Bribery: An inventive yet pernicious avenue of corruption

We frequently find that history can provide examples and solutions to contemporary problems. This is particularly true when dealing with fraud, bribery and corruption. As documented by thousands of case studies, these activities are as old as civilisation. Even as technology advances, one can detect familiar patterns in how these activities are carried out and the types of actors involved. Recently, I read an account of Portugal’s involvement in WWII and thought it fun to relate a particularly innovative form of bribery that was employed.

One of the greatest films ever made, Casablanca, starring Humphrey Bogart, Ingrid Bergman and Paul Henreid, portrays the story of wartime intrigue between belligerents and neutrals in the exotic Moroccan city. At the conclusion of the film, Rick Blaine watches Victor Laszlo and Ilsa Lund board a plane to Lisbon. Since its release in 1942, the film has become one of the most quotable with its plethora of memorable dialogue.

????????????? What is not widely known about Casablanca is that the story was partly based on real-life events in neutral Portugal during WWII. While the battlefield never arrived, for this small, impoverished country on the western fringe of the Iberian Peninsula, the threat was existential, with the people and the regime under constant pressure from the warring sides. Portugal pursued knife-edge neutrality despite diplomatic overtures from London and Berlin – some friendly and others more menacing. Further tension was borne on the ground with Allied and Axis agents seeking to influence Portuguese government policy in their favour.

????????????? There were several reasons why Portugal drew so much attention from the Allied and Axis powers. A primary – geopolitical - reason was the strategically important islands that formed the Azores archipelago roughly 1,400 kilometres west of Lisbon. Occupation of these islands would provide each side with a forward base for submarines, naval ships, warplanes and ground units to invade each other’s side of the Atlantic.

????????????? Second, its capital, Lisbon, was one of the last remaining Atlantic ports enabling refugees to flee persecution as the German war machine stationed itself at the French Pyrenees along the border with Spain. The port allowed those who could afford exit visas to sail or fly to the Americas.

A third reason was the competition for Portuguese tungsten, a rare earth mineral used to develop military weapons. The government openly sold its stocks to warring parties and profited hugely from the trade.

????????????? For the last two reasons, one had to deal with the Portuguese civil service to secure the required permits to leave Lisbon or export tungsten. Casablanca depicted the wheels of bureaucracy turning slowly, but one could grease the skids by offering an inducement, financial or otherwise, to an official. Doing so promulgated the completion of the necessary paperwork. The same method was equally successful in the Byzantine government corridors of Lisbon.

????????????? Of course, the inducement is commonly and correctly recognised as a bribe. Black’s Law Dictionary defines the act of bribery 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”[1]. When an individual or organisation offers a bribe to a government official, they exchange something of value for a bureaucratic favour of equal value. Since bribery confers a governmental benefit not ordinarily available in a fair market, it is widely illegal and certainly unethical. When bribery is widespread across the government, the public loses trust, and institutions weaken.

????????????? In many developing countries, government departments are unsophisticated, understaffed and inefficient. Underdeveloped tax structures often result in poorly remunerated civil servants who are susceptible to financial inducements and provide the requested services more enthusiastically. These conditions were present in wartime Portugal and exacerbated by a limited economic base under pressure from the swell of refugees. The requests for papers and permits were unrelenting and overwhelmed the limited staff available to issue them.

????????????? The wealthier of the new arrivals and the most persistent foreign agents in Lisbon resorted to bribery to get what they wanted when they wanted it, leaving many without the means or the influence forlornly waiting. For those seeking to flee Europe with its religious and ethnic persecution, Portugal’s system of prioritising applications based on the frequency and size of the bribe caused terrible hardship. Not only were the desperate migrants suffering, but the country endured periodic food shortages[2] as poorly paid Portuguese workers abandoned the farm for the mine as the price and demand for tungsten ballooned as the war progressed.

????????????? While bribery in Portugal was illegal and frowned upon, it was familiar. As in Casablanca, the easiest way to bribe a government official was to directly pay physical cash, often using a brown envelope or other laughably simplistic concealment[3]. This soon attracted the attention of the efficiently run secret police. However, the bribe took on more innovative and elaborate forms if access to more senior officials was required. One such innovation was designed to disguise the inducement as a legitimate transaction between disinterested parties.

????????????? A British Special Operations Executive (SOE) officer left an account of how the Germans did business with Portuguese officials and avoided the secret police. Dr Neill Lochery explains it like this:

“…a notionally important Portuguese official who was viewed by the Germans as being sympathetic to the British and needed to be turned, at least temporarily, to become more pro-German. The process runs as follows: A plan is put into action where a locally based German resident arrives in the official’s office and says that unfortunately he has been recalled to Berlin at rather short notice. He owns a large Mercedes, which is in excellent condition with four good [tyres] (an important feature during the war), and he has to find a buyer within the couple of days he has left in Lisbon. He is asking only a very reasonable price and the purchaser can pay him in instalments over the coming year.[4]”

????????????? The official was asked if he knew anyone interested in buying the vehicle. Recognising he was being offered a good deal but ignorant of the intent that the offer represented, he accepted, and a deal was struck to buy the car.

????????????? Sometime later, a different German arrives at the bureaucrat’s Lisbon office after recently arriving from Germany. He asked the official if he knew of a good-condition Mercedes with four new tyres and was willing to pay a high price for the vehicle in cash[5]. The official offered his recently purchased car from the former German visitor. A new deal struck, and the official pocketed the difference between the purchase and sale price.

The three parties to the two transactions had not engaged in bribery by the day’s standard because there were transparent ownership changes. However, the two Germans have established a debt over the Portuguese official. The car trick was one of many sophisticated German espionage tricks employed in Lisbon to get cash to local officials in return for favours and information[6].

Similar methods have been employed since WWII in a wide variety of settings. For instance, collusive parties have used the stock and property markets to artificially inflate asset prices and make extra-market profits. Dummy bidding, for example, at house auctions, was a particular scourge in the Australian property market. Real estate agents encouraged ‘plants’, people explicitly employed for the task, and, in some cases, vendors to place bids on the auctioned house. The real estate agent received a higher commission from the sale. The plant received a payoff for services rendered. The vendor received a higher price for sale than otherwise might have been the case. All three parties created an immoral but profitable debt with and to the other. The buyer gets the desired house at the ‘market’ price, ignorant of this invisible wealth transfer that took during the auction.

Indeed, a dummy bidder was present at an auction I attended in the late 90s. Someone who had not previously bid nodded to the auctioneer and nudged the price over a psychologically significant barrier as the auction slowed. Still, I withheld a counteroffer and the property ‘sold’ to the ‘plant’. Several days later, the real estate agent contacted me to say the sale “fell through” and was I willing to honour my second-highest bid before the dummy bid? No mention was made about the legally binding nature of any offer for real property in Australia, genuine or otherwise. Ultimately, I negotiated a slightly lower sale price than my last offer and closed the deal. Thankfully, this pernicious and unethical practice is now illegal in Australia.

The NSW Independent Commission Against Corruption’s (ICAC’s) Operation Jarek in 2012 uncovered a similar take on the Mercedes car trick. The investigation found:

“…that staff from a number of local councils and other authorities engaged in corrupt conduct by accepting gift vouchers and other gifts from suppliers as an inducement to continue placing orders with their companies or as a reward for placing orders with the companies. The ICAC also investigated allegations that staff from two local councils engaged in corrupt conduct in relation to false invoices to those two councils[7].”

The more times change, the more they stay the same! So, how do risk professionals prevent and detect transactions in Mercedes cars? The number one solution is Know Your Client (KYC) in which organisations conduct due diligence on their clients, identify individuals, ultimate beneficial owners, assets, locations of business and transaction patterns, etc.. Governance, Risk & Compliance (GRC) platforms and products are designed to collate KYC information and verify client transactions. It does this using various methods, such as verifying business registrations, bank account owners, registered addresses, and so on. Transaction matching uses sophisticated algorithms to search for unusual trends in financial payments for possible manual investigation. However, no system is foolproof, and transaction matching is a powerful tool in the fight against systemic corruption.

Just as the German agents in Lisbon celebrated their ingenuity in bribing officials in ways that evaded the law and the attention of the authorities, today’s peddlers of corruption think of themselves as equally exceptional. This misplaced superiority is borne from the need for pervasive secrecy and constant manoeuvring to gain an advantage; colleagues have no idea they are engaging in corrupt activity[8]. Awareness of the pervasive and innovative ways in which unscrupulous individuals engage in fraud, such as the Mercedes car trick, can assist risk professionals in protecting their organisations.

[1] ?Garner, B.A.. 2019. ‘What is bribery?’ Black's Law Dictionary. Toronto. Thomson Reuters. (Accessed 5 October 2021).

[2] Lochery, N. 2011. Lisbon: War in the Shadows of the City of Light, 1939-1945. New York. Public Affairs Group. 116.

[3] Ibid. 145.

[4] Ibid, 144.

[5] Ibid, 145.

[6] Ibid, 145.

[7] ICAC. 2012. Public authorities – Corruption allegations that staff from a number of local councils and other authorities accepted secret benefits from suppliers and that staff from two local councils facilitated payment of false invoices from suppliers (Operation Jarek). https://tinyurl.com/24mn5nf7 (Accessed 8 October 2021).

[8] Samenow, S. E. 2019. The Criminal's Sense of Uniqueness: The cornerstone of his self-image. https://tinyurl.com/4z96evv7 (Accessed 8 October 2021).