Breaking the Chains of Corruption

Matej Michalko is the CEO of DECENT, a decentralized blockchain platform revolutionizing data distribution

In the digital age, modern technologies are increasingly forcing government officials to move processes from behind closed doors, into the public sphere. From live streaming court cases in China, to logging public information on open data ecosystems, new technologies are improving transparency and increasing accountability in an an area which has traditionally been endemic with corruption.

However, experts suggest that it will be the blockchain — the decentralized digital ledger on which information can be stored and shared, but not deleted or tampered with — which has the potential to make the most long lasting change. To date blockchain applications have been rolled out with varying levels of success in processes such as recording election results, but a recent report from the OECD says that public procurement — the buying of works, goods or services by public bodies — is one of the government activities most vulnerable to corruption, and is most suited to the application of the blockchain.

So how can blockchain technology clean up the traditionally dirty area of public funds management?

Problems with traditional management of public procurement

Governments employ large amounts of staff with varying levels of responsibility, across a huge range of different departments, bodies and agencies. The US government hires upwards of 21 million people, while the UK public sector employed 5.4 million people in 2017.

As such, even when buying seemingly small, inexpensive items like stationary, costs can spiral into staggering figures. And when dealing with more expensive costs like transport fleets, maintenance and upkeep on all government assets, and new buildings contracts can cost in the hundreds of millions of dollars.

According to recent figures, public procurement accounts for more than 14% of GDP in the EU, 15% in the US and as high as 20% in China. And with costs running as high as $7 trillion dollars per year in the US, there is plenty of space for sticky fingers, and dodgy backhanders.

Traditionally, the most common forms of corruption have included withholding funds (embezzlement), overestimating costs and needs for personal gain, bribery of public officials involved in the awarding of government contracts, or fraud in bid evaluations, invoices or contract obligations.

And while public procurement is monitored and regulated by global governing bodies like the EU commision, to ensure that member states respect the 3 key principles of equal treatment, non-discrimination and transparency, cases of mismanagement are estimated to be much higher in ‘emerging’ economies like former USSR states, and African countries, which are comparatively less regulated by external watchdogs.

As such, it’s not surprising to see that according to The Economist, “nine in ten government organisations say they plan to invest in blockchain technology to help manage financial transactions, assets, contracts and regulatory compliance” by the end of 2018.

How blockchain helps

To best understand how blockchain can make public procurement more transparent, it is important to first look at the most common forms of corruption:

Preferential treatment for bids

Generally, government bodies will receive a number of ‘bids’ from suppliers, and in a fair scenario would choose the best deal in terms of price. However, one of the most common forms of corruption in procurement, is when officials give preferential treatment to certain suppliers after receiving bribes. Some common forms of unfair bidding include:

• Collusion among bidders to cut out outside competition.
• Officials offering bidders with advance “inside” information.
• Choosing “sole source” contracts rather than using multiple suppliers.

However, the blockchain can act as a deterrent to this type of behaviour, by adding a new level of traceability which can track all bids, and terms from suppliers on the blockchain, which in turn makes it easier for fraudulent behaviour to be noticed. Put simply, if the figures don’t add up, and the best deal financially is not chosen, all this information will be saved.

Smart contracts can be coded, which require more than one official to ‘sign off’ on a deal and using these same smart contracts, funds can also be put in escrow until a transaction is verified by someone who is designated to this purpose. This ‘approval’ system is likely to deter officials from trying to make a quick buck by offering preferential treatment.

Inflated orders/invoices

Another common type of fraud is when officials overestimate or falsify invoices for work or services which have already been completed. In the pre-digital age, when orders and invoices were stored on paper, it was extremely easy for officials to change or delete invoices and order information to cover up corruption.

Common forms include:

• Submitting falsified or inflated invoices for services or products that have not been delivered or work that has not actually been completed.
• Creating bogus “Shadow vendors” and then billing them for large sums for work/services which did not take place.

However, using the blockchain it would be simple to eradicate this type of behaviour. By creating unique identity management, and creating a ‘personal key’ for each supplier, and also for each official who submits invoices, it would be easy to trace who had filed for expenses, and which company had allegedly completed the work.

And when the purchase of physical goods were in questions, it would be easier to trace costs back to the source, and also record how many units of materials were used, thanks to easily scannable and recordable barcodes, and shipment codes being saved on the blockchain.

Using low standard goods/materials

Another common issue, which is particularly dangerous to the public and other government employees, is when official contractors invoice for certain materials, but in fact use cheaper or lower quality materials to complete the job.

However, thanks to information being stored on the blockchain, officials can ‘track and trace’ products from production to sale, offering more visibility about where a product was created and with what materials. Blockchain’s innovative qualities of immutability, transparency and security can be used for the whole supply and value chain of suppliers and sub-suppliers, to ensure that the right materials or services are provided to the right place at the right time.

Current government applications on the blockchain

Blockchain technology is already being used to improve accountability by government officials across the world.

In South Africa, in light of accusations that former president Zuma has syphoned off billions from local government departments, a number of South African financial institutions have rolled out a blockchain technology called Springblock, which supports Ethereum, Hyperledger, Chain Core, Corda, and Quorum. Using the SpringBlock technology, government employees, suppliers and contractors could be assigned with public and personal keys, which would record exactly who was spending what, and also securely monitor the management of public funds across the board.

In Estonia, the government has rolled out an e-residency program that harnesses the blockchain. If Estonians or foreigners need to sign any official form, or register a business, everything can be done easily and quickly online, and information is stored on the blockchain. Whether it be for official forms, tax returns or land ownership records, using these digital identities makes the process safer and more transparent for users, and allows them to track the progress of these processes at any moment in time. By making processes quicker and easier, this also reduces space for fraudulent behaviour from officials who may have previously accepted bribes to speed up the process.

With procurement costs in the trillions, blockchain technology offers a streamlined manner for governments to ensure that rules are followed, and corners are not cut by public employees. Aside from improving public trust in governing institutions, this should help governments improve their money management which in turn, should provide more available funding for important public projects, which can really help citizens, rather than filling the pockets of corrupt officials.