Construction Fraud in the Netherlands Case Study

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Total Length: 8194 words ( 27 double-spaced pages)

Total Sources: 30

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Framework Analysis & Review

As is also noted in the methodology of this report, the overall basis and goal of this report is to assess the widespread and national-level Dutch construction fraud scandal that erupted and came into full bloom in 2001. As will become clear throughout this framework and paradigm analysis, the presence of fraud within the Dutch construction industry and environment is without question and this was especially true in 2001 and the immediately preceding years running up to the same. Even if the amount of fraud, graft and collusion has tapered off and been regulated out of the system since then, it is still a very real issue and one that authorities and industry executives must remain vigilant about. Indeed, the amount of results found in a swath of academic databases with the search string “Dutch construction fraud” numbers nearly ten thousand and that is just academic and peer-reviewed journals. As one might expect, a great majority of the applicable studies and articles pertain to the 2001 scandal as well as the related and preceding ones in the 1990’s that were dealt with rather unsuccessfully, thus necessitating a firmer and more complete response after the 2001 iteration.

One substantial study about the Dutch construction paradigm and the problems it has was published in 2005. At that time, the fraud in the construction industry was perceived as being pervasive and obvious due to what came to light just a few years prior. Due to these revelations, there was predictably an inquiry and investigation completed by the Dutch Parliament as it related to the scandal. It was apparently caused by the rampant and obvious amount of collusion and corruption that was going on at the time. It created a huge concern about the blend of state and corporate crime. Thus, there was a perceived need to investigate the matter and thus find ways to reduce the problem as an issue. The Royal Commission was put into motion in 2002. An ensuing document was published which was known as Irregularities in the Dutch Construction Industry. The hearings that surrounded all of the above were done in public view and they generated a lot of activity and reactions from the public. The major finding of the report reflected that there was a “long-lasting structural interrelation between these three types with a special role for the twining between collusion and corruption” (Van Den Heuvel, 2006).

More to the point, the collusion was so substantial and entrenched that it had actually become a stable network unto its own. The implications for this would mean that individualized or customized efforts via legislation to deal with the problem would quite likely not be successful. Thus, it is obvious and apparent to many experts that more extensive and wide-ranging systems are needed to truly needed to stem the collusion and corruption that existed up until that point. Specific methods and tactics that were clearly in use included double-entry bookkeeping, slush funds, forced-up prices, fraud, bribery, cartelization, illegal consultation in advance and violation of the law and so forth. Upon completion of the proper due diligence and investigation, it came out in the news media that the Public Prosecutor’s Office had reached agreements with three large construction firms so as to avoid prosecution for fraud in connection with clear cases of graft and other illegal behavior. As part of that deal, each of the firms had to pay a fine of one million Euros. Beyond that, they were required to pay back a client by the name of Dutch Rail in the amount of five million Euros each. In addition, Dutch Rail had to pay back about 25 million Euros to the Dutch Ministry of Transport, the Public Works Department and the Water Management department. These latter payouts were due to the reception of subsidies that should not have been given along. Even with the finding out of the problems and the repaying of the funds, there was obviously a “disconcerting picture” painted for those involved. During the public hearings mentioned before, there were more than five dozen witnesses. The final report, as alluded to before, came out in December 2002 (Van Den Heuvel, 2006).

One of the projects that was involved when it came to all of the fraud was the Schiphol Tunnel. The three construction companies that were just mentioned as being fraudsters forged a total of 189 invoices for the purpose of helping secure favorable business results for everyone involved.

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The three firms were KSS, Strukton and HBW. The scheme was about taking an actual profit of roughly 42 million Euros and artificially bringing it down to $13 million Euros, not even three fourths as much as the original total. There were suspicions before all of the fraud came to light. In fact, at least one of the subsidies was almost not issued due to suspicions about the soundness of the agreement and its structure. What was already obvious and apparent was just what was on the surface as there were many other layers and facets to the fraud including shadow accounts and the creation of cartels. Conflicts of interest and other ethical flaws came to light over the course of the investigation. Due to the aforementioned public/private blend of the business involved, there was obvious a staggering amount of incompetence or illegal/unethical behavior in both the public and private sectors. Indeed, there were cases of collusion found between the companies themselves and there were also the same sorts of things found between the companies and some of the public authorities that were involved. The situation was so complex and nebulous that there were even emergences of things like self-justifications, neutralizations, damage and defining who the victims really were. The only clear and obvious victim would be the taxpaying public that was not in any involved in the project. Anyone else would be at least partially responsible for encouraging or allowing the fraud to occur (Van Den Heuvel, 2006).

Doree (2004) offers a similar perspective and that author’s line of reasoning and analysis came out at roughly the same time as Van Den Heuvel. The Schiphol tunnel was just of many projects and patterns that were discovered during the 2001 scandal. Similar to Van Den Heuvel, Doree notes that corruption and graft is to the extent that the reputation of everyone involved is damaged both with the clients of the construction firms as well as the general public. A series of parliamentary inquiries from the government of the Netherlands found what was mentioned in the last source as well as many others. These include massive violation of antitrust rules, the use of cartels and the rigging of bids on a structural and widespread level. Just as the corruption was structural in level, the same would be true of any solutions. For example, there are new methods that are suggested by the inquiry committee that relate to procurement. These are structured in a way so as to restore proper market function. The increased competition that will be garnered from these revised methods will steer the process towards traditional procurement strategies and approaches and thus reduce the illegality that is described above (Doree, 2004).

An issue that arose during the 2001 scandal was cost overruns. These cost overruns can happen even when there is good faith and legal behavior. Regardless, they still happen and the actual genesis of these overruns, regardless of what they are, need to be figured out so that they can be prevented in the future. At the very least, it can serve as a recitation of what happened in case there are people concerned about the extra costs. The thing about cost overruns in the Dutch construction industry is that they are actually about as common as cost underruns. Regardless of whether there are cost overruns or cost underruns, the same overall method should be used to capture what the costs really are so that there is consistency in all measured values. Apparently, this is an item of concern within the Dutch construction industry as not all firms use the same method and/or they do not use the same method every single time and in all situations. If and when there are situations where there is not consistency in reviews being done or being the same way, this can be an indication of manipulation and deceit. Such was obviously the case in the 2001 Dutch construction scandal (Cantarelli, Molin, Van Wee & Flybjerg, 2012).

The roots and genesis of the 2001 fraud, with the above in mind, actually varied quite a bit. What is without question is that fraud is global and widespread in nature but the identification of the same is rather infant-like in nature by comparison and this was certainly the case in the Netherlands in 2001, it would seem. However, there are many people and sources that are trying to change all of this. A common suggestion that exists.....

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