Real estate and greed White‐collar crime in the real estate Lenny Vulperhorst Van Gennep • Amsterdam
© 2008 Lenny Vulperhorst / Van Gennep Publisher Nieuwezijds Voorburgwal 330 1012 RW Amsterdam Translated from Dutch. Online only version of Lenny Vulperhorst, Hebzucht in vastgoed, over crimineel gedrag van topbestuurders. www.aef.nl
‘For when desire has the upper hand, there is no place for moderation. No, in the realm of pleasure it is impossible to preserve one’s virtue.’ Cicero, The Art of Growing Old Contents Introduction 7 Part I Fraud in housing corporations 11 Notes 49 Part II Real estate fraud 55 Notes 89 Introduction Sad to say, rather much has gone wrong in the construction and property worlds in recent years. Cartel agreements among construction companies came to light in 2001, and there are fraud cases in the housing corporation sector every year. Property investment funds such as Palm Invest appear to mainly exist to serve their directors’ own interests. In the legal case against Willem Holleeder it turned out to be difficult to separate what is lawful or unlawful, what belongs to the world of legitimate business and what to the underworld. And to crown it all, it emerged in 2007 that the institutional property world was seriously infiltrated by fraudulent directors and former directors who systematically caused vast losses for their own companies, only to then fill their own pockets with illegal premiums. Even if construction sector fraud might be ‘understandable’, because those involved are working in organisations where people have little trust in one another, things became truly extraordinary when fraud also appears to be standard practice in high trust organisations; institutions where mutual trust, and the trust of the outside world in the organisation, are taken as read. How could it be that high trust organisations such as housing corporations, pension funds and the Bouwfonds property development, property finance and asset management company, which not much earlier had been a ‘public enterprise’, now turn out to be the financial footballs of fraudulent directors? 7 That question is the point of departure of this book. In the first section, I will examine the property fraud that came to light on 13 November 2007. The second part, which was originally intended as a separate publication, concerns fraud in housing corporations. Grat van den Heuvel provided a detailed commentary on an earlier version of the text, and encouraged me to dig another layer deeper. I discussed the analysis of the property fraud with Jos Verlaan on many occasions. As an investigative journalist, he principally encouraged me to come up with ‘news’. For this reason, I anonymously interviewed a number of key players in the property world. The central question was always: is it possible to do business in the property world without participating in fraud? The answer was revealing: ‘Yes, it’s possible, but it isn’t easy’. You have to watch your step very carefully indeed. ‘The most important thing’, according to one authoritative property developer, ‘is to steer your own course as a business. Our company has never concentrated on attaining positions of power through land ownership, but rather on concepts that provide added social value. We want to make a contribution to society. What’s striking is that such a stance also immediately makes us less attractive to entrepreneurs who want to do business illegally. We’ve also been approached by dishonest businessmen, of course we have, but it soon becomes clear that ‘we don’t see things the same way’, as one of the main suspects in the latest property fraud cases told us after we’d had two meetings. 8 It’s still possible to do honest business in the sector on your own initiative, but you need to keep your antennae switched on.’ 9 Part I 10
Fraud in housing corporations How can large‐scale fraud in housing corporations be prevented? That is the main question that a number of recent cases require us to answer. One of those cases showed how a small group of people was able to enrich itself over a prolonged period through a sophisticated fraud. A number of people in key positions entered into transactions that appeared normal to others within the housing corporation, but that ultimately turned out to be far from normal. Under the flag of social housing ideals, property was acquired upon which a private commission was paid by the seller, or an intermediary, to the parties concerned. Other cases showed that directors extorted money from clients: false invoices were sent out, quoting higher prices, with the supplier paying the director in kind or in cash. Invoices and project records were falsified, directors defrauded their own organisations, tax was evaded and directors accepted gifts or money. Merijn Rengers, a journalist with Dutch national daily newspaper De Volkskrant, poses the rhetorical question of whether ‘the corporation sector has become infested with trendy young property sharks who aren’t too particular about following the rules’1. Abuses in corporations? What is going wrong in such corporations? A failure of supervision? Is the administrative organisation unsound? Did the corporation just happen to have employed a few ‘bad 11
apples’? Are their colleagues dozing? Or do they have their own reasons to look the other way? In his book Controle is goed, vertrouwen nog beter (‘Control is good, trust is better’), Professor Kees Cools shows that fraudulent organisations adhere to rules of good governance just as closely as honest businesses. ‘Performance on governance criteria varies somewhat in certain aspects (…) but is on average identical for both groups. It appears (…) to be illusory to think that regulations requiring independent and expert supervision will reduce the chance of ‘accidents’, let alone prevent them.’2 But if the problem does not lie with the regulations, where does it lie? Corporations are organisations with a high level of mutual trust. It is assumed that everyone who works at a corporation has the interests of the tenants and of social housing in general at heart. Standing up for the weakest in the housing market is the shared value par excellence of virtually all who work at a corporation. As a social organisation, this is where a corporation derives its right to exist. Growth or profitability are goals of a lower order. That even applies to continuity, because the interests of the weakest players in the housing market might be better served by a merger. Everyone trusts everyone else inside a corporation. There is no place for suspicion: nobody thinks it possible that another ‘family member’ will dupe them. Irregularities in other corporations are the proverbial exceptions that prove the rule. Incidents are trivialised. It is usually only an individual, or a small group, that is enriching itself. 12
For example, early in 2006, Peter Boerenfijn, a director of the AEDES association of housing corporations, stated in response to a publication by a leading accountant that ‘in the last three years there have been three major cases and a handful of minor cases of fraud. Set against the total number of corporations, the sector is no more liable to fraud than any other’.3 Boerenfijn forgets to mention the number of cases of fraud that never become public because they are settled internally or within the sector. It is precisely because large amounts of money are involved in the world of the corporations, and because the value of their property can be assessed in various ways, that they have a heightened vulnerability to fraud. A minimum of four billion Euros is invested each year, and that figure is rising.4
Interpersonal trust The type of society we live in (a welfare state such as Denmark, Sweden, the Netherlands and Finland), according to the Swedish political scientist Bo Rothstein, is characterised by a high level of interpersonal trust (most people trust most other people) and the absence of significant corruption (and especially by the social consensus that this is the way things should be).5
With regard to the situation in the Netherlands, management expert Marc Bovens states that ‘there are no indications of the
systematic corruption of public employees and politicians that Dales warned of. Politicians are almost never implicated, with the exception of a few local councillors or mayors of small municipalities. And there are no indications whatsoever of large‐scale forms of corruption as we know them from Eastern Europe and South America. In almost all of the cases investigated, it concerned a lone operator who, out of loyalty to family and friends or macho 13
attitudes towards business contacts, or occasionally out of love or sympathy, overstepped the mark. In so far as there was any financial gain, it only involved large amounts in a small number of incidents.’6
Interpersonal trust has risen sharply in the Netherlands in the last 25 years, from around 45% to 70% in 2005.7 This makes the Netherlands a member of a small and select group of European countries. In most other countries in Europe, most people think you can’t be too careful in your dealings with others! At the same time, the Netherlands scores lower on the so‐
called ‘citizenship index’. The index measures the degree to which people condemn driving off after an accident, evading taxes, riding on public transport without paying and falsely claiming social benefit payments. These two scores seem to conflict with one another, but Henriëtte Prast and her co‐
authors wonder whether the Dutch are perhaps more trusting of one another ‘because they don’t find it so terrible of themselves or of each other if they bend certain rules’. In other words, we are highly trusting of one another in the Netherlands, but our trust is based on the assumption that none of us is wholly free of sin. A widespread example is illegal ‘cash in hand’ working. Everyone is against it, but at the same time it is socially accepted that the cleaner, the painter and decorator and other household service workers will be ‘working black’, as the saying goes.
This interpersonal trust is important because it means that society functions better: people are prepared to contribute to the common good. According to Arthur Docters van Leeuwen, former chairman of the Netherlands Financial Markets Authority, this organisation ‘needs to concern itself with promoting standards, with tight supervision forming an element of this. That’s also what people expect of us. Suppose you don’t know for sure that the people who break the rules 14
will be caught. What happens then? You lose your trust. Or you stop keeping to the rules yourself.’8 He has restated this elsewhere, but from a different perspective: ‘Where intermediaries are concerned, we also receive requests to crack down hard on the miscreants, so hard that they’ll never do it again, or even disappear from the market altogether. People have clearly become more alert to unethical behaviour.’9
Trust The sociologist Diego Gambetta edited an anthology on trust in the 1980’s. In the final chapter, he summarises the book’s findings, and in doing so he relies heavily on German social theorist Niklas Luhmann’s social systems approach. Luhmann makes a distinction between confidence (the expectation that something will go well) and trust (the belief that it is worth the risk to assume that others will voluntarily keep to their part of an agreement). ‘Trust presupposes a situation of risk. You can avoid taking the risk, but only if you are willing to waive the associated advantages’.10 As a systems theorist, Luhmann sees trust and suspicion not as opposites, but as functional equivalents. In both cases risks have to be weighed up, uncertainties are eliminated and action must be taken. Gambetta believes that ‘Trust (or, symmetrically, distrust) is a particular level of the subjective probability with which an agent assesses that another agent or group of agents will perform a particular action, both before he can monitor such action (or independently of his capacity ever to be able to monitor it) and in a context in which it affects his own action. When we say we trust someone or that someone is trustworthy, we implicitly mean that the probability that he will perform an action that is beneficial or at least not detrimental to us is high enough for us to consider engaging in some sort of cooperation with him. (…) In conclusion, trusting a person means believing that when offered the chance, he or she is not likely to behave in a way that 15
is damaging to us, and trust will typically be relevant when at least one party is free to disappoint the other, free enough to avoid a risky relationship, and constrained enough to consider that relationship an attractive option. (…) Trust is a peculiar belief predicated not on evidence but on the lack of the contrary evidence’.11
Trust in people and institutions ‘is concerned with the trustworthiness and the honesty of the other party. Interpersonal trust is connected with an expectation of the behaviour of others. When people trust one other, they behave as if they know the future.’12 Trust is more than simply honouring your agreements, contractual or otherwise. Influenced by sociologist Jon Elster, Prast says ‘ʹTrust goes much further. It is not the letter but the spirit of the contract that is pivotal to the collaboration, especially when unforeseen events occurʹ’13 The director of the Blaise Pascal Institute and Professor of Philosophical Ethics in the Department of Philosophy of the VU University Amsterdam, Bert Musschenga, takes the same view when he speaks of integrity: ‘We want to be sure that we can trust someone in a certain role, even in situations when he comes under pressure or in which he is exposed to temptation. And we especially want to know this if we are the dependent and therefore the more vulnerable party in a relationship.’14 He goes on: ‘That is why I would refer to integrity as “proven decency”’. In the Aristotelian vision of virtue, the virtuous person is a trustworthy individual with a constant and unvarying character, who nobly bears the adversities of fate. In my view, a person of integrity is one who continues to do what is expected of him in normative terms, even when circumstances become less favourable and many others around him are failing to do the same.’15 16
The social trap Trust is an extraordinary ethical value. That only becomes clear when groups or organisations operate on the basis, not of trust, but of mutual mistrust. ‘Trust is a psychological variable of an extremely unusual nature. One of the notable characteristics of trust is that (just as moral innocence, or virginity) once it is lost it is extremely difficult to regain.’16 Rothstein examines the question of how the trust of Russian citizens in one another and in the community could be enhanced. He wonders how you can change groups of people who distrust one another: ‘How can you get people who have long harboured deeply rooted mutual suspicion to suddenly begin to trust one another and cooperate loyally for the common good? Why should people with long standing and extensive experience and memories of the untrustworthiness (evil, duplicity, cruelty, etc.) of ‘other people’ suddenly begin to rely on one another?’ (…) ‘The reason they continue to act treacherously or opportunistically is not necessarily that they (or their culture) suffer from some kind of moral defect, but rather that there is no point in being the only honest player in a rotten game at which everyone else cheats (or is perceived to be a cheater). This is a case when rationality fails, because one cannot rationally decide to forget treacherous behaviour’ (…) ‘And again, this is not because most other people are actually evil and fundamentally disloyal, but because they expect that everyone else will cheat’.17
With this, Rothstein concurs with game theory, upon which the prisoners’ dilemma is also based. Gambetta says of this: ‘It is necessary not only to trust others before acting cooperatively, but also to believe that one is trusted by others’.18 Rothstein: ‘We have captured two of the central insights of non‐cooperative game theory. First, that political and economic actions should be understood as ‘strategic’ in the sense that what we do depends on what we expect ‘other 17
people’ are going to do. Secondly, that the end result of individual rationality may very well be collective irrationality.’19 Rothstein subsequently introduces the concept of the ‘social trap’. When people distrust one another, this becomes a spiral that is difficult to break out of. ‘Behaviour (of social actors) is determined by their assessment of the future action of others. The logic of the situation may be described as follows: The situation is such that “everyone” wins if “everyone” chooses to cooperate. But ‐ if people cannot trust that “almost everyone else” will cooperate ‐ it is meaningless to choose to cooperate, because the end is contingent on cooperation by almost everyone else. Thus, non‐cooperation may be rational when people do not trust that others will also cooperate. Conclusion: Efficient cooperation for common purposes can come only if people trust that most other people will also choose to cooperate. Lacking that trust, the social trap will slam inexorably shut. That is, we end up in a state of affairs that is worse for everyone, even though everyone realizes that they would profit by choosing to cooperate.’20 ‘Once a society, an organisation or a group has been caught in a social trap situation, it usually stays there. (…) It is very difficult to get out of social traps’. Indeed, it requires that you now suddenly trust the ‘other’ who you earlier distrusted: ‘to breach an enduring social trap would require people who (for good or bad reasons) have developed deep mutual mistrust over a long time to suddenly begin to trust one another and thus erase their memories about the untrustworthy and deceitful behaviour of the other group’.21
18
Caught between public and private? In the last twenty years, housing corporations have been transformed from semi‐public administrative institutions into private organisations with public responsibilities. Accompanying this shift, the remit of these responsibilities has grown steadily wider. Where initially the sole aim was the provision of affordable housing, the concerns of these organisations now also include liveable neighbourhoods and social entrepreneurship. Economies of scale, efficient working practices, involvement in other areas of the housing market (such as the private ownership and healthcare sectors) and increasing professionalism have been characteristic developments in the privatisation of corporations. In reaction to this, social entrepreneurship once again rose high on the agenda, with the underlying idea of halting and reversing the isolation of corporations from their tenants. This counter‐reaction did not occur in isolation. The search for the balance between public and private is of great current concern. In the Netherlands Council of State’s 2005 Annual Report its Vice‐chairman, Herman Tjeenk Willink, expresses sharp criticism of what he calls the ‘bureaucratic‐corporate logic that attempts to make a business of government’. He calls for a return to the Trias Politica, would like to see the professional expertise of public servants returned to its central position, and wants to return to the tradition of republican citizenship and dispense with the notion of the citizen as a consumer of government products.22
Professor Dorien Pessers also questions the high level of trust that in recent decades has been placed in the market rather than in public institutions. Pessers: ‘In broad terms, every society has two great moral registers, both based on the principle of reciprocity, but in divergent variants. Reciprocity is the moral value of lasting connections and of solidarity – as in the fields of love and social attachment – in which unlimited 19
obligations are repeatedly fulfilled in the trust that they will be repaid in their turn. Trust is the key concept here. Mutuality, on the other hand, is the moral value of the short‐lived connections of the market, in which a transaction, strictly contractually defined in terms of its timing and content, is undertaken between strangers. Here mistrust is the key concept. (…) As principles of social organisation, however, the two moral registers are diametrically opposed to one another: with connection versus competition, trust versus mistrust, the social contract versus the private contract, good faith versus the bad faith of the empty promises of advertising; connection in the communal public domain versus exclusion in the private domain, the public interest versus private interests, rational management through political decision‐making versus the irrational management of subconscious and manipulated wants and needs.’23
Abuses in the corporation sector have always been with us, it is true, but the extent and significance of these abuses become greater as the relationships between public and private become more diffuse and there is a merging of interests. ‘Osmosis’ between corporations and the property sector, worlds with different definitions of ‘trust’, can then be the result. That is reinforced still further when the distinction between public and private values is blurred. In that regard, the entrepreneurship of corporations is a risk. Corporations enter the market as new players, and have the tendency to assume the business values of the corporate world. Superficial appearances, private boxes at sporting events, extravagant leaving parties and all the rest. Their original austerity and modesty are put under pressure. 20
Breaking the rules You do not only place your trust in others because you share the same values, but also on the basis of the other’s reputation and his actions. A person who acquired a somewhat tarnished reputation in a former position will have to make greater efforts to win the trust of new colleagues than someone without a stain on his character. Moreover, some professionals are quite simply more trusted than others. Trust grows. If in the beginning it is primarily an intention, when people work together their trust is usually ‘proved’. It is. How can it be, then, that some people abuse that trust? How is it that some break the rules, or play double? How can illegally benefiting oneself have become an element of everyday transactions? Geert Mak quotes Barlaeus: ‘No more pernicious opinion has ever slunk into the human condition than that which has distinguished the honest from the beneficial’. The most important fundamental rule for wise entrepreneurship is therefore also, in Barlaeus’ eyes: ‘that which appears to be beneficial must not be dishonest, and that which is dishonest must not appear to be beneficial.’24
The motives for illegal actions are quite diverse, of which more later. First, we will examine the mechanisms that make those actions possible. In criminology, a distinction is consistently made between ‘rational choice’ and ‘opportunity’. Deloitte, in a publication on fraud in housing corporations, talks of the classical distinction between ‘opportunity’ and ‘intention’. A distinction is made between exploiting an opportunity and creating an opportunity. Opportunities are exploited when the organisation ‘has defects that the fraudster has noticed and exploited’. This fraudster is ‘the most “dangerous” for the corporation, because both the opportunity and the fraudster have been present in the organisation for some considerable time’. In other words, this 21
concerns the opportunities within the organisation to carry out misdeeds. The mesh of the net may be broken in places, or be too wide here and there, and an awareness of this can be used to one’s own advantage. In the latter case, the fraudster ‘creates the opportunity by manipulating the (administrative) system (procedures etc.) He devises a structure that causes losses to the corporation and benefits himself or others’.25 The characteristics of this form of action are not only meticulous preparation, but also the manipulation or removal of the traces that the action leaves behind. In fact Deloitte talks of being ‘led astray’. But one cannot be led astray without temptation. And if we are to discuss temptation, various forms can be distinguished. The first form comes from outside. An attempt is made from outside to tempt someone within the organisation. To give an example: a new director of a corporation asks his maintenance workers what would be a good and reliable company to carry out renovations on his newly acquired house. The selection of a contractor who also works for the corporation is quickly made, and the renovations are carried out satisfactorily. When after a few months the invoice has still not arrived, the director asks the contractor what has happened to it. He is told that it is not normal practice in these cases to issue an invoice… Another form of temptation arises when – to stay with the same example – a director approaches a contractor with a request to renovate his house free of charge. A director of a construction company was recently forced to resign because he tried to make such a deal with a mayor who offered a construction site in exchange for a free renovation. Naturally the company’s code of integrity does not allow this. Temptation can thus come from two sides, and what these examples have in common is that one of the parties actively attempts to tempt the other, often without knowing if the other party is open to this. 22
A third form of temptation can arise when employees enter too completely into the grey area of ‘oiling the wheels of business’. Getting too close to an external party makes subsequent independent functioning extremely difficult. With regard to the motives for misdeeds in housing corporations, Deloitte states that social circumstances (gambling addiction, living beyond one’s means, relationship problems, etc.) are the most important factor.26 Self‐enrichment is of course a much simpler, and according to others equally important motive: ‘Both parties benefit if the transaction is successful, but it is often the case that one party gains more, through deception and abuse of the trust of the other.’27
Cools indicates this when he attempts to understand what motivates fraudulent directors: ‘It appears to be an element of human nature to see things in their most favourable light (…) It almost seems as if ethics have degenerated into a simple calculation of the rewards against the chances of being caught. (…) As someone once put it, if you walk into enough hairdressers enough times, sooner or later you’re likely to get a haircut. The vice of greed can then no longer be tamed. As the stakes grow steadily higher, it becomes increasingly difficult to keep a straight backbone and resist the enticements.’28 Markets are always driven by greed, according to The Economist.29 And elsewhere The Economist says of corporate fraud: ‘each new story appeared against a constant background of complaints about bosses being paid too much’.30
In the wake of recent corporate scandals, based upon the analyses of Professor Manfred Kets de Vries31, psychological motives are increasingly mentioned. Cools: ‘The core of the 23
problem lies in human behaviour. The top director who behaves like a corporate messiah.’32 And elsewhere he says: ‘Our Sun King hypothesis has been confirmed. In fraudulent companies we find celebrated heroes, people of exceptional popularity within the business world and beyond it.’33 Cools describes them well. They ‘surround themselves with mirrors, and with sycophantic yes‐men who are expected to affirm the narcissistic peacocks in their vanity (…) Narcissistic leaders lose their feeling for limits, and no longer tolerate any contradiction.’34 Usually it does not end well, according to Cools. ‘But successful leadership, and certainly charismatic leadership, often owes its existence to narcissism, and therefore goes hand in hand with hubris. And pride goes before a fall. The successful leader begins to float with his head in the clouds, forgetting that what is important is his position and not himself. He hides his head behind the newspaper, begins to truly believe that the sky’s the limit, gathers yes‐men around him, and no longer tolerates contradiction. He is always right, and his success provides the hard proof of this. And success makes one powerful, omnipotent.’35
The motivation of power also play a role: ‘The heads of both companies (Enron and Ahold) became blinded by success, and were spurred on by credulous analysts, investors and journalists, share options, and the constantly rising share price. The figureheads (…) wanted to become the greatest of all.’ ‘Keep making us millions,’ wrote the head of Enron to fraudulent employees in 1987, employees who he did not reprimand, but simply encouraged to carry on as they were going.36 The vitamin cartel, which systematically held prices 24
high, also viewed customers principally as enemies, and did not feel they were doing anything wrong.37
Sometimes there are probably not even any explanations at all. In certain organisations, at certain levels, being ‘on the fiddle’ is a cultural fact. Cultural facts are ‘the things that go without saying, which apply within an established culture without question.’ They are ‘things that are kept in existence by human actions, but that for those involved stand as established facts’.38 ‘There is no excuse for my behaviour,’ said Thomas Coughlin, vice‐chairman of Wal‐Mart (who was once responsible for the ‘theft prevention department’, and who earned 3.9 million dollars in 2005). According to the court, Coughlin was ‘a model citizen who had reached the top but fallen deep’. Coughlin claimed hundreds of thousands of dollars for, among other things, yachting equipment, dog food, underwear and a stuffed wild bear.39
The last motive is that of the ‘kick’. Some people find it exciting to exploit the holes in the net to the full. Cartel members also point out the romance of conspiracy: building contractors ‘become immediately enthusiastic and, full of pride, tell of how they were too smart for so‐and‐so, and of how much profit they were able to make’.40
Blurred boundaries Former professor and real estate specialist Pé Kohnstamm says that it is ‘remarkably difficult to explain’ that ‘there is an upper world and an underworld, and that there is more and more interaction between the two.’41 According to Europol, the capacity of organised crime to infiltrate the world of legitimate business forms just as great a threat to society as the use of violence by criminal groups. Because criminals infiltrate – 25
especially – the construction and property sectors, they acquire a respectable public profile.42
Despite this blurring of boundaries between the upper and underworld, it is nonsensical to suggest that fraudulent directors have become a part of the underworld. Or, conversely, that the underworld is bedding into the upper world by buying off directors. According to experts, these are much too convenient images. Legal entrepreneurs are also involved in illegal activities, while criminal entrepreneurs are increasingly involved in legal activities. The criminologists Petrus van Duyne and Maarten van Dijk state: ‘With the observation that the distinction between the upper and the underworld is becoming increasingly blurred, nothing new is being reported. The entire distinction between the underworld and the upper world is actually a misleading construction, and the proposal that ‘organised crime wants to climb upwards’ (like some sort of demon in the cellar) is thoroughly ludicrous. Criminal entrepreneurs do not come from another planet: they are just as much our (criminal) fellow citizens as the top management of Ahold when put on trial or the bosses of the Netherlands’ fraudulent construction sector when sentenced.’43 Professor of Public Sector Economics at the School of Economics of Utrecht University, Brigitte Unger, also points out how the legal and the illegal are increasingly intermingled: ‘Money hides itself away in financial markets. Money laundering can be well concealed in legal and fiscal constructions. Money launderers prefer to see a healthy legal economy with flourishing businesses. We believe that economically attractive countries are also more attractive to money launderers than corrupt ones. Losing money does not always matter to money launderers. They can view the losses 26
as a type of ‘laundry tax’. What money launderers want is legal income from a legal transaction.’44
It is precisely in the property sector that there are a multitude of opportunities to hide money away. Fiscal Information and Investigation Service/Economic Investigation Service director Jan Hermans states that for this reason more attention is focussed on ‘the property sector, and its suspected entanglement with the underworld.’45 Arthur Docters van Leeuwen underlines this point: ‘the property sector also has our [the Financial Expertise Centre’s] attention. We are looking at the relationship between criminals and the legitimate business world. Is Mr Endstra the only underworld banker? Are all those people in the financial world squeaky clean then?’46 Corporation directors on the slippery slope Corporations have become social enterprises. They are hybrid organisations, part public, and part private. Since around a decade ago, the directors and managers of corporations have been operating in more than one ‘sector’ simultaneously. Of course they act primarily in their own corporate sector, but alongside that they are also involved in the worlds of property, social welfare and politics. These four sectors are differ markedly from one another, and in a certain sense they have they own standards and values. The social interpretation of the trust that we have in the world differs just as strongly. Almost one in five of the Dutch population has a negative or strongly negative opinion of the integrity of the business world, with 30% having a positive or very positive one. When it comes to social welfare, in contrast, around 70% have a reasonable amount to a great deal of trust, while trust in parliament does not even reach 30%. 27
It appears that in the property world mutual trust between different organisations is not very high. There is always (as a precaution, shall we say) some doubt about the integrity of the other. Nobody is really surprised if the other party is not, or not completely, honest. Double agendas often come into play: so be vigilant, or the other may cheat you. And every entrepreneur ensures he always has a few cards up his sleeve when it comes to negotiations or collaborations. Rothstein’s ‘social trap’ approach shows us that, in view of the fact that not everyone trusts everyone else, it is not wise for an individual actor to assume that we can trust one another. Or as Prast puts it so well: ‘If you find yourself in a place where opportunistic behaviour is the norm, it is unwise to put yourself in a vulnerable position by placing your trust in other people or organisations. For after all, that trust will be immediately abused.’47
At the beginning of this century, the construction sector was fully exposed to the harsh light of day by revelations of cartel agreements in virtually every sector of the building industry. New revelations during the Holleeder trial concerning the penetration of the underworld into the Amsterdam property world resulted in sections of the property sector being linked to criminal organisations. Margriet Meindersma, chairman of the Housing Corporations Supervisory Association, is of the opinion that caution is advised when it comes to relationships between corporations and (some sections of) the property world: ‘in the property world, builders, government clients, project developers and housing corporations are still in one another’s cultural grip. It is a world that maintains its own standards and values, and from which it is difficult to escape. 28
But gradually the awareness is growing among supervisory boards that they should keep a close watch on the relationships between housing corporations and the property world.’48 Accountant Piet Klop says of this: ‘At the same time, they [housing corporations] are working together with a sector that has been shown to be vulnerable to fraud. The entire construction fraud dossier has clearly shown that.’49 Klop does also point out, however, that there is no evidence that fraud is inevitable when corporations and the property world collaborate too closely. A journalist asks him: ‘Is the corporation sector infested with trendy young property sharks who aren’t too particular about following the rules?’ To which Klop replies: ‘That’s not my impression. The sector is accepted as legitimate by the banks. Fraud, if it is confirmed, will be thoroughly investigated. More thoroughly than in the private sector, where they’d still like to think ‘oh well, a few thousand Euros have gone missing, but it would cost just as much again to get to the bottom of it, so just leave it.’50
Professor Unger of Utrecht University goes somewhat further. In her view, the property sector plays a significant role in money laundering ‘because this sector is not transparent, and has a large volume. We have tried to find a property broker who would tell us what is going on in the property sector, but nobody was prepared to risk giving us an interview. I think that brokers have become afraid, because there have been a number of killings in recent times. I didn’t ask it of everyone, but it was made clear to me that it would be impossible for us to get anyone from the sector involved in our research. It was all too sensitive. We know surprisingly little about what takes 29
place in the property sector. We don’t know what goes on with prices and payments. We don’t know in all cases who the buyers and sellers are, or even who the owners are. But the suspicion that something is going wrong in the sector is well founded. You see how widely house and office prices vary. When a price suddenly shoots up by a factor of eight, that’s strange. Cash payments are an easy way of laundering money.’51
Criminologists Cyriel Fijnaut and Gerben Bruinsma are also greatly concerned about criminal investments in property. Fijnaut: ‘Money from large‐scale organised crime has found its way into the Dutch economy on a structural basis. Vast assets have been amassed in certain circles.’ Gerben Bruinsma: ‘The money has mainly rained down on the property in the city. Organised criminals are busy buying up premises, in the hospitality industry and other sectors. We are learning more and more about the situation in Amsterdam, but we are extraordinarily naïve about what is happening in The Hague, Utrecht and Rotterdam. These are no “dumb kids” we are dealing with here.’52
For that matter, people are (often) fully aware of who in the property and construction sector is operating on one side or the other of the thin line between right and wrong. ‘I don’t do business with that firm. I can’t see how they come by their assets’, says one insider. ‘Watch out for that company,’ says another. ‘It’s not clear if they’re completely legitimate.’ ‘If I did business with them I’d be out of here before my feet touched the ground. My supervisory board wouldn’t stand for it’, adds a third. ‘And be careful. If you cross that guy you’re asking for trouble.’ 30
What will happen now that these worlds, the worlds of the corporations and of property, which are prepared to do business illegally, have become mixed? In that area of the property world, the ‘reputable people have only two choices, join in or get out. Get out, otherwise you won’t stay clean. But if someone joins in with that world, and thus apparently prefers to do business with the ‘disreputable’, he has no other possible than to mask his loss of reputation within his own world. There is no way back. Many of the fraudsters in the corporation sector lived in two worlds. Their primary world was (we assume) the respectable, familial one of the corporations, where trust in one another’s good intentions was central. Alongside that they lived in a shadow‐world, where impropriety and shady deals were the norm. It almost goes without saying that living in both worlds meant leading a double life. In this context, the following questions are of interest: are the people concerned merely ‘small fry’ who want to grab a share of the profits from the disreputable world? Do these people form an independent criminal organisation that simply extorts money from its ‘victims’ in the property world? Or are they no more than extras in a larger drama that is being directed from within the fraudulent sections of the property sector? White‐collar criminality Over a hundred years ago, in 1907, American professor Edward Alsworth Ross identified what was apparently a totally new sociological phenomenon: stealing from the company where one works. Ross: ‘The current methods of 31
annexing the property of others are characterised by a pleasing indirectness and refinement’.53 Because it was not individuals but institutions that were being stolen from, the criminal act became impersonal. ‘Still more impersonal is sin when the immediate harm touches beneficent institutions rather than individuals, when, following his vein of private profit, the sinner drives a gallery under some pillar upholding our civilization.’54 The criminal also has a different appearance: ‘The modern high power dealer of woe wears immaculate linen, carries a silk hat and a lighted cigar, sins with a calm countenance and a serene soul, leagues or months from the evil he causes’.55 And he behaves differently: ‘These partial villains, with their piebald consciences, lack the stigmata of the true criminal type. In their crania Lombroso would miss the marks of atavism. They are not the prey of wicked impulses, not Nature’s criminals. Bone of our bone and flesh of our flesh, they are in their wrong‐
doing merely the creatures of Crooked Thinking and Opportunity’.56 This makes it difficult to unmask these criminals: ‘Today the villain most in need of curbing is the respectable, exemplary, trusted personage who, strategically placed at the focus of a spider‐web of fiduciary relations, is able from his office‐chair to pick a thousand pockets.57 ‘The big and formidable sinners are grey of soul, but not black, so that chastisement according to their character rather than according to their deeds lets them off far too easily’.58
32
So, to summarise the characteristics of white collar criminality: ƒ
ƒ
ƒ
The offence is committed in a ‘more respectable context than other crimes’, ‘by a person of high status in his occupation’ 59 the perpetrators often do not view their irregular behaviour as illegalmany criminal acts occur as an element or as an extension of regular work the acts are mainly impersonal the ‘victims’ are often organisations. ƒ
ƒ
The manner of dealing with such irregularities differs from country to country. In the Netherlands there is a rather laconic attitude regarding what is and is not reprehensible, in contrast to, for example, Japan or Korea. ‘Hyundai Donates Billion after Scandal’, read the headline in the Dutch financial daily Het Financieele Dagblad of 20 April 2006. In Asia it is normal in cases of corporate wrongdoing for the heads of businesses to resign, offer their apologies, and attempt to ‘make amends’. Vice‐chairman Lee Jeon‐kap of Hyundai: ‘We offer our apologies for the problems we have caused.’ The response in the Netherlands is completely different. Construction companies allowed directors who had been found guilty of offences to simply carry on working for years after the construction fraud cases, and other captains of industry who have been sentenced generally also land on their feet. Take for example Hans Andreae of Ahold. ‘He’s a fine manager, who we can use in difficult times’, said Jan Kiemel, chairman of the board of Amsterdam’s Slotervaart hospital.60 33
Of course not everyone feels comfortable with this. Columnist J. Koelewijn was staggered by the appointment: ‘In general, I get two sorts of reactions. The first is that people ask me if he really did anything wrong. I rather think he did! The court pronounced a clear verdict and imposed a penalty. Andreae has a criminal record, because he was a co‐perpetrator of an offence. The second reaction I find even worse: ‘OK, so Andreae’s been a bad boy, but he didn’t profit from it personally, so it wasn’t really as bad as all that.’ Nonsense, nonsense, nonsense: Andreae certainly did benefit from it. (…) I think Andreae has got off very lightly. The most disturbing aspect of the matter is that he doesn’t show the slightest sign of remorse. He might at least have made some kind of a gesture, such as compensating investors out of his own pocket or making an apology.’61 Financial fraud In an interview with Het Financieele Dagblad, René Craemer, chief executive officer of the National Public Prosecutorʹs Office for Financial, Economic and Environmental Offences, makes it clear that there is ‘nothing on paper’ regarding the level of penalties for corporate fraud. He identifies four elements that have an influence on sentencing in a financial fraud case: the sophistication of the fraud, the degree of self‐
enrichment, the harm caused to investors and the social impact. In Craemer’s opinion, penalties are currently often (too) lenient: ‘We want to raise the penalties for senior business figures a little. (…) It is our organisation’s deliberate policy in cases of fraud in companies or organisations to go after the people who have the leadership. They have the responsibility for maintaining a culture of integrity.’62
34
Let us examine these four elements as they apply to corporations. The sophistication of the fraud is concerned with the ability of a ‘white collar worker’ to make the fraud possible. Systematically organised fraud is many times more sophisticated than the type that can be summed up as ‘succumbing to temptation’. The first type is rational (and increasingly unemotional), while the second is emotional (and perhaps increasingly rational). Fraudulent corporation directors seem to come in all shapes and sizes: petty swindlers who exploit an existing opportunity seem to be the most common, but this may also have to do with a lack of sophistication, or unreliable ‘partners’. The fraudsters who take a more planned approach are in any event discovered less quickly. Their illegal activities are well organised, and their criminal actions and operations in a second world remain well concealed. Of course achieving the right mix of legal and illegal activity is in itself always an ‘art’. The perpetrators also usually take care to avoid an excessively lavish lifestyle and overly conspicuous spending. That appears to go on in secret, far out of sight of colleagues from the corporation world. Nelken says of this phenomenon that perpetrators of white‐collar crime go to great lengths to keep their activities secret, and also to organise them in such a way that others who belong to the same organisation do not become suspicious.63
The second element that Craemer identifies is self‐enrichment. Where this is concerned in cases of fraud in the corporation world, the matter is simple: aside from the occasional bending of the rules concerning a housing allocation, it is almost always about money. We can therefore more accurately speak of the degree of self‐enrichment. If we are to use the penalties that 35
have been imposed on corporation directors as a yardstick, then self‐enrichment runs into the hundreds of thousands of Euros, and it is remarkable how easy it is to scrape together a million. But here again we are referring to directors who merely exploit the opportunities open to them. The degree of self‐enrichment in the case of planned, long‐term fraud will be many times higher. Then we come to the harm that is caused to tenants. Extra income or lower expenditure must be set against the higher costs brought about through fraud. The tenants do not notice it directly in their wallets, but as the financial position of a corporation grows weaker, expenditure on, for example, maintenance can also be put under pressure. That is a key characteristic of white‐collar crime: the theft is not from individuals, but from the organisation. Finally, the social impact. Fraud in the non‐profit sector amounts to a double theft: not only from the organisation, but also from the community. In such cases, social condemnation is greater than with regard to fraud in a commercial business. But even then it is the social significance that is important. Concerning the penalties demanded by the Public Prosecution Service against Ahold, Docters van Leeuwen says: ‘I can quite understand the severity of the public prosecutor’s demands, leaving aside the question of whether the directors are in fact guilty. Ahold shares were truly ‘people’s shares’, so the behaviour at issue here is fundamentally connected with trust in the market.’64
36
When discussing the question of what may determine the level of the penalties for fraud in corporations, one more element must be added to the list, and that is the degree to which the fraud is organised, and whether it is a ‘one man operation’ or the work of a ‘criminal organisation’. Many of the well‐known corporation fraud cases have been fairly unorganised, and belong to the category of one‐man operations. Sometimes a culture turns out to be so corrupt that one can still refer to unorganised fraud, but that several one‐man operations are running alongside one another. Organised criminal activity by a number of directors is fairly rare, but the casuistics show how simple it is. By carrying out large transactions at a higher purchase price via a series of links, personal gains can be concealed. Rumour has it that that is what occurred at IWS in Rotterdam. At the same time, we must realise that organised crime inevitably involves secrecy, so that much of what goes on never comes to the surface. Fraud in corporations thus scores on all points in Craemer’s list: reason enough for a less Dutch (i.e. less laconic) reaction. The deceived The dishonest cannot survive without deceit. But how can these cheats be classified? Are they narrow‐minded specialists who are only concerned with their own tasks and are blinkered to the total picture or the actions of others? Are they naïve, reckless individuals? Or are they blinded by trust? Are they hangers‐on, with not the strongest of personalities, who do not dare to ask critical questions or, if they do 37
dare, allow themselves to be fobbed off, or verbally intimidated by a quick‐tempered charlatan? Or are they people who have been recruited precisely because they have no acceptable alternatives in the labour market, and therefore resign themselves to their role? Wim Dubbink points out that ‘immoral or reprehensible behaviour within organisations may come about because people, as moral actors, yield to temptation.65 Opinions differ on the reasons why this occurs. Dubbink proposes that ‘in the design of organisations we must take account of the fact that some people within the organisation will respond to morally relevant situations as purely economically calculating actors, as blindly obedient players, as moral juveniles or as people who will grasp at any chance to avoid responsibility’.66
It is striking that when wrongdoing is discovered in corporations, the reaction of others within the sector is often ‘we thought so all along, it comes as no surprise’. And it is noteworthy that outsiders react the same way, without subsequently feeling the need to broach this difficult subject. For let us be clear, the mutual solidarity of corporations obstructs them from evaluating one another and bringing any failures or irregularities to outside attention. The solidarity within the group is stronger than the law, it seems. A corporation director says: ‘We already suspected it, so when it came out it didn’t surprise us at all. We’d say “you can see it in his face, in his eyes, that he’s not to be trusted. You just know the man’s a crook.” But still we do nothing. So are we to blame?’ The deceived seem in any event to be (or to have been) no heroes themselves. According to cognitive dissonance theory, people pay particular attention to messages that confirm their existing opinions and are in line with their 38
fundamental attitudes. Evidence of irregularities is ultimately denied. People in positions of leadership who have become involved in deceit have allowed it to happen to them, but of course this does not let them off the hook. It is too convenient to simply say you knew nothing. In the United States this is referred to as deliberate blindness. Those who (deliberately) close their eyes are also committing an offence. Harvey Pitt was for a time the USA’s financial watchdog, and his proudest achievement is the law stating that chairman of boards and financial directors can no longer shelter behind the defence that they had never seen anything of the abuses, never heard anything, and definitely never knew anything. ‘Of course CEOs and CFOs knew about the problems in their companies. And if not, they should have known. That makes little difference to me. It’s the same as in my home. If my children misbehave, I’m responsible.’67 Docters van Leeuwen also points out that those in authority should not claim ignorance: ‘There are things in the business world where I say: this has really got to stop, right now. It was a thorn in my side that until recently we couldn’t act against market manipulation. Now we can, and we will. And then don’t come to me with your stories about not knowing.’68
The former chairman of the supervisory board of Kempen & Co, Pieter Winsemius, is clear in his explanation of why the CEO had to go. ‘Let say at the outset that there is no excuse for this. It is wrong, and you ought to know that.’69
39
* DIRECTORS AND SUPERVISORS ON THE INTEGRITY OF HOUSING CORPORATIONS 1. Is there a policy? The majority of the directors questioned (73%) said that their corporation has a policy regarding integrity. 24% of the housing corporations have an unwritten policy, and only 3% say they have no policy. Whistle‐blower schemes are present in 40% of the corporations. Conclusion: three quarters of the corporations have a written integrity policy. 2. Temptation Corporation directors report that external contacts lead employees of corporations into ‘temptation’. Almost all directors (90%) indicate that their employees are offered enticements by people outside of the organisation in the form of events such as football matches, concerts, golf, and so on. A second category is taking part in dinners, trips etc. (54%), and a third is the offer of gifts (42%). Only a very small percentage of the directors say their employees have been offered money. Of the chairmen of the supervisory bodies, a mere 10% say they have occasionally been brought into temptation by external parties. This concerns invitations to events, attending dinners, and very occasionally gifts. According 40
to the chairmen, members of the boards of these organisations are also approached by outsiders. Conclusion: external parties attempt to tempt corporation employees. Supervisors are approached sporadically. 4. Fraud Over a third (36.9%) of the directors indicate that they have come across fraud by employees. A majority of those questioned (63.1%) have never encountered fraud. Directors who have been involved with cases of fraud in the past say that in most cases (almost 60%) they concerned some form of theft. Giving favourable treatment to some external contacts such as advisors or building contractors (over 20%) or customers (over 15%) in exchange for favours or money also occurs regularly. Conclusion: one third of corporations have experience of fraud 5. Dismissal following fraud In cases of fraud, according to the directors, the majority of employees and/or managers (68%) simply remain in their posts. That is a surprisingly high figure. In recent years, only 32% of fraud cases have resulted in dismissal. It is noteworthy that in almost all cases of fraud in which the perpetrators were dismissed, the individuals concerned were employees, and in only one case a manager. 41
Conclusion: only a third of those found guilty of fraud are dismissed. Managers almost always stay out of the firing line. 6. Assessment of integrity of actions In general, directors are satisfied with the integrity of operations within their own corporation (average score: 7.8). The majority (53%) gave a score of 8 for the integrity of their own corporation’s actions. The directors are clearly less satisfied with the integrity of their sector (average: 6.8). 57% of the directors gave their sector a 7. Members of supervisory boards assess their own situation much more positively than directors. Chairmen give their own corporation an 8.3, board members an 8.8. Their evaluation of the sector is comparable. Conclusion: corporations feel that they themselves score much higher for integrity than the sector in general.
7. Integrity codes of conduct for managers and the role of the supervisor For most directors of housing corporations (66%), it appears that codes of conduct have been drawn up by their supervisory bodies with regard to the integrity of managers. It is therefore interesting to ask how well those codes of conduct are upheld. Almost 70% of the directors say that a critical question is asked now and then, and in 10% of the cases not even that is so. Almost two thirds of supervisors 42
even state that in the last two years they have asked no questions about integrity at all. It is striking that only a small number of the directors (22%) indicate that compliance with codes of conduct is supervised in any serious way. 65% of the directors say that in 2006 the supervisory body only asked general questions about integrity. A quarter of respondents report that the supervisory body had asked specific questions, for example in connection with outside activities and/or conflicts of interest on the part of directors. A third of supervisors say they have asked specific questions in the last two years. Supervisors indicate that the integrity of the director is only systematically checked to a limited degree. For around three quarters of the supervisors, these checks are only proper if the situation demands it. 5% of the supervisors do not carry out any checks in any event. The majority of the directors (over 80%) nevertheless attach great value to the assessment of the supervisory body with regard to integrity. It is striking that almost 20% do not attach very much importance to the opinion of the supervisor. 12% indicate that the value of the opinion depends on the person concerned. 6% go as far as to say that they attach little importance to the evaluation of their supervisory body. 80% to 85% of the supervisors place demands upon the behaviour of the director. These mainly concern regulations with regard to ‘greasing palms’, or critical questions in connection with this. Conclusion: there is no systematic supervision of directors’ integrity. 43
7. Conflicts of interest among supervisors
Virtually all corporations’ supervisory bodies have agreed policies concerning (apparent) conflicts of interest among their members. Less than 10% view the matter with indifference. We see the same pattern when it comes to declaring outside activities. 11% of the corporations have no policy on the declaration of outside activities by directors. 12% also do not have agreements on such declarations by members of the supervisory body. Conclusion: 10% of the corporations are too laconic in their manner of dealing with conflicts of interest. Sources: AEF survey of directors of housing corporations 2007 VTW survey of supervisors of housing corporations 2007 *
When should the alarm bells begin to ring? The question of when alarm bells should ring concerning others (that is to say professionals, usually with a high level of education, broad experience and a high salary) is an interesting one. After all, the fraudsters acquire the space to operate, not because they are so clever or cunning, but also because the others give them that space, or accede it to them out of negligence. According to Nelken, there will always be structural opportunities to abuse trust. The key questions are therefore concerned with whether others do not see this, do not want to see it, or deny it. The management style of directors, according to Deloitte, has a great influence on the risk of fraud within 44
organisations. According to recent research by the KPMG consultancy firm for the Ministry of Housing, Spatial Planning and the Environment, the director of a corporation is the determinant of the internal culture. That culture is thus personalised. In this sense, there is no organisational culture as such.70
In his handbook on the risks of fraud for housing corporations, Corporation Governance: Fraud, Deloitte warns against the ‘risky manager’, characterised as ‘a whiz‐
kid, a boaster, headstrong, insensitive, a gambler, impulsive, biased, highly emotional, profit‐oriented, vain and bombastic.71 Thee basis upon which Deloitte makes this observation is unclear, all the more so since the manager with a low fraud risk bears a close resemblance to a Deloitte accountant. On the basis of research, Cools says of this: ‘Exorbitant remuneration, plus Sun King reputations, combined with unrealistic targets: it’s bound to end in tears.’72 And elsewhere he states of this combination that it ‘works into the hands of fraud’.73
Nepotism among directors, revealing itself in appointments policy and the selection of advisors, is another indication of fraud.. Often directors gather people around them who will not give them too much trouble, who are too busy with their own tasks or who resign themselves to a role in the second echelon. The lack of strong counter‐
forces at directorship level is usually an indication that, to say the least, performance will be below optimum. The absence of a strong financial specialist who can provide a counterbalance to the director should lead to critical questions being asked. The same applies to the director who surrounds himself with friendly advisors. This incurs great risks. 45
If the director (deliberately) conceals his (personal) portfolio from others, this should also arouse suspicion. Fraudulent directors often make sure they have extensive portfolios with a relatively high proportion of external, operational tasks. It is not only the composition of the portfolio that should lead to questions being asked, but also a lack of opportunities for intervention in one another’s tasks. If a director also appears to find it irritating if others make enquiries concerning his portfolio, alarm bells should start to ring. A situation with a single director/manager is in any event more risky than if there are two who regularly exchange tasks. Monocratic leadership is very common in corporations, and is often found in combination with a weak management team and a supervisory board made up of friends. According to one of the property entrepreneurs interviewed, corporations have to guard against acquiring ‘the wrong kind of culture’. Directors can begin to act like entrepreneurs, even though they are not. ‘Their deals are often not sharp. That’s because money is no problem, and they can also come by projects fairly easily. What’s more, contracts are often sloppy, and too much based on good faith. Put ten corporation directors together and you’ll get ten different versions of accountability.’ Corporation directors also have to be careful not to fall into reprehensible behaviour. ‘On a study trip recently, the employees all flew economy class while the corporation directors were in business class’, says the same property entrepreneur. ‘Then they excuse themselves by saying that they thought that we…’ 46
Internal supervision The composition, quality and term of office of the supervisory board is the following signal. Ignoring the rules of good governance ought to set off the alarm bells. An excessively intimate, overly friendly relationship between the chairman between the chairman of the supervisory board and its members, as well as between the chairman and the director, are worrying signs. An associated reason for asking questions in this connection can be the existence of double positions. Sometimes members of the supervisory board have more than one paid commissionership within the same organisation (for example not only with the main organisation, but also with an ancillary or allied company). That does not encourage independent judgement. The private interests of supervisory board members can also be a problem. Excessive remuneration for little effort neither encourages the mobility to make way for newcomers after two terms of office, nor one’s critical evaluation competencies. In this context, the old boys’ network is an important factor. The world of the corporations is a closed one, and the pool from which supervisory board members are recruited is small: like knows like. The absence of ‘shareholders’ in the corporation sector is in any event a difficulty. Supervisory boards appoint themselves through cooption. No outsiders are taken into consideration. What is more, there is nobody to call the supervisory board to account in times of crisis except the Ministry of Housing, Spatial Planning and the Environment, and the ministry only intervenes in highly 47
exceptional cases, and then too late. Ultimately, corporations have no ‘owners’. Supervisors come in all shapes and sizes, and failures of supervision are not a direct consequence of a lack of professionalism. In some well‐known fraud cases the corporations had professionals as supervisory board members. That makes it clear that there are two major threats to internal supervision: incompetent supervisors who are not equipped to carry out their role, and arrogant supervisors who think they know it all and ‘tear open their envelopes on the spot’ (come unprepared to meetings). Discussions of ‘failure’ should therefore not only be focused on the ineffectual supervisors, but precisely also on the arrogant supervisors. Both groups should actually be sent to a school for supervisors. There they should be trained in asking the right questions of directors, quickly and critically reading the dullest of policy jargon, skimming through complicated legal and financial documents, contenting themselves with a four‐
year term of office, and bursting all manner of bubbles and balloons. Alongside this, they should be trained in weighing one another up. Supervisors who see one of their number failing in his duty should ensure that he is put out of the club. That is already happening on occasional, one is glad to say, although in fact it is still considered ‘not done’. If there is an ineffectual member on the board, then he generally sits out his term of office in polite docility while the others manoeuvre around him. But in fact these respectable mono‐
specialists, with their closed portfolios and closed mouths, may also be guilty of the same dereliction of duty. Other supervisors with a broader vision (and at the risk of overstatement: with qualifications!) are therefore needed. That is the key factor. Years of service as a director, manager, 48
municipal councillor, civic dignitary or local industrialist are no longer the keys to the boardroom. Plain common sense Supervisors ought to have a sixth sense for irregularities. Sometimes they should be able to feel when something doesn’t add up: ‘If you’re continuously growing twice as fast as the market there are grounds for suspicion, and there has to be an unusually good explanation,’ according to Cools. In other words: use your plain common sense. A little healthy mistrust never hurt anyone. ‘Bosses will always be greedy, auditors will always be fallible, boards will always miss things. Enronitis showed that there is no substitute for constant scrutiny and questioning.”(...).’74
Often there is no critical evaluation by an auditor. Many of the fraud cases of recent years had been swiftly rubber‐
stamped by the big accountancy bureaux. Deloitte says of this: ‘Many fraud cases are difficult for us to get to the bottom of. If there is a deliberate conspiracy by people in leading positions within an organisation, the auditor often doesn’t stand a chance.’75 That is a remarkable argument, because it has been repeatedly shown that when they are required to carry out counter‐appraisals, auditors do (and do dare to) pose critical questions. Long‐term contracts with accountancy bureaux, little turnover of personnel and friendly relations do not normally make a person (and thus also an accountant) more critical. Of course this observation also applies to long‐term contracts with notaries, property brokers, banks, advisors and contractors. It is essential that partnerships are kept sharp. And if this is not happening, in one way or another, then that is a reason to broach this difficult subject. 49
But how can an organisation find such courageous and professional critics from outside of its ranks? Cools: ‘Power must be scrutinised, power must be accountable: that is the essence of good governance. But laws and codes are apparently not able to achieve this. True checks and balances and a genuine balance of power require independent counterbalances: people or institutions who have the gravity and the independence, as well as the personal expertise and experience, to be able to provide the necessary counterweight. The qualities that are needed for this cannot be measured with a ruler, and cannot be encompassed by regulations and hard criteria. The crucial qualities and personality traits are found between the ears, and you just try measuring there… (…) The three counterbalances for the CEO, the three forces that must hold the shadow side of his success in check, are the chairman of the supervisory board, the CIO, and ‘the missus’ – possibly joined by teenage children, though usually they’ve already flown the nest.’76
And, naturally, there is common sense. And then, as Nelken puts it, it all comes down to three questions: Who can you trust? How, when and why do you trust them? And how far?77
50
Notes 1.
de Volkskrant, Dure projecten van corporaties zijn vatbaar
voor fraude, 24/10/2005
2.
K. Cools, Controle is goed, vertrouwen nog beter. Over
bestuurders en corporate governance, Van Gorcum,
Assen, 2005, p.37
3.
Lieuwe Koopmans, Fraude en toezicht bij corporaties, in:
De Accountant, jrg. 112 (2006), nr.6., p.43
4.
Het Financieele Dagblad, Woningcorporaties te laks
met frauderisico’s, 24/10/2005
5.
B. Rothstein, Social Traps and the Problem of Trust,
Cambridge University Press, 2005, p.8-9
6.
NRC Handelsblad, Er is minder corruptie in Nederland dan
we denken, 3/12/2005
7.
H. Prast, R. Mosch, W.F. van Raay, Vertrouwen. Cement van
de
samenleving
en
aanjager
van
de
economie,
De
Nederlandsche Bank, Amsterdam, 2005, p.42
8.
NRC Handelsblad, We grijpen in als het nodig is en hard
ook, 12/11/2005
9.
FD Strategie, Af en toe een gevoelige tik op de vingers, June
2006
10. N.
Luhmann,
‘Familiarity,
Confidence,
Trust:
Problems and Alternatives’, in: D. Gambetta, Trust:
Making and Breaking Cooperative Relations, Basil
Blackwell, Oxford, 1988, p.97
11. D. Gambetta, ‘Can we trust trust?’, in: D. Gambetta,
Trust: Making and Breaking Cooperative Relations,
p.217
12. Prast, p.25 13. Excerpt from Prast, p.26 51
14. A.W. Musschenga, ‘Integriteit: een conceptuele verkenning’, in: R.M. Jeurissen, A.W. Musschenga, Integriteit in bedrijf, organisatie en openbaar bestuur, Van Gorcum, Assen, 2002, p.10 15. Musschenga, p.14 16. Rothstein, p.18 17. Rothstein, p.7 18. Gambetta, p.216 19. Rothstein, p.7 20. Rothstein, p.13 21. Rothstein, p.18 22. Raad van State, Jaarverslag 2005, The Hague, p.29 23. D. Pessers, ‘Vertrouwen van burgers is verkwanseld, want de vorm wordt belangrijker dan de norm’, in: NRC Handelsblad, 23/24 September 2006, p.15 24. G. Mak, De Mercator Sapiens Anno 2004. Over eenzaamheid, moed en vertrouwen, Raiffeisenlezing 2004, Rabobank Groep [online document], p.11 25. P. Klop., e.a., Corporatie Governance. Fraude, Deloitte, Dordrecht, 2005, p.15 26. Klop, p.15 2 7 . P r a s t , p . 2 6 28. Cools, 2006, p.38 and 40 29. The Economist, Pigs, Pay and Power, 26/6/2003 30. The Economist, Another Scandalous Year, 18/12/2003 31. M. Kets de Vries, Leiderschap ontrafeld, Nieuwezijds, Amsterdam, 2001 32. Het Financieele Dagblad, Met hoge bonussen bind je de kat op het spek, 9/12/05 52
3 3 . C o o l s , 2 0 0 6 , p . 4 1 34. Cools, 2006, p.44 3 5 . C o o l s , 2 0 0 6 , p . 5 3 36. Het Financieele Dagblad, Voor Enron en Ahold klapte iedereen, 2/3/2006 37. J.M. Conner, Global Price Fixing: Our Customers Are The Enemy, Kluwer Academic publishers, Boston / Dordrecht, 2001 38. H. van Gunsteren, Woordenschat voor verwarde politici, Van Gennep, Amsterdam, 2003, p.69‐70. 39. Het Financieele Dagblad, Oud‐bestuurslid Wal‐
Mart veroordeeld voor diefstal, 11.8.2006 40. L. Vulperhorst, Verzwegen onderneming, Van Gennep, Amsterdam, 2005, p.224 41. Het Financieele Dagblad, Vastgoed worstelt met criminaliteit en huurvrije periodes, 29.3.2005 42. Staatscourant, Europese Commissie onderzoekt verband corruptie en criminaliteit, jrg.194, nr.50, 11.3.2008 43. De Volkskrant, Criminologen baseren zich niet op feiten, 6.4.2006 44. NRC Handelsblad, Nederland is een draaischijf voor witwassen van crimineel geld, 11/3/2006 45. Het Financieel Dagblad, Fiod zoekt witwassen via verkoop vastgoed, 26/3/2008 46. Het Financieele Dagblad, Jacht maken op criminelen in de bovenwereld, 7/3/2005 4 7 . P r a s t , p . 2 8 48. Het Financieele Dagblad, Verleidingen zijn groot bij corporaties, 24/10/2005 53
49. Het Financieele Dagblad, Woningcorporaties te laks met frauderisico’s, 24/10/2005 50. De Volkskrant, Dure projecten van corporaties zijn vatbaar voor fraude, 24/10/2005 51. NRC Handelsblad, 11/3/2006 52. De Volkskrant, Als we zo doorgaan wordt het hier een soort Italië, 31/3/2006 53. E.A. Ross, Sin and Society. An Analysis of Latter‐Day Iniquity, Harper & Row, New York, 1907, p.8 54. Ross, p.13 55. Ross, p.10‐11 56. Ross, p.28 57. Ross, p.29 58. Ross, p.31 59. D. Nelken, White‐Collar Crime, Aldershot, Dartmouth, 1994, p.360‐361 60. Het Financieele Dagblad, Ex‐Ahold bestuurder in toezicht Slotervaart, 21/6/2006 61. Het Financieele Dagblad, Zeurdilemma, 8/7/2006 62. Het Financieele Dagblad, Vrouwe Justitia grillig in haar oordeel, 2/8/2006 63. Nelken, White‐Collar Crime, p.367 6 4 . FD Stra tegie, June 2006 65. W. Dubbink, ‘Instituties’, in: W. Dubbink, H. van Luijk, Bedrijfsgevallen. Morele beslissingen van ondernemingen, Van Gorcum, Assen, 2006, p.37 6 6 . Dubbink, p.38 67. Het Financieele Dagblad, Bestuurders leren het ook nooit, 11/3/2006 54
68. NRC Handelsblad, 12/11/05 69. Het Financieele Dagblad, Kempen niet recht door zee? Kul. Commissaris Winsemius over aantijgingen, remedie en overnamedreiging, 29/8/2006 70. KPMG, Beweegredenen commerciële partijen op de (huur)woningenmarkt, The Hague, Ministerie van VROM, 2007 71. Het Financieele Dagblad, Verleidingen zijn groot bij corporaties, 24/10/.2005 7 2 . C o o l s , 2 0 0 6 , p . 5 2 73. FEM Business, Pas op voor Rockstar‐CEO’s, 7.1.2006 74. The Economist, Investor Self‐Protection. Enron A Year On, 28/11/2002 75. De Volkskrant, Dure projecten van corporaties zijn vatbaar voor fraude, 24/10/2005 76. Cools, 2006, p.54 77. D. Nelken (ed.), The Futures of Criminology, Thousand Oaks: Sage Publications, London, 1994 55
Part II
56
Real estate fraud These are not good times for those in the property business. The fraudulent practices of a number of prominent property institutions hangs like a dark cloud over the property sector. Legitimate developers who continue to work conscientiously are naturally suffering great damage from the weeds that are flourishing amongst the harvest. Particularly problematic is that these weeds have now donned camouflage so as go unnoticed in the midst of the crops. While bona fide companies busy themselves formulating, maintaining and evaluating codes of integrity, and do their utmost not to damage the sector’s image, other entrepreneurs are playing a subtle and duplicitous game of guile and deception. It is time for the property sector to take on the task of sorting the wheat from the chaff and, through a marked improvement of supervision within its own ranks, among other things, to enable itself to guarantee effective regulation. Furthermore, insiders are looking forward to speedier legal proceedings from the public prosecution service, quicker court cases and higher penalties. Denial as mechanism ‘There are always phoney arguments on hand. One must be completely incorruptible and transparent; there is no escaping it. There is simply no acceptable excuse. Nowadays everything will come to light, perhaps not immediately, but eventually.’ This from Professor Hans van den Heuvel.1 Once again we see that the classic arguments for denying fraud roll far too easily off the tongue. The former chairman of NEpRom, the Netherlands Association of Property Development Companies, had this to say of the property fraud which came to light in 2007: that 99.9% of the property sector is ‘trustworthy’. Fortunately he adds that ‘this is not 57
only about fraud, but about our culture.’2 Chief executive officer René Craemer says it is ‘appalling that the current reaction of the property sector concerning fraud is to simply gloss over it. This is similar to the responses in the early days of the construction fraud, namely, ‘everyone’s doing it, and if I don’t join in then there are ten others who will.’3 It is worth noting that the construction sector has barely reacted to the property fraud. At a closed summit of builders in mid‐March 2008, the fraud was initially brushed off as being connected with a different sector. Elco Brinkman, chairman of Bookend Nederland, member of the supervisory board of Rabo Bouwfonds and chairman of the supervisory board of Amsterdam’s Zuidas business development area: ‘I admit that it’s currently very complicated to untangle the various roles. As far as the fraud case is concerned I have deliberately discouraged publicity. In my position as a supervisor at Rabo Bouwfonds, it is difficult to react at this time. I can say that the fraud case is widespread and serious.’4 The main editorial comment in Vastgoedmarkt magazine in April 2008 is revealing: they blame it all on the journalists. Denial is a central element of the world of white collar crime.5 Denials are the arguments used to justify illegal transactions and, in effect, all this repeated denial adds up to a confession. Professor Marc Bovens has drawn up a fine list of the ten top denials: 1. I was only a small cog in a big machine. 2. Other people did much more than me. 3. If I hadn’t done it someone else would. 4. Even if I hadn’t done it, it would have happened anyway. 5. It would have been even worse if I hadn’t been involved. 6. I had nothing to do with it. 7. I wash my hands of the matter. 58
8. I know nothing about it. 9. I only did what I was told. 10. I had no choice.6
When a stock market listed construction company receives an unexpected budget increase from its client for making payments to various companies to which contracts have supposedly been issued, this apparently provokes no suspicion. When the judicial authorities suspect fraud, this is the kind of argument they find being used to justify involvement. From a reconstruction of unusual extra payments concerning a construction project in the Zuidas development, which was published in Het Financieele Dagblad, we can assume that the alarms were evidently switched off at the construction company concerned. 7 There were more than enough indications that there was something fishy about the payments. The property fraud of 13/11 2007 will go down as an exceptional year in the annals of the construction industry. On November 13th, in relation to the property fraud, the public prosecution service carried out searches on 50 suspect organisations and 30 individuals in the Netherlands and abroad. The public prosecutor spoke of the ‘largest ever campaign’ against white‐collar crime. But the campaign wasn’t focussed on shady characters or suspicious projects, no, it went to the heart of the property world, in particular the prestigious Zuidas development and, in the words of Jan Hermans of the Fiscal Information and Investigation Service/Economic Investigation Service, the big fish: directors and former directors of respected concerns such as Philips Pensioenfonds and the Bouwfonds. There were also (indirect) links to well known construction firms and leading property entrepreneurs from the Quote 500 ‘rich list’. The crux of the property fraud was that 59
(former) directors had been cheating their own (former) companies since as far back as the late 1990’s. The gains amounted to more than 130 million Euros, of which 100 million has already been confiscated from suspects. Through CEO René Craemer, the Public Prosecution Service announced: ‘It is time to turn the tide. Stormy weather is approaching.’8 The list of offences with which the Public Prosecution Service charged suspects was no laughing matter: fraud, bribery, forgery, money laundering, handling stolen goods and membership of a criminal organisation. The fraud in the property scandal utilised two methods. In one, a company sells property for a (sometimes remarkably low) price to an intermediary, who in turn sells it on to a second company for a higher price. The difference is divided between the middle man and the directors of (several of the) companies involved. One insider puts it in terms of siphoning off funds: ‘A sells land to B for 7.5 million, and C buys it for 20 million. That makes a difference of 12.5 million. The actual value depends on a number of factors. Meanwhile all sorts of transactions have been taking place, and it transpires that a number of private companies have also been involved, and they’ve all been busy siphoning off funds to. Friends passing the ball to one another, each of them grabbing a share of the profits. And all without any actual effort having being made for that money. The private companies that are being made use of are often dissolved again within six months.’ 60
DIAGRAM; SIPHONING OFF VIA ABC‐CONSTRUCTIONS Company A sells
Intermediary B
Company C buys
The second mechanism concerns dishonesty with regard to supplementary work. The implementation of a project has to cost a certain amount – it is a contractual obligation. Subsequently the company carrying out the work is asked to pay out unforeseen expenditures to companies whose services have supposedly been employed, services whose extent is impossible to determine or which turn out to be wildly overpriced. The extra costs for the expenses may then be declared as supplementary work. The companies to whom the expenses are paid are allied to the fraudulent contractor, and the payments are to private individuals or companies. In this way construction companies have probably diverted 9 million Euros as supposed supplementary work within a project of 50 million Euros. An insider again: ‘The 9 million on supplementary work. How do they go about it? Well, there are signatures on the accounts. And the private companies do actually exist. There’s no other verification available. That’s the way it often goes. It’s almost impossible to check up on. Yes, 9 million on supplementary work is an unbelievable amount: but who dares to question it? It’s 20% on top of the price!’ The main participants in the property fraud were the board members of Philips Pensioenfonds, who systematically sold off company property for too low a price, or bought overpriced new property, and (former) directors of the Bouwfonds, who were involved as developers or middlemen. It concerned a network of participants from the 61
regular property market who were interweaving legal and illegal activities. Forms of property fraud In attempting to understand what is going on concerning property fraud, it is useful ‐ in order to be able to determine how individuals misuse companies for their own ends ‐ to make a distinction between legal and illegal activities, and between the upper world and the underworld. Legal activities are all those activities that do not contravene the law ‐ earning money through business transactions is not necessarily illegal, and this also applies to cashing in on high profits from property deals. Illegal undertakings are those activities that are in breach of the law. The upper world is made up of organisations that operate within the confines of the law and who carry out their work through legal transactions. Of course the boundaries of the law are often pushed, but what is essential is that these organisations are part of the institutional world and operate both legally and transparently. If these organisations do violate the law by operating illegally, then we can talk of institutional criminality. Infringement of the rules of open competition is a good example of this. Then there are the criminal organisations that operate outside the public view. They carry out legal and illegal activities simultaneously, use (threats of) violence and systematically break the law. This book is not concerned with these organisations, but anyone who wishes to form a picture of such groups could plough their way through the surfeit of publications that appeared in 2006 and 2007 concerning Willem Endstra and Willem Holleeder. 62
DIAGRAM: FORMS OF PROPERTY FRAUD Legal
Upperworld
Underworld
Ilegal
In 2007 a number of different criminal activities in the property sector were exposed. The intertwining of legal business in the upper world with illegal underworld practices came to light in the Holleeder case. The precise methods remain unclear, but the direction was plain: money laundering. Money obtained unlawfully through illegal dealings was added into normal economic transactions. In a recent fraud concerning a housing corporation the existence of this intertwinement between the upper world and the underworld becomes apparent: A legitimate organisation (the corporation) does legal business (albeit at inflated prices) with a shady undertaking which in turn has relations with so‐called property sharks, who themselves are suspected of criminal activities. Illegal payments are the made to private partnerships owned by individuals associated with the corporation. Other recent frauds concerning housing corporations followed the method whereby legal transactions take place 63
against inflated costs ‐ for example payments services that had never been provided. From the profits thus acquired, payments are made to those involved, either in cash or in kind. In this case only legitimate organisations are involved, but legal and illegal transactions are interwoven ‐ forgery, fraud, bribery, tax evasion and so on. Property fraud follows a similar pattern. Lawyer Hendrik Jan Biemond typifies fraud as certainly being widespread but at the same time a classic and relatively simple form of corporate fraud.9 Legal transactions take place between companies, involving inflated or deflated prices: what is known in the business as ‘siphoning’. The difference is then ‘siphoned off’ privately. It’s an ingenious mixture of legal and illegal transactions in the upper world. Illegal payments also take place through the mechanism of so‐called supplementary work. Property fraud takes place in the upper world, and concerns legal transactions. By transferring property several times, or by inflating costs, profits are made which can then be used to reward dishonest directors. As these transactions concern large amounts of money, even a small percentage adds up to a nominally large sum. These settlements take place behind closed doors. 64
DIAGRAM: PROPERTY FRAUD IN THE UPPER WORLD
Legal
Upperworld
Underworld
Ilegal
Important to the property fraud is that it did not simply concern individual deeds, but the activities of a network of directors with defined responsibilities – this was organised fraud. In both the Philips Pensioenfonds and the Bouwfonds cases it probably concerned group of several people in tight‐
knit collaboration. Anyone who takes the trouble to examine a list of those involved in Bouwfonds Property Development around the year 2000 cannot fail to notice that it includes a conspicuous number of names of suspects in the property fraud that came to light in 2003. White-collar crime
Time and again it appears that uncovering the complexities of white‐collar crime, and bringing a successful prosecution, is a complicated matter. The criminal proceedings that took place at the time of the property fraud were also problematic. Imposing fines and dismantling the companies involved in the 65
construction ring no simple matter as far as prosecuting the people involved was concerned. Nonetheless, according to Toni van Hees, solicitor with the Stibbe legal firm and receiver in the fraud affair concerning investor Van den Berg from the Dutch ‘millionaire belt’ of Het Gooi: ‘Nowadays there is far more interest in this sort of offence. Both the public prosecutor’s office and the investigation service have a great deal more knowledge in this field. There’s a world of difference compared with ten years ago. In those days, if you lodged a complaint there was only a slim chance that you would hear anything more about it. Nowadays there’s a fair likelihood that something will come of it.’10 White‐collar crime has long been considered a marginal phenomenon. Yet in recent years there have been a considerable number of cases concerning illegal operations by owners and directors of businesses. And needless to say, the phenomenon is not limited to the property world. 66
DIAGRAM: CONVICTED WHITE‐COLLAR CRIMINALS IN 2006 (NRC Handelsblad 08/01/2007) Name Company Punishment Offence (includes) Peter Jan Q. Eco Brasil
6 years imprisonment
deception, fraud Peter K. Eco Brasil
4 years imprisonment
René van den Intervaluta B. Paul G. Air Holland Cees van D. Air Holland Jef M. AvL Z’huis Willem K. Massier Ton van Z. Dudok Aan van der W. Dudok Bart van E. Bakker Bart Marco van D. Van Lanschot
Dirk de G. Cees van der H. Michel M. deception, fraud deception, money 5 years imprisonment laundering 3 years imprisonment money (6 months suspended) laundering 18 months money imprisonment (6 laundering 2.5 yrs (6 months accepting suspended) bribes 2 years imprisonment bribery, (8 months suspended) forgery 20 months suspended sentence, fine, etc
20 m suspended sentence., fine, etc 1 year imprisonment (8 months suspended)
1 year imprisonment (8 months suspended) 1 yr suspended sentence Ahold 9 months Tax fraud Tax fraud Tax fraud Tax fraud Tax fraud Forgery suspended Ahold 9 months suspended 67
Forgery Peter S. Laurus Adri S. Strating Jeroen S. McGregor 6 months suspended sentence, fine, etc.
4 months suspended receiving bribes
tax evasion sentence
fine insider trading Why it is that the public prosecution service is not geared up for effective prosecution ‐ Biemond has this to say: ‘(at the National Public Prosecutorʹs Office for Financial, Economic and Environmental Offences) there has been too little thought given to the follow‐up stages: good personnel, good support, commitment right up to the highest level. That is actually the problem: the organisation is there, but it’s an empty shell.’11 And according to Tineke Hilverda it is still a fact that ‘crime fighters are more driven when it concerns murder or manslaughter than with a case of white‐collar crime. Combating fraud can be complex and often entails specific expertise and patience (…) The upper echelons of the Public Prosecution Service have informed me that once an officer has scented blood, from that moment on they are no longer suitable for the task of combating financial fraud.’12 Furthermore it is of great importance that the Public Prosecution Service is in possession of sufficient expertise concerning a specific sector in order to comprehend how fraud can arise and continue to flourish there. 68
And that is difficult, because most sectors are closed and have their own specific ‘cultures’. Becoming an informer is usually not an option, unless it is specifically encouraged, for example by the offer of a reduced sentence or even, as is practice in the United States, offering a percentage of the proceeds from fines. Structural characteristics of the property market Over the last ten years the property market has become less transparent. Around 1980 there were mainly institutional investors, a few dealers and construction companies. Now these three groups have been supplemented by banks, property investment funds, project developers, wealthy individuals, major real estate agents, specialised technical and financial advisors, process advisors and project managers who are active in the property market. Sometimes these firms (or individuals) are also active in a number of different capacities (Chinese walls often provide insufficient cover). Owing to these additions, the property market has not only become busier, but also more complex and thus less transparent. Furthermore, the market is no longer purely a national one but has to a certain extent become globalised. Doing business with companies that are based abroad has become a matter of routine. Finally, the scale of projects is now many times greater than in the past. Whereas in the early 1990’s a project involving 100 million Euros was exceptional, today such projects are commonplace. A great deal of money circulates on the property market, and that too encourages a lack of transparency. As a reaction to all these developments there is of course an attempt to arrive at some kind of market regulation. Construction management, building organisation and whole chain approaches are examples of attempts to achieve codification and regulation. 69
In addition to property management (the letting and maintenance of buildings), the property sector consists of three subdivisions – the constructors of buildings, the property dealers and the investors. All three are involved in the current property fraud, but it is mainly property dealers who are implicated. Also, it would appear that the property fraud begins with the dealer and then fans out to include the constructors and investors. Moreover, the dealer is the central point. But honesty compels one to admit that it is rather a ‘chicken and egg’ question here. Who can say where it all starts? Is the dealer bribing the investor? Or is the investor extorting money from the dealer? Just as was the case with the construction fraud of 2001, the property fraud will have far‐reaching consequences for the image of the sector. Huub Smeets, director of Vesteda, characterises it thus: ‘The serious accusations of conspiracy to commit fraud reach into the heart of the institutional property sector. The sector does not have its affairs in order. It is time to take this to hand.’13 An insider, who wishes to remain anonymous, has this to say: ‘This sort of thing has occurred more than once. This is not an isolated incident. The sector is careless with checks and balances, and that hasn’t changed since 2007. Many property businesses have no effective integrity regulations. Integrity isn’t even considered to be something worth valuing.’ In the meantime, property sector associations such as the Association of Institutional Property Investors in the Netherlands and the Netherlands Association of Project Development Companies are busy enforcing and sharpening their integrity regulations. The new crisis in the property sector has to do with the question of why the boundaries between the legal and the illegal appear to be so easily breached. This is partly to do 70
with the (structural) characteristics of the sector itself: there is a lot of money involved; there are a lot of transactions; many different parties are involved. But it also has to do with moral principles. Neill Stansbury, project director at Transparency International, describes a number of factors that make construction particularly susceptible to fraud. Many of these characteristics are also relevant to the property world. The most relevant are cited below: ƒ The scale of the projects: in extensive projects fraud is easily covered up. ƒ The uniqueness of projects: it is difficult to compare one to another. ƒ The large number of building partners involved: each contract, but also each operation based on the contract, offers possibilities for irregularities. An overview of the complete project is difficult as projects are frequently divided into several phases involving several different partners. ƒ The complexity of projects: complexity entails a diffusion of responsibilities and that offers opportunities for irregularities. Much of the work is ultimately obscured. ƒ In construction no‐one has overall responsibility. ƒ There is a lack of internal financial checks. ƒ The costs of incorruptibility are high: it is cheaper to take part in wrongdoing than to behave honestly. ƒ And it is a closed culture. 14 Risk management
There is not much that can be done about the structural characteristics. At most directors and supervisors should be extra alert to the risks posed when a project includes a number of these risky characteristics. 71
Solutions can be devised for other risks that are incurred because of these structural characteristics. These vary from simply investigating who is behind a particular company, and the ‘four eyes principle’ with regard to strict, honest and professional supervisors. For the sake of clarity – at Philips Pensioenfondsen it had been apparent for years that the fund was scoring worse than the trade index, but apparently that did not give any great cause for alarm.15 In the property sector there is an assumption of low trust. ‘You always have to be on your guard. You have to check everything really well because it’s always a one‐off, and record it because it can have considerable consequences. In fact you consistently have to start from an assumption of untrustworthiness,’ says an anonymous interviewee. ‘You regularly do business with people who are not to be trusted,’ adds an insider. ‘If you cannot make a deal with them competently, then you’ll be taken for a ride. You have to check all your transactions and get them recorded. It is, by the way, entirely possible to do business with untrustworthy people. ‘Untrustworthy’ only differs very slightly from ‘shady’. We don’t do business with shady companies. We check out companies that we don’t know, and if we think they’re on the wrong side of the law then we don’t do business. It’s strange to see that some respected colleagues do carry out business with them.’ What are the current everyday indications that a company may be on the wrong side of the law? ƒ An unknown company shows up with a big deal ƒ An unknown company has an indeterminate foreign address ƒ A small company has a large property portfolio ƒ A company grows exceptionally quickly (‘Sometimes you wonder if they can perform magic.’) 72
ƒ
ƒ
ƒ
ƒ
ƒ
ƒ
A deal is excessively complicated A deal cannot be legally or financially verified Obscure amounts have to be paid to obscure companies The reputations of the directors involved are not unblemished The lifestyle of the directors involved provokes questions The company culture is overstated and ostentatious Along with all this there is the ‘return a favour when asked’ principle. A deal is only a deal when there’s something in it for the middleman. Financial lubrication and lionising also belong in that category. Huub Smeets, director of Vesteda, says that you must also be alert to the question of people holding additional offices and the business of dealing exclusively with only a few companies. About this last he says: ‘Surely that indicates that something is going on? We don’t have to kid one another, do we?’16 One should also be especially alert in cases involving the wearing of different hats: it can create extra risks when an undertaking finances, develops and supervises without making an adequate distinction between the various functions, or without adequate communication. Risk situations can also occur when property brokers simultaneously deal and develop without declaring it. An entwining of interests increases the risk of fraud. It is conspicuous that property fraud occurs in businesses which as private companies either aspire to benefit the public
(Philips Pensioenfonds) or aspired to do so in the past (Bouwfonds). ‘When do things go wrong in the property world?’ asks an interviewee. ‘Companies such as Bouwfonds or a pension fund suddenly find themselves involved in things that they weren’t involved in previously. Their own people aren’t equipped for that. Retraining of accountants isn’t such a handy thing to have to do, so they have to hire new people. 73
But at the same time there are no mechanisms in place to closely supervise what these new people are doing. There’s a huge risk in that. My impression is that Bouwfonds took far too many risks in that area. For that matter, corporations are going to be running that risk in years to come. They’re recruiting property people from the market, for a great deal of money, and those people are being given a relatively large amount of space to manoeuvre. Internal supervision is falling a long way short.’ Not everyone is in consensus with this analysis. Some say that the problem lies with the hiring of intangible new expertise combined with failing internal supervision, but another school of thought considers the problem to lie entirely with the lack of proper internal supervision. In order to control structural characteristics a company needs to have sound internal integrity regulations. Examples of ways to enable avoidance of risks are: ensuring that transactions take place under two pairs of eyes; ensure that it is not always the same parties that are being worked with; that directors are open about their outside work; that checks are made on the backgrounds of enterprises with whom business is being done; and that there are strict rules about lubrication and lionising as far as relations between companies are concerned. For the system of internal checks and balances a company hires externally in order to evaluate the internal system of control and improve upon it. This is then followed up by the appointment of compliance officers to safeguard the internal mechanisms and permanently review them for their procedural soundness. After this of course, it’s necessary to have strict and honest supervisors. Fewer old boys, more new faces. Alongside this, keener external supervision over the construction and property worlds would help a great deal. The NMA is already paying close attention, but a more extensive involvement by the AFM would be no bad thing. 74
And: ‘As a contractor you always have to keep your radar switched on. A lot happens in this business that continues to surprise you.’ The most important thing is the exemplary role of the board of directors. If they are not honest, then no‐one else will be. Business ethics
Chief executive officer René Craemer is of course not at liberty to say too much about ongoing investigations into property fraud, but what he does say is not to be taken lightly: ‘We are coming up against forms of crime on the financial markets whereby we consider using the most rigorous means appropriate.’ He goes on: ‘It is absolutely not the case that the property sector is rotten through and through, not by a long shot. We must take care not to paralyse the whole sector. But I don’t find it an easy job, considering what we’re up against. We run into people whose motives I simply cannot. So incredibly rich, and yet still such swindling. It would be most peculiar if the suspects that we have our eye on at the moment turned out to be the only ones from that world who are up to such things.’17 In connection with this, Craemer speaks of ‘a dulling of ethical awareness’ in the business world. One expects managers of Dutch enterprises to behave themselves. It amazes us that people earning so much still have their fingers in the till. Ordinary people like you and me. And the horizon is being continually pushed further and further away.’18 One contractor who was interviewed says: ‘I am completely taken aback. How can it be that such people are given so much room to manoeuvre in their company? The property market apparently exerts some special attraction on people lacking in moral principals.’ The most important explanation for fraud is the greed of directors. Some individuals also cite the culture of constantly pursuing higher turnover and the enormous pressure to achieve financial results. By participating in risky (and 75
sometimes illegal) deals, the chances for higher returns are increased. On top of that there is often a bonus for high returns, though not for internal reporting of the possibility that closing a particular deal might pose a risk in terms of the integrity regulations. In any event, greed turns out to be the main motive behind fraud. It begins, according to insiders, with someone (consumed with jealousy) who notices that the property that he’s selling is earning the middlemen a lot of money, and that they are thus able to lead a life of luxury. This leads them to ask for commission. ‘They’re doing big deals and want to have a share of the profits: how come there’s no commission for me in this deal? Directors are robbing their own companies. They have sticky fingers.’ Moreover, if someone is planning to commit fraud they’re better off not asking for too little, but rather a large amount, otherwise they’re a loser. Because the fraudster is a well‐
educated professional, and often a person who is supremely responsible, he knows how the monitoring system in his company works and how to circumvent it. If the fraudster is especially brazen, he announces – if he calculates that his supervisors will not object – that he has his own company and occasionally takes on a project privately. If that would be disapproved of, he devises a construction using a puppet front man. The fraudster soon realises how lucrative it is to do business in this way, and furthermore he has thought up a sophisticated system and considers it unlikely that he will be caught. Before long he is asking for higher commissions, but also taking greater risks… During an interview for this book, criminology professor Grat van den Heuvel compared this behaviour to that of a ‘“trailer trash” family who have discovered how with hashish dealing (if you take adequate precautions) you can have hundreds of thousands of Euros in your pocket within a couple of weeks. And once you’ve smelled that big money, it works like an addiction. There is no return.’ 76
Now that even the men at the very top are involved in fraud, trust in the property world and between its members is under greater pressure than normal. ‘You don’t know who you can still trust. If all the chairmen of the boards of the pension funds are now filling their own pockets, who can you possibly trust? Unfortunately, the good guys can no longer be distinguished from the bad guys.’ Playing double In many parts of the world irregularities in the property world are treated quite laconically. In some sections of the market it all seems to be simply part of the game. The principle of ‘you scratch my back and I’ll scratch yours’ takes the place of moral ethics. But there is no longer a single, undivided property world. An old hand in the business says: ‘There are two continents, which have nothing to do with one another. If you work honestly and others are aware of that, then you operate in two parallel worlds, you may never be conscious of the others. In all the years that I worked in the property business I was never approached. We stay out of range of the circuit of fraudulent dealers. We don’t want anything to do with all that. But if you’re at a reception, you can smell them. For that matter they’re easy to recognise: money and pumped up status oozes from them. I don’t want to be seen with the likes of them.’ There seem to be two separate cultures in the property upper world. One is a more a formal world of cautious bureaucratic officials, and the other a more informal world of property entrepreneurs who take greater risks in their pursuit of (very) high returns. The boundaries between these two worlds are fluid: parties are continuously doing business with one another and encountering each other daily ‘on the market’ ‐ both groups being interested in a specific location or building. It is probably possible to trace these cultural differences mainly to differences in attitudes toward doing business. For 77
one individual, ‘B2B’ ‐ business to business ‐ will entail adhering to certain rules and check‐ups more than for the other. What is a grey area for the one, counts for the other as just this side of the line, or he is of the opinion that it can’t be done any other way. The area with the biggest differences
seems to be that of business ethics. There is also another difference: only rarely does a property entrepreneur take up a post in a formal organisation, while bureaucratic officials often cross over to the world of the property entrepreneurs. According to initiates, some sections of the property world are not to be trusted. Often some kind of double cross is being committed. It is not easy to make an insightful analysis the distinction between trust and mistrust, but it certainly exists. The director of a development company: ‘There are different types of companies in the upper world. In our firm, lists of companies that we do not do business with are circulated. Nevertheless, I cannot rule out the possibility that business is being done with them anyway, because an intermediary may have slipped in between. And by the way, we’re talking about legitimate companies here. We don’t trust them, we think that there’s something fishy going on.’ And when pushed on the subject he adds: ‘You can see who’s on the wrong side of the line. The market knows, they see it. As a respectable company you stay away from those people.’ But this director acknowledges that blood will out: ‘Many things are impossible to verify, because they don’t exist. After the fact, I heard that one of my salesmen had passed on some work – for a sum – to someone else. How can I possibly find out that I haven’t acquired a particular job? It’s invisible, it can’t be seen anywhere. In this case the person who had approached my salesman came to me and asked why we hadn’t wanted the job. I threw our salesman out and the company to whom he passed the work on has been placed on the black‐list.’ Trustworthiness is not so easy to establish. Fraud specialist Gert Hoffman says: ‘In my experience it’s the case that ten 78
percent of Dutch employees are morally corrupt, and ten percent are above all possible corruption. The remaining eighty percent are pretty much prepared to abide by the rules, providing everyone else does so too. But when the time comes that they see people filling their pockets left, right and centre to the detriment of their employer and society in general, and doing so without any repercussions whatsoever, then sooner or later they will do the same.’19
Cultural facts In construction and property duplicity is a common phenomenon. In my book on the construction fraud, Verzwegen onderneming (Suppressed contracts), I wrote about this: ‘In contacts with outsiders and in private, building contractors conduct business like conscientious citizens, while as officials in the contracting business they flout the law without a second thought. Precisely by subconsciously switching from one to the other regularly, a person is able to ‘perform’ in both worlds. (…) This concerns men who for the sake of their careers committed (many) wrongdoings but who for the rest were terribly normal.’20
This evokes the interesting question of how it is possible that fraudsters consider that they’ve done nothing wrong. The Oxford professor of criminology Federico Varese decrees that where corruption is customary, it is no longer an issue: ‘As time passes, the memory of a no‐corruption equilibrium fades away.’21 Moreover, because corruption becomes a part of organisational culture, the distinction between what is legal and what is illegal vanishes. This has direct consequences for the ways in which people think and behave: ‘Bribe‐takers develop an “easy conscience” and “a culture of justified bribery”. When norms such as “return a favour when asked” exist in a pervasively corrupt society, they encourage further corruption”22 When ‘return the favour when asked’ becomes the prevailing standard it 79
appears as if no other reality exists: ‘People practicing such mutual debts (return a favour when asked) will be very surprised if they are accused of dishonesty.’23 Varese speaks of ‘fact‐based beliefs’. People consider what they do to be normal, they don’t know any better. Professor of politicology Herman van Gunsteren prefers to speak of cultural facts. ‘Culture is something that goes without saying, something shared. An established culture creates cultural facts. These are matters which are maintained by the way in which people conduct themselves, but which for those involved are experienced as indisputable facts.’24 ‘The world is full of such cultural facts, full of things which within a particular culture are unquestionably accepted as natural. Everyone goes along with them, either out of a sense of reality or else a sense of reality plus conviction.’25 Setting up helpers White‐collar crime is a metier, which apparently embraces many different parties. Property needs to be evaluated; notaries often allow a number of deeds to be executed on the same day for the same property but for different prices; tax specialists give advice about attractive tax evasion schemes and puppet front‐men are ready to allow their limited companies to be made use of as stopover points. ‘No notaries – no property fraud’ was the appropriate headline in the NRC Handelsblad on February 23rd 2008. According to Robert Salomons, chairman of the Royal Brotherhood of Notaries (Koninklijke Notariële Broederschap), we shouldn’t exaggerate: ‘Almost all of the 1,450 notaries in The Netherlands are honourable. Some are perhaps a little naïve and allow themselves to be taken advantage of, but that’s almost always the extent of the matter.’26 Several years ago the sizable Utrecht notary firm Hermans & Schuttevaer was ordered to pay damages of 1.6 million Euros to KBC bank. The notary had supposedly been negligent and because of this the bank 80
had allowed itself to be misled by a group of property dealers.27 Hermans & Schuttevaer claim to have been misled themselves: ‘The notary declares that he himself was cheated by a group of “professional fraudsters”. Lawyer Van Andel uses the term “pure white‐collar crime” and points in particular to the property men.28 Deloitte was also rapped on the knuckles by the judge in connection with this affair. The number of cases against perpetrators and their helpers is limited. ‘The chance that those involved will ultimately be prosecuted is slim,’ says Francien Lankhorst in her study entitled Professional services and organised crime (Professionele dienstverlening en georganiseerde criminaliteit).29
Criminologist Gerben Bruinsma adds that notaries are not only essential players in the legitimate game, but that they are also sometimes involved in money laundering: ‘We are now gaining some insight into the silent power of organised crime: that world of intricate financial structures and concealed ownership, with a backdrop of violence or the threat of it. There are so many millions being earned that there must be notaries, financial experts and lawyers involved. Money corrupts. And if such an advisor makes the mistake of stepping over that line even once, they will never let go of him. That’s the way that world works. Brutal.’30
Meanwhile the reins are being tightened in some professions. The helpers are being given less room to play, notaries’ freedom is being limited, and disciplinary jurisdiction intensified. One particularly unusual group of helpers turns out to be local councils. From anonymous interviews with property entrepreneurs it transpires that city councils, sometimes without giving any thought to the matter, have been working together with property investors and developers who are not always particularly honest. Civil servants and local councillors unconsciously act as ‘cover’ for this type of 81
contractor. ‘They allow themselves to be taken to the cleaners. They’re naïve.’ That’s the judgement on these public servants. ‘There are too few checks on the public side to make sure that these ‘super‐entrepreneurs’ are truly bona fide. Big cities seem all too eager to enter into joint ventures with characters who later turn out to be villains.’ For respectable property entrepreneurs it is becoming rather difficult not to do business with contractors who have the blessing of the local council. How can you reject a deal or an alliance if there’s a nice partnership contract with the council on the table? At the same time there is also good news for the councils. Employing ammunition from the administrative arsenal such as the Public Administration Probity in Decision‐Making Act appears to be an effective medium for tackling illegal contracting. Cultural differences Large property firms are bureaucratic organisations with structures, systems, function profiles and salary scales. They could be, for example, linked to a significant firm or sector as a pension fund, or to a bank, a substantial construction concern or a group of institutional investors as a developer. They are ‘decent’ organisations with ‘decent’ men and women. Alongside them there are many independent contractors and small entrepreneurs active in the property world. Sometimes those contractors have large sums of money at hand so that, despite their relatively limited size, they can nonetheless participate in large deals. Both types of organisation are active within the same market, and often work together on the same projects. Precisely within this parallel existence of two ‘continents’ lies the probable explanation for the current property fraud. On the one hand there are those holding prominent positions in companies who are supposed to abide by the rules, but on the other hand there are the ‘rogue traders’ who are busy 82
trying to make some easy money in the property market and who have a different interpretation of the rules. When these two worlds conduct business transactions together the one goes home with a greater share of the profits than the other. This apparently stimulates greed in some of those with company positions who would like to get a piece of the pie or become a rogue trader themselves. Here too, supervisory measures are going to be needed. In a court case concerning fraud in the construction business it transpired that the director already had a ‘past’. Apparently investigating someone’s background to ascertain their incorruptibility when it concerns a position at the head of a company is not standard procedure. But wherever people are concerned things become difficult, after all, who can still be trusted when directors themselves are busy robbing their own firms? This is the problem facing the whole of the property sector. With the construction fraud, middle managers of the companies involved were rather casually left carrying the can. But what we have now is the men at the very top, those in supreme positions of responsibility, who were probably laughing behind the backs of the members of the cartel who had probably been left with nothing anyway. Outside the existing political system Since the year 2000, several of the publicity‐seeking nouveau riche in the property sector have firmly allied themselves with new right‐wing political parties such as the Lijst Pim Fortuyn and Trots op Nederland. Time and time again these property barons speak out in favour of strong leadership, oppose any regulation that might hamper contractors, express an aversion to the current political elite and push for firm decision‐making. During the Fortuyn era there was one group of property entrepreneurs who openly showed their 83
support. Today, with Rita Verdonk, the main support appears to be from individual property developers. This open liaison between the nouveau riche of the property world and the populist right‐wing parties is an enormous thorn in the side of the traditional players. One director of a property investment firm puts it thus: ‘The image of our sector is incredibly vulnerable, particularly since the construction fraud. This open flirtation with Fortuyn and Verdonk only serves to further marginalise us. By behaving fraudulently we place ourselves outside of the economic system and by allying ourselves with Fortuyn and Verdonk we also place ourselves outside the political system. What kind of weird business is this?’ Someone else says: ‘The property world increasingly appears to outsiders as a world of easy money ‐ if you want to get rich, you should go into property. But once you’ve become rich there are three things you can do: enjoy it modestly; play the benefactor for the common good; or you may wish to become a public figure. One encounters this last inclination ‐ to flaunt oneself ‐ among the property entrepreneurs who are allying themselves with the new political parties. They employ this route in search of a kind of social recognition, wanting to also belong to the political elite.’ Here an interesting difference comes into view ‐between the property dealers and the more institutionalised parties. The first group is made up of contractors, who have often – swimming against the flow – built up their own companies, whereas the second group consists mainly of managers, who have spent time working at first one investor and then another. The independent contractors consider themselves to be outsiders, who have to stick up for themselves and who feel that they aren’t sufficiently valued by the political and professional elite, whereas, contrastingly, the top managers in the property business are on extremely friendly terms with 84
the existing political elite. Even if it’s only because they happened to study in the same department of economics or civil engineering, or had been members of the same club. The circles within which these two groups move are thus partially separate. A significant feature of the current property fraud is that in each case where the institutional property world is concerned, fraudulent managers are inevitable involved. Integrity The property sector has been through bad times in the last ten years. The underworld launders its money there. Construction companies make illicit price agreements. And (former) directors of property companies are being caught with their hands in the till. How can this sector be cleaned up again? The good news is that sooner or later criminal activities will surface and be made public. Whether it concerns whistle‐
blowers, concerned contractors, witnesses for the crown or the tax authority, sooner or later criminals and fraudsters will become careless and leave tracks, or make enemies who are prepared to spill the beans. The indefatigable detective work done by investigative journalists from the national papers has been particularly helpful in exposing irregularities in the construction and property worlds. In recent years they have, thankfully, been aided by the Fiscal Information and Investigation Service/Economic Investigation Service on the one hand and supervisory services such as the Netherlands Competition Authority on the other. Even if it was the case that these organisations were still hibernating at the time the construction fraud commenced in 2001, these days they are much more on the alert. Nevertheless, it is high time that the Netherlands Competition Authority started taking action on conspiracy concerning land prices. There are many reports of 85
deals being made on land prices at major housing development locations. At the same time, the bad news is that it is almost always people from outside of the construction and property world who are the ones pointing the finger at irregularities. In an article in Het Financieel Dagblad on fraud among property funds, an activist alleges: ‘There are still certainly forty illegal property funds active in The Netherlands. I’ll put it this way – you should be able to explain to your own wife where the income from a property investment comes from. If you can’t do that, then you shouldn’t get involved.’31
Supervisors only function well when honest contracting is concerned – more value is placed upon mutual collegiality between directors than on the reporting of irregularities. Moreover, it would seem that the attitude in the property world toward what is permissible and what is not differs somewhat from the way in which this is viewed by the rest of society. When, in 2005, I spoke with one of the newly wealthy property entrepreneurs about the cartel agreements in the construction business, he called me naïve: ‘I can tell you’re not a businessman. If you won’t do something for somebody else then you put yourself out of the market. Being part of the ‘return a favour when asked’ system is at the core of the property business.
And deals are simply a part of that. It’s ridiculous that you found anyone willing to publish that book.’ Since the construction fraud, building contractors and those in the property world are additionally sensitive to any doubts about their trustworthiness. In any case, the restoration of trust which is essential to the relationship between contractors and construction companies has, since the revelations concerning the construction fraud, been made very complicated. Not without reason does the old saying go 86
that you can lose trust in just one minute but it can take many years to restore it. The mayor of Hoorn, Onno van Veldhuizen, who was one of the few to make a strong intervention regarding municipal organisation as a result of the construction fraud, he says: ‘I wouldn’t want to still call it a distorted relationship, but relationships are not what you would call normal.’ In the view of the mayor, the construction companies themselves are largely to blame. ‘They are only too happy to go to court the minute they’re dissatisfied with a tender submissions procedure. That doesn’t do the relationship much good.’ On top of that, very few construction firms have actually dismissed employees who were involved in forbidden preliminary talks at the time. ‘That in itself doesn’t feel right. A contractor can shout as loud as he likes that he’s a member of the Stichting Bevordering Integriteit Bouw (the Foundation for the Promotion of Ethics in Construction), but it just isn’t pleasant to do business with someone who once screwed you over.’32 Clean hands However, the calls for ethical behaviour are not limited to the property and construction worlds. In all the western countries, the theme of white‐collar crime has recently become an important point on the agenda. One only has to glance at the fuss about the recent scandals among our neighbours to the East. The chairman of the BDI industrial organisation in Germany, Jürgen Thumann, wants to exclude criminal managers from now on. The direct reason behind this is the ‘Liechtenstein affair’, a tax fraud that ran into billions, of which Klaus Zumwinkel, the CEO of Deutsche Post, became the first casualty. Union leader Frank Bsirske speaks of a ‘culture of greed’. The Liechtenstein affair followed hot on the heels the Siemens affair (1.5 billion Euros in bribes to pull in contracts), the Volkswagen affair (buying off industrial peace) and the Daimler affair (options valued at 87
tens of millions given to dishonest top man Jürgen Schrempp).33
René Craemer explains that the more severe approach of the public prosecution service ‘stems partially from dissatisfaction in society. Fraud is being frowned upon more harshly by the public in the Netherlands. Trust in the business world has come under discussion.’34 That should be no surprise according to professor Hans van den Heuvel: ‘Since the 19th century the government has been required to operate within the bounds of the law. Legality became the basis of the democratic constitutional state. I would situate the emergence of legitimacy in the period around the velvet revolution in the 1860’s. Since that time, the way in which the government behaves has to have a democratic basis: moderate and acceptable. We want to know what the government is up to. It is no longer above you and beyond you. We want to be a part of policy‐making. Moral ethics go even further – we insist that government exhibits morally unimpeachable behaviour. The instruments are there: the general beginnings of respectable administration. There are ombudsmen, possibilities for lodging grievances, whistle‐
blower schemes, protocols, periods for appeal and mediators: they’re all in place. All this has come about in a very short space of time. And he continues: ‘The populace want to be treated decently ‐ so no arbitrariness and no abuse of authority. At what point did we become aware that this exorbitant self‐enrichment was going on? When did we finally say ‘enough is enough’? When company directors were being rewarded in millions even though they incurred massive losses for the company? You’ll see that society is going to set strict standards. As consumers, the public are going to insist on socially responsible commerce.’35 Perhaps it would be a good idea if the Dutch public heeded that 88
prophecy, and started insisting that things be done in a decent manner. In fact, the first requirement for clean hands is professional internal supervision. That is something which companies have to do for themselves. It starts with the appointment of managers and directors who can serve as an example when it comes to ethical dealing. Following that, the supervisors must ensure the existence and smooth functioning of adequate internal systems that ensure the right levels of checks and balances. Moreover, supervisors must treat their directors strictly as advisors and not as friends. If the supervisors don’t measure up, who else will? And if that doesn’t happen, well, we now know what the consequences can be. This is the most important lesson that the property sector needs to learn. Better internal supervision. Directors must employ strict standards concerning what is and is not acceptable. It won’t work if someone is indifferent to the history of an ‘asset’ while in the meantime someone else is refusing to buy property that smells fishy. The same thing goes for the scale of the irregularities. Shrugging off ‘the odd million’ will be unacceptable. The exemplary function of directors will be the essential factor: ‘Where and from whom can one learn what decency is otherwise?’ 89
Finally, the good guys have to stop doing business with the bad guys. It is far too easy to say that the provenance of a particular property doesn’t matter, or that the party (or intermediary) with whom one is doing business hasn’t been convicted of any offence. Furthermore, companies should check more extensively how often loners or newcomers on the property market are suddenly in a position to make extensive deals – how have they come by the money? If councils can employ the Public Administration Probity in Decision‐Making Act to enforce ethical dealing, why shouldn’t companies do the same? A number of companies do already make use of this sort of internal procedure. A more principled attitude amongst the good guys is needed, otherwise the chain will not be broken and weeds will reappear regularly (and always at awkward moments) among the crops. With such an approach it is only logical that employees report back to management when they have suspicions that a deal is not ‘kosher’, and that such deals are then scrutinised, and when necessary reported to the judicial authorities. 90
Notes 1. NRC Handelsblad, Je moet fatsoen opleggen aan de macht, 28/4/2007 2. Het Financieele Dagblad, Vastgoed zet schoonmaak in, 20/3/2008 3. Het Financieele Dagblad, 20/3/2008 4. Het Financieele Dagblad, Zuidasplannen zijn niet meer te stoppen, 25/4/2008 5. L.Vulperhorst, Verzwegen onderneming, Van Gennep, Amsterdam, 2005, p.217‐225. 6. M. Bovens, The Quest for Responsability, Cambridge University Press, 1998, p.124 7. Het Financieele Dagblad, Smeergeld Zuidas via Brabantse bouwers naar fraudeverdachten, 27/03/2008 8. Het Financieele Dagblad, 20/3/2008 9. Het Financieele Dagblad, Vastgoed doof voor inbraakalarm, 8/12/2007 10. NRC Handelsblad, De curator moet de boel ook uitbezemen, 3/1/2007 11. NRC Handelsblad, Fraudebestrijding is niet de core‐business van Justitie, 28/4/2007 12. Het Financieele Dagblad, Fraudebestrijding vergt meer middelen, 16/5/2007 13. Het Financieele Dagblad, 20/3/2008 14. N. Stansbury, ‘Exposing the Foundations of Corruption in Construction’, in: Global Corruption Report 2005, Pluto Press, London, p.36‐38 15. BN De Stem, Controle pensioenfonds Philips faalde, 23/11/2007 16. Het Financieele Dagblad, 20/3/2008 91
17. Het Financieele Dagblad, Hoofdofficier: ondernemingen zouden altijd aangifte moeten doen van fraude, 22/1/2008 18. Het Financieele Dagblad, Fraudeparket: bezem door vastgoedwereld, 4/12/2007 19. A. Groot, J. Libbenga, De man die onzichtbaar wilde blijven, Nieuw Amsterdam, 2007, p.22 20. Vulperhorst, p.225 21. F. Varese, ‘Pervasive corruption’, in: A.V. Ledeneva, Economic Crime in Russia, Kluwer Law International, Den Haag, 2000, p.106 22. Varese, p.99 23. Varese, p.109 24. H. van Gunsteren, Woordenschat voor verwarde politici, Van Gennep, Amsterdam, 2003, p.69 25. Van Gunsteren, p.70 26. Het Financieele Dagblad, Notariaat scherpt controles aan, 9/11/2006. 27. Het Financieele Dagblad, Cellstraffen na fraude met vastgoed, 14/2/2008 28. Het Financieele Dagblad, Notaris bloedt voor rol in vastgoedfraude, 10/11/2006 29. F. Lankhorst, J. Neelen, Professionele dienstverlening en georganiseerde criminaliteit, hedendaagse integriteitsdilemma’s van advocaten en notarissen, Vrije Universiteit / Kerkebosch [reeks: Politiewetenschap, no.16, 2004] 30. de Volkskrant, Als we zo doorgaan wordt het hier een soort Italië, 31/3/2006 31. FD Geld, Malafide vastgoedfondsen. Nog zeker 40 te gaan, 2/2/2008. 92
32. Cobouw, Het is lastig zakendoen met iemand die je heeft belazerd, 14/12/2007. 33 Het Financieele Dagblad, Fraudeurs horen niet in de club, 18/2/2008 34. Het Financieele Dagblad, Vrouwe Justitia grillig in haar oordeel, 2/8/2006 35. NRC Handelsblad, 28/4/2007; see also, J.H.J. van den Heuvel, Fatsoenlijk en onbaatzuchtig besturen, Kluwer, Alphen, 2007 93