The Foreign Service Journal, November 2004

honest error. International agencies want stability, respectability and good public relations, so it’s much better if something can be smoothed over rather than having dirty laundry aired in public. Fraud reflects badly on their judgment. Why did they select such a compa- ny? How did this happen? Are there no safeguards? Are their procedures flawed? Isn’t their staff professional and trained to catch these problems? Didn’t they investigate the company beforehand? Obviously the corrupt manager and fraudulent suppliers want the matter cleared up promptly as well, so it’s in everybody’s interest to get on with it and continue with the same company. (Naturally, a few heads at the company’s lower eche- lons may roll, but such is the price of doing business.) After all, what is the agency going to do, sue? Prolong the agony by bringing criminal charges? Three-Card Monte There is a street game called three- card monte. A hustler has a card- board box upon which he places three face-up playing cards. The “mark” (you) picks a card such as an eight or a jack and watches as the hustler puts the three cards face down and moves them around rapidly. Now he asks you to identify the card you chose; sure enough, when he turns your cho- sen card up, it is yours. You do this successfully a few times and then he asks you whether you’d like to bet some money? Of course, you would. You bet and you win — at first. But as the size of your bet increases, sudden- ly you begin to lose — unbeknownst to you, the hustler has palmed your selected card and replaced it with another. You never had a chance because his hand was quicker than your eye. If you’re stubborn enough, you may lose many times the amount you were (briefly) ahead before you give up. But the dealer is careful to keep the stakes low and not get greedy; after all, he doesn't want a disgrun- tled loser getting louder and louder, attracting a cop’s attention. Instead, he wants a large number of small losers so that at the end of a few hours he can pocket his earnings and go home. A multi-divisional transnational corporation, which can transfer income among divisions across inter- national lines and into different cur- rencies, always has the potential to play its own version of three-card monte. For example, if there is a buildup of profit in one division, it can be transferred to another subsidiary in another country as a temporary tax shelter. (Perhaps this is why corpora- tions in the United States contribute just 12 percent of total public tax rev- enues.) The $63 million petroleum overcharge in Iraq by Halliburton could well have been an honest, legit- imate mistake, but it certainly fits this pattern. And after all, the very struc- ture of a large, multi-billion-dollar company lends itself to many kinds of economic prestidigitation. Moreover, cash is fungible, affording the oppor- tunity to change poured concrete, structural steel, or a consulting service or gasoline into a beach house or a new car. There are other versions of the game, too. One rule of funding agen- cies is that the contractor must change dollars into the local currency at the official rate. The difference between the official rate and the black market rate (or the “parallel market” as the World Bank prefers to call it) can be considerable: up to 30 or even 40 per- cent. Knowing this, companies will sometimes use employees, consul- tants and even its executives traveling into the country where the work is being done to carry cash in dollars (under $10,000 to meet the legal reg- ulation) for currency exchange. If the carrier is an executive, part or even most of his time is being paid for by the project. He can also use a portion of this time not only to visit the ongoing project but to scout other project possibilities as well. These potential opportunities may be local or in other neighboring countries, but they afford additional chances to rob Peter to pay Paul. Fighting Back The two employees of the Halliburton subsidiary who stole a couple of million dollars from a USAID project in Iraq were, we are assured by the company spokesper- son, promptly fired. But there has been no mention of criminal proceed- ings against them. If your biggest downside is to be fired and the upside is making a million bucks, lots of peo- ple will choose to take a chance. Clearly, the legal penalties for fraud need to be strengthened and rigor- ously enforced. The international aid agencies must demonstrate that despite the possibility of negative publicity, they are committed to putting white-collar criminals in jail. Forensic accountants who have specialized in fraudulent accounting 58 F O R E I G N S E R V I C E J O U R N A L / N O V E M B E R 2 0 0 4 International agencies want stability, respectability and good public relations, so it’s much better if something can be smoothed over rather than having dirty laundry aired in public.