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Tuesday
Feb132018

John Bray: Agents use sunk-cost psychology to encourage bribery

Almost all major international bribery cases involve third parties, typically commercial agents who pass on part of their commissions to government officials as bribes. As demonstrated by Richard Bistrong’s recent post, the relationship between these agents and their international clients is often psychologically complex. Richard was blackmailed by people he thought were his friends.

Last year’s Lifese Engineering case in Australia is another example where agents used a combination of seduction and pressure tactics to win over their clients.

The case stands out for several reasons. The bribe ran to $1 million, but there is no evidence that the money ever reached the Iraqi officials for whom it was presumably intended, and Lifese never won a single contract. Nevertheless, Justice Christine Adamson in the New South Wales Supreme Court sentenced three of the protagonists to four-year prison sentences (see the judgment here). These were two Lebanese-Australian businessmen, Mamdouh and Ibrahim Elomar, and John Jousif, an Iraqi national resident in Australia who had served as a business intermediary. The custodial prison sentences were a first for Australian anti-foreign bribery enforcement.

Until around 2013, the Elomars represented an Australian immigrant success story having built up a multi-million dollar engineering and construction business from almost nothing. Then they hit hard times. One factor was a general downturn in the construction business. However, there was a second, more personal problem. Mamdouh’s son Mohammed joined the Islamic State (IS) in Syria and appeared on widely publicized IS propaganda videos before being killed in an air strike. There was never any evidence that either father or uncle shared Mohammed’s radical views.

Nevertheless, the publicity surrounding the story damaged Lifese’s business. According to documents submitted to the court, the company’s turnover declined from AUD 24.2 million ($18.8 million) in 2013 to AUD 4.9 million ($3.8 million) in 2014, and its workforce was reduced from 200 to 20. The desire to rebuild their fortunes is what led the Elomars to Iraq.

Jousif had his own backstory: he was from Iraq’s Christian minority and had defected from the Iraq army in the closing stages of the first Gulf war (1990-91) before reaching Australia as a refugee. Now he had re-established contact with his country of birth, and it was he who took the initiative to approach the Elomars, offering to help them win business in Iraq. He offered to introduce them to Wael Al Zubaidi, a second middleman based in Baghdad, who had extensive government connections.

The relationship went through several stages. The Elomars in April 2013 appointed Jousif as their “Resident Office Manager in Iraq,” even though he was based in Australia, and transferred 45,000 dollars into his son’s bank account for onward transmission to Iraq. Over the following months they began the expensive process of applying for registration and setting up an office in Iraq. Jousif in August 2014 took Ibrahim Elomar to Iraq to meet Al Zubaidi. He in turn made an introduction to the Al Rasheed Company, which was an adjunct company of the Ministry of Industry and Minerals.

Ibrahim on August 11, 2014 signed a partnership agreement with Al Rasheed, confident that this would lead to a series of lucrative business offers. According to the court judgment, it was only at this point that Jousif and Al Zubaidi made clear that the Elomars would need to pay a bribe to secure the contracts that they were seeking. These included a waste management project, potentially worth $450 million.

At first the two brothers demurred. They had already incurred heavy expenses, and did not want to spend any more until they were sure of a return. Jousif tried to calm them, insisting that “This is a guaranteed job. All your rights are guaranteed.”  The Elomars allowed themselves to be persuaded.

The Elomars then had to work out how to transmit the bribe given that Australia had placed sanctions on the transfer of funds to Iraq. This led to a series of delays. Al Zubaidi put pressure on them, telling them that their company risked being blacklisted in Iraq, and that he himself would lose a million dollars. He added that there might soon be a new minister “and he might ask for double these amounts.”

In early September 2014, Mamdouh Elomar handed Jousif more than a million dollars in cash. Jousif then carried the cash to a backstreet money transfer company. He sent the money in his own name, explaining that it was “to help the Christian people of North Iraq.” The money went through. Jousif on September 9, 2014 congratulated Ibrahim Elomar, announcing that the contract was complete.

Over the following weeks, Lifese prepared pricing proposals for a chlorine factory, a waste management factory and a pre-cast concrete plant. However, nothing was ever finalized. At one point it was suggested that the government’s budget process had led to delays. Al Zubaidi in November 2014 suggested that their main government contact needed further “nutrition,” a euphemism for a bribe.

All this time, the Australian Federal Police had been monitoring the mobile phones of Jousif and the Elomars. All three men were arrested on February 15, 2015.

In her summary, Justice Adamson commented on the process by which the Jousif and Al Zubaidi had persuaded the Elomars to pay the bribe. They had already invested “psychologically and financially” in Iraq before the demand came. Arguably, they were susceptible to the sunk costs fallacy – “the more you invest in something the harder it becomes to abandon it.”

However, she did not think this was a mitigating factor. The Elomars were seasoned businessmen who “calculated the risk and decided to send the money.” She added, “It was their greed which motivated them to do so.”

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John Bray, pictured above, is a Director at Control Risks’ Singapore office.