2001 Dutch Construction Fraud: Fraud Triangle Analysis

When it comes to any crime or series of crimes, there are three main components that are typically present. Those three parts are the opportunity, the financial pressure involved, and the rationalization. Similarly, any fraud involves an act, its concealment, and a conversion. This paper examines the 2001 Dutch construction fraud scandal through both the fraud triangle and the fraud activity triangle, before evaluating the anti-fraud efforts — detection, prevention, and deterrence — that ultimately brought the misconduct to light.

Opportunity

In the case of the 2001 Dutch construction fraud episode, the opportunity was created by the fact that regulation and control of the Dutch construction market were not sufficiently rigorous to stop the fraud from starting or perpetuating. The opportunity for crime in the Dutch construction industry from 1992 to 2001 was substantial, owing to a lack of clarity in the law and even weaker enforcement of the same (Vulperhorst, 2005).

Financial Pressure

The financial pressure involved in the scandal was the drive to create and extend profits beyond what was normally permitted under Dutch construction market conditions and government limitations. One intriguing facet of the 2001 construction scandal is that even those directly involved lamented what was going on. They noted how easy it was to engage in the behavior, but they also acknowledged it as a negative, feeling that it was "crippling the renewal of entrepreneurship in the building trade." In other words, the actors were not necessarily fond of what they were doing. At the same time, they apparently felt sufficient financial pressure — and saw sufficient opportunity — to pursue the fraud regardless. The prospect of money to be made was apparently enough to get them to act (Vulperhorst, 2005).

Rationalization

The rationalizations involved in a scandal like the 2001 Dutch case would obviously vary. However, in each instance, the rationalization sought to justify why the cheating or unethical behavior was acceptable. A few examples include the belief that regulations are too strict, that profit margins are not high enough, that the work being done has more value than is being recognized, or that those involved deserve the extra money as compensation for their service. When it comes to public-sector employees involved in the fraud, there is the concept of warping and otherwise reinterpreting what is permissible under the law. Moreover, the consent and involvement of government officials was often necessary for the fraud to function at all, as the scandal could not have been sustained without their cooperation (Vulperhorst, 2005).

A specific example of rationalization that can be directly attributed to the 2001 Dutch construction fraud scandal can be seen in the way construction directors reflected on their clandestine deal-making. They acknowledged that the system of collusion should be stopped, yet noted that "scarcely a single contractor argued that doing business illegally was totally inappropriate in itself." As for how these leaders could justify known and continued violations of the law, they pointed to the lack of clarity in Dutch legislation as it stood around 1992. Beyond that lack of clarity, enforcement of those rules was essentially absent. The construction leaders involved thus had little incentive to comply: there was money to be made from the behavior, and seemingly no negative consequences for engaging in it (Vulperhorst, 2005).

When it comes to any crime — whether a smaller offense or a large systemic one — there are three major components in the fraud activity triangle: the act itself, the concealment of the act, and the conversion.

The Act

The act alone is not enough to "get away" with the crime, but it is the genesis and onset of the malfeasance. Examples drawn directly from the 2001 Dutch construction scandal include bid-rigging, collusion, and improper coordination between parties. One of the acts that was part of the 2001 fraud revelations had supposedly been addressed in the early 1990s — but not firmly enough. At issue was the timing of when parties involved in a project were permitted to consult and work with one another. There is a defined period of consultation that is expected and allowed. Coordination outside of or prior to that period is not permitted. There was apparently knowledge of this pattern as far back as 1992, but the proper enforcement mechanisms were not put in place. By 2001, when some seventy million euros had been improperly handled or charged, it was clear that the same acts were still occurring (Vulperhorst, 2005).

Concealment

No matter how small or large the crime, it must be carried out in a way that is not obvious and can be concealed. When it comes to collusion and bid-rigging of the kind seen in the 2001 Dutch construction scandal, this can be easier said than done. Concealment typically involves using methods that reduce the risk of detection and getting others to "play along" and facilitate the fraud. The participation and cooperation of government officials — or the silence of those who knew better but said nothing — were both very present during the 2001 scandal. A more specific example is the clandestine pre-planning and pre-coordination that was occurring up to 2001, in addition to what was legally permitted. Even with partial knowledge of these practices from events in the 1990s, it took the full and swift action of the Dutch Parliament in 2001 and beyond to truly get to the root of what was happening. Despite having been partially revealed before 2001, the back-room deals and negotiations were still ongoing, with no end in sight (Vulperhorst, 2005).

Conversion

The conversion is the synthesis and filtering of any given act to make it appear genuine and legal. Money laundering is a classic example: the illegal origins of funds are concealed and "washed" to obscure the fraud. In the case of the 2001 Dutch construction fraud scandal, conversion refers to portraying the extra funds obtained from inflated bids, kickbacks, and unearned subsidies as legitimate. The full cycle, as it pertains to the 2001 scandal, consisted of the illegal or unethical acts themselves, the concealment of those acts, and then the conversion of the funds or activity to make the entire process appear proper and legal.

The illegal subsidies procured by three major construction firms that were later caught and fined provide a clear illustration of this cycle. A more specific example is the general padding of profits. It was found, as a result of the scandal coming to light, that customers typically suffered a "detriment" of about 8.8 percent — meaning they paid nearly nine percent more than they should have under normal market conditions and proper government oversight. The padding of bids, the collusion between parties, and the acquiescence or cooperation of government officials all contributed to costs rising higher than they should, thereby "converting" inflated amounts into what appeared to be normal costs of doing business.

Among the names that came to light as participating in or facilitating cost inflation were Benk Korthals and Annemarie Jorritsma, the former minister. It was noted that both aided and abetted the fraud to some degree. Jorritsma apparently had an unusually close relationship with construction executives and power-brokers, while Korthals was shown to have revealed "incorrect information" to the House during the investigation into the fraud and collusion (Vulperhorst, 2005).

When it comes to the 2001 construction fraud scandal in the Netherlands, anti-fraud measures can be understood through three components: detection, prevention, and deterrence. What is clear is that detection became far more necessary and central than prevention or deterrence had ever been. Even so, it is valuable to examine prevention and deterrence — and why they failed, or failed fully — as they pertain to this scandal.

The first step in stopping a fraud once it is in motion is to act decisively when it is detected. What is particularly troubling about the 2001 Dutch construction fraud scandal is the number of instances where someone knew something — or should have known — yet did nothing. This problem was most acute among the public officials involved with or aware of the scandal. The ambivalence and the "playing down" of the situation by people within the Dutch construction field was apparent and widespread. At one point, the news program Zembla had the story and was moving forward with it, yet there was little concern among the players involved because it seemed that nobody was taking the story seriously. Despite knowing that the media was at least attempting to generate outrage, those involved were apparently not greatly worried.

What makes that whole situation even more striking is that one of the primary drivers of the investigation behind the program and the revelations that followed was a contractor who worked for one of the large construction firms: Ad Bos, a former technical manager for Koop Tjuchem. Part of what he revealed through his whistleblowing was that "building contractors were breaking the law by fixing prices among themselves, giving each other calculation allowances, and bribing officials" (Vulperhorst, 2005).

One condition that emerged from the 2001 scandal was that allowing fraud to persist so long and so pervasively means it can take years — if not decades — to fully dissect and uncover everything that occurred. For example, one aspect of the scandal did not fully come to light until three full years later. According to a 2004 report by Expatica, the Public Prosecutions Office was still launching an inquiry into a firm based in Rijswijk, Boele and Van Eesteren, a subsidiary of Koninklijke Volker Wessels Stevin. Documents discovered at that point revealed additional crimes dating back to at least 1989, including a litany of wholly illegal price agreements. The projects and victims involved included universities, hospitals, and schools, with losses potentially reaching up to one million euros across approximately 250 projects. Major companies implicated included Bam, Ballast Nedam, IBC Bouw, TBI, and Dura Vermeer. One of the key tools of the fraud was a shadow account maintained by Koop Tjuchem. In response to these revelations, a number of firms — including Ballast Nedam, BAM Groep, Heijmans, and Volker Wessels — reached out to the NMa. The Lower House of Parliament demanded answers as this information continued to surface not just in the weeks and months following 2001, but for years afterward (Expatica, 2004).