in the ‘game’ of rigged economics. This position can be exploited in multiple ways to grow political and business empires, making the investment in electoral success the ticket price for much greater fortunes.

The risks

It also ought to be noted the risk of being caught in PNG is negligible – successful prosecutions are the exception rather than the rule.

In some countries deeply impacted by grand corruption, we have seen corrupt parties use offshore banking services and corporate bodies, to cloak their illegal activity.

Its not clear if in PNG there is significant demand for this kind of service. That said, we certainly know senior politicians and business people actively use offshore financial, corporate, legal and accountancy services – however, we lack the data to confidently state whether offshore entities are a significant spoke in corrupt schemes.

There are good reasons why PNG politicians and business people may not be conducting their illegal activities through offshore entities on the same scale as other regions. Primarily, there is actually less risk of being prosecuted in PNG for money laundering or bribery, than there would be the case if these transactions were organised in foreign jurisdictions.

After all, PNG’s law enforcement agencies are entirely lacking in resources, specialist skills and leadership, and political control can be exerted over them, where needed.

Equally, why set up a British Virgin Islands company, when beneficial interests in corporate bodies registered with the IPA can be easily cloaked through proxies. Furthermore, there is no evidence to suggest that the Company Registrar is actively policing company regulations – although at the very least the IPA has recently demonstrated a welcomed commitment to enforcing annual reporting requirements contained in the Company Act.

In a similar vein, why become entangled in foreign banks, when banks operating in PNG are enmeshed in the national power structure and thus more easily influenced.

Because the banking sector is so heavily reliant on the PNG state for its survival, there is a culture of dependency which would appear to act as a strong disincentive for banks conducting thorough due diligence when handling the accounts of politically exposed entities – especially when those entities are connected to senior political power brokers with a network of powerful allies.

Certainly there is evidence on the public record indicating some banks in PNG handle transactions that have red flags all over them.

Concerns are also growing over the independence of the judiciary. But this is often more at the level of whispers. There is not a surplus of hard evidence yet on the record to make confident assessments in this respect.

However, there is much more solid evidence on the record demonstrating that members of the nation’s legal and accountancy fraternity, are acting as key spokes in corrupt schemes. They help fix the deals, cloak the criminality, and launder the funds.

Given this is a widespread problem in both professions, it is certainly a concern that their numbers populate the judiciary and senior government offices.

Owing then to the professional expertise at hand, the lax enforcement culture, and the politicisation of criminal justice, PNG appears a considerably safe jurisdiction to engage in high value criminal conduct. So its reasonable to conclude, why go offshore?

The primary reason may be to spread assets. And we certainly know that assets resulting from criminal activity, are being held in jurisdictions such as Australia and Singapore – with little reaction from either nation.

Breaking corrupt networks: The many headed hydra

Besides impunity, another problem facing the anti-corruption movement in PNG, is the way in which rigged transactions are organised.

Evidence suggests criminal networks organising corrupt transactions tend to be small and nimble. Senior politicians and business people surround themselves with a trusted cadre of professionals and proxies, who do their bidding.

Often these cadres have considerable power over the affairs of these senior figures – so the bonds binding them together are tight, built over many years of collaboration, often further solidified through kinship ties, friendships and marriage.

Thus, it is exceedingly hard to break the code of secrecy within these closed, small networks, and even if you break one group, many others exist, operating largely independently from one another.

We have observed this type of structure in relation to terrorism, small cells operate independently, so if one is nabbed by authorities, the whole organisation is not destroyed.

In PNG this is not an intentional design – that is, all these small networks are not part of a much bigger conspiracy. Nevertheless, this illicit structure is a mainstay. So taking down one politician or business person, will not have a domino effect beyond their immediate cadre of helpers and perhaps one or two senior allies, because their affairs are rarely strongly interconnected with a much larger network of business/political figures.

Corruption misnomers

Another challenge facing the anti-corruption movement in PNG, is dispelling problematic assumptions.

For example, it is something of a misnomer to claim that Melanesian cultural norms are to blame for corruption. So the argument goes, Western style market and political transactions have become tainted by Melanesian kinship obligations.

While it is certainly true, kinship bonds can act as an important glue for closed corrupt networks, they are not the cause of corruption, they are simply a means through which revenue theft is better organised, drawing on the secrecy and loyalty kinship bonds afford.

Similarly, it is equally problematic to claim it is an ‘Asian’ disease. While it is certainly evident that Malaysian, Chinese and Filipino business people are actively rigging markets for considerable profit in PNG, there is a lot of evidence to suggest Australians have been equally prolific – although receiving much less share of the blame.

So it would be dangerous to suggest any foreign region is more prolific than others – but it can be safely said, foreign business people and professionals are high frequency actors in grand corruption as practiced in PNG.

Accordingly, steps must be taken to work with those  foreign states willing to place pressure on these transnational networks, through prosecutions and asset seizure.

Conclusions: Steps we can take to combat corruption

All of which may come as cold comfort for PNG citizens who have the unedifying task of working hard for their income, while being extorted through unfair market monopolies. And then as if to add injury to insult, citizens must endure limited, substandard government services and infrastructure, frequently the result of inflated contracts executed with no serious oversight.

However, be that as it may, unless we begin to map this system in intricate detail, formulating strategies to fight it will be educated guess work at best, rather than evidence based anti-corruption policy.

Of course it may be asked, whats the point in building an evidence based strategy, given the national government has not even followed through on an elementary promise to launch the proposed ICAC?

True.

But long journeys take place through small steps. Each forward step in our knowledge, analysis and practice, is one step closer to the goal of making some serious inroads on corruption, however long the journey will be.

In short there is no diamond bullet.

But we can take steps in the right direction, like:

• Consolidating data-sources on corruption, so we can build more accurate empirical models of the networks, processes and mechanisms used to commit grand corruption in PNG.
• Apply novel data-analysis tools to squeeze more juice out of this data, to improve the quality of our theory.
• Expose publicly those involved in corrupt transactions and the techniques they use.
• Support victims seeking justice or restitution.
• Patronise media organisations and social media outlets putting a credible spotlight on corruption.
• Consolidate public pressure around a set of primary objectives, such as the establishment of an ICAC, or to launch an open-data project on public procurement.
• Build better relationships between community groups, NGOs, media organisations and research institutions, involved in the fight against corruption.
• Support those civil servants and politicians demonstrating a genuine commitment to anti-corruption measures.
• Acting as a critical friend of anti-corruption agencies, ensuring they are conducting robust, efficient investigations, and are being supported by government through adequate budgets and infrastructure.
• Promote a culture of transparency and data-openness, ensuring all oversight organisations are making their reporting available to the public in a timely and accessible manner.
• Target known choke points in virulent corrupt schemes, such as Supply and Tender Boards, or prolific banking institutions and law firms.
• Remain vigilant, ensuring revelations and recommendations produced through commissions of inquiry, etc., are not forgotten.

Of course, this list could go for many pages. The point is, if we try to eat the entire meal of anti-corruption in one bite, its impossible. But we can begin to make progress, one bite at a time.

The greatest defence corrupt networks have, is a public who feels disempowered and demoralised – and sometimes just a few victories can suddenly electrify a nation.