Organized crime behavior of shell-company networks in procurement: prevention insights for policy and reform

TL;DR

This paper introduces a network-based approach to analyze shell-company networks involved in procurement corruption, providing insights for policy reform and fraud prevention through case studies in Mexico.

Contribution

It develops a novel network framework combining ownership, management, and contracting data to identify organized crime behaviors in shell-company networks.

Findings

Quantifies economic impact of shell-company operations.

Identifies connected components and modules in networks.

Suggests legal reforms based on network analysis insights.

Abstract

In recent years, the analysis of economic crime and corruption in procurement has benefited from integrative studies that acknowledge the interconnected nature of the procurement ecosystem. Following this line of research, we present a networks approach for the analysis of shell-companies operations in procurement that makes use of contracting and ownership data under one framework to gain knowledge about the organized crime behavior that emerges in this setting. In this approach, ownership and management data are used to identify connected components in shell-company networks that, together with the contracting data, allows to develop an alternative representation of the traditional buyer-supplier network: the module-component bipartite network, where the modules are groups of buyers and the connected components are groups of suppliers. This is applied to two documented cases of procurement corruption in Mexico characterized by the involvement of large groups of shell-companies in the misappropriation of millions of dollars across many sectors. We quantify the economic impact of single versus connected shell-companies operations. In addition, we incorporate metrics for the diversity of operations and favoritism levels. This paper builds into the quantitative organized crime in the private sector studies and contributes by proposing a networks approach for preventing fraud and understanding the need for legal reforms.