Memorandum submitted by the Department
for International Development - continued
SECTION 6: ATTACKING
THE PROCEEDS
OF CORRUPTION: MONEY
LAUNDERING AND
ASSET RECOVERY
6.1 Corruption is aided and abetted by money
laundering which allows those involved to protect the proceeds
of crime and to benefit from them. The laundering process will
often involve financial centres in industrialised countries such
as London, Geneva or New York, as well as financial centres in
some developing countries. With the globalisation of capital markets,
the proceeds of corruption can flow across national borders in
seconds, so that international co-operation is essential to prevent
it. The Government is committed to maintaining effective anti-money
laundering controls in the UK and actively supports the efforts
of the international community to tackle the problem—in
particular through the work of the Financial Action Task Force
(FATF), which is the principle international anti-money laundering
standard setting body.
6.2 The Treasury are the lead department
on financial crime and determine overall UK policy. The Home Office
leads on domestic law and on international legal cooperation.
Government policy on improvements in these areas is set out in
a recent study by the Cabinet Office Performance and Innovation
Unit (PIU).[5]
The main proposals for action in this context are noted below.
Money laundering controls in the UK
6.3 The Government is considering legislation
to simplify and clarify the legislative basis of anti-money laundering
provisions. In future there will be a single offence of money
laundering under specific legislation and new rules for disclosure
and reporting will be set out. The Government is minded to tighten
the law to ensure that the test for money laundering charges is
no longer so weighted in favour of the defendant. It would no
longer be possible to claim lack of knowledge of money laundering
as a defence. In future there will be a greater expectation of
due diligence and an offence would be deemed to have been committed
provided the defendant could reasonably be expected to be aware
of the laundering operation.
6.4 The Government is also keen to ensure
that financial institutions have appropriate procedures in place
to detect and deter money laundering, and to report suspicious
transactions to the authorities. In addition to ensuring greater
compliance with the existing money laundering regulations (1993),
the Government has given the Financial Services Authority (FSA)
a statutory objective to combat financial crime. The FSA is consulting
on new money laundering rules which will apply to the institutions
and individuals it regulates. When the new Financial Services
and Markets Act recently passed by Parliament is fully implemented,
a full range of regulatory powers will be available to the FSA
to enable enforcement of the new rules.
6.5 The Government is also concerned to
ensure that a wider range of professionals, such as lawyers and
accountants, take seriously their responsibilities to report suspicious
transactions. The Government believes that the current negotiations
on the EU directive will tighten up the regime applying to professionals
across Europe. It will also make corruption a reportable predicate
offence for money laundering in all EU Member States. Once implemented,
these new rules plus more rigorous enforcement of the regulations,
the proposals set out in the recent PIU report "Recovering
the Proceeds of Crime", and the proposed amendments to the
1991 EU money laundering directive, will give the UK one of the
most sophisticated set of money laundering controls in the world.
6.6 The National Criminal Intelligence Service
(NCIS) deals with reports of suspicious transactions. Government
plans to expand its operational staff and set new performance
targets for their work. NCIS will also give a higher priority
to educating financial institutions on the disclosure requirements
and arrangements will be put in place to ensure a close working
relationship is maintained with the FSA. The Government is investing
to increase the supply of trained financial investigators available
to the police and Customs and Excise. Both organisations are encouraged
to investigate money laundering offences wherever appropriate.
These measures will further strengthen UK anti-money laundering
systems but their effectiveness will ultimately depend on the
continued vigilance of finance sector institutions and the police.
The system is continuously reviewed to identify any new problems
that may emerge.
International action against money laundering
6.7 The UK is an active member of the Financial
Action Task Force (FATF) which is the main international body
working to take action on anti-money laundering. Its membership
comprises 29 countries including all 15 EU Member States plus
the European Commission and the Gulf Cooperation Council. FATF
has published 40 recommendations for Member States including:
legislation to make money laundering a crime; use of asset freezing
to confiscate the proceeds of laundering; and regulations to ensure
that financial institutions check for unusual transactions and
report such cases. FATF monitors members through peer review and
promotes international cooperation in all the above areas. It
promotes its recommendations through regional organisations encouraging
non members to sign up to them as the basis for the effective
control of money laundering.
6.8 The Government is working within FATF
to ensure that laws in other states are tightened to make corruption
and other serious crimes "predicate offences"—ie
to recognise a wider range of crimes which can generate proceeds
that may be caught under money laundering rules. The effectiveness
of anti-money laundering measures can be undermined by jurisdictions
that operate weakly regulated financial regimes. The Government
therefore fully supports the ongoing FATF exercise to identify
jurisdictions which have less than satisfactory arrangements for
dealing with money laundering and which are judged to be non-co-operative
in the international fight against money laundering. Fifteen such
states have been identified so far, and the Government remains
committed to ensuring an effective dialogue between FATF and the
named states in order to assist them tighten up any identifiable
weaknesses. Where this dialogue does not produce results, the
Government is willing to consider a range of further sanctions.
6.9 The Government is currently reviewing
the systems for financial regulation in UK Overseas Territories
(OTs), and remains committed to encouraging all OTs and Crown
Dependencies to adopt and comply with international standards
of financial regulation.
6.10 The Government supports FATF efforts
to promote its recommendations throughout the world and efforts
are underway to help establish and support FATF-type regional
country groupings which would address financial regulation and
anti-money laundering. A Caribbean Group has been operating for
over five years, with support from the UK and other FATF members.
Similarly, the UK has provided financial and technical support
to European groups operating under the auspices of the Council
of Europe. The UK also provides support to the recently established
Eastern and Southern African Anti-Money Laundering Group, and
regularly sends delegates to the Asia-Pacific Group on Money Laundering.
We have indicated a willingness to support the West African group
being established through ECOWAS. This collaboration has helped
to improve legislation and anti money laundering regulations in
some many of the countries concerned.
Co-operation to recover the proceeds of corruption
6.11 From time to time the authorities in
developing and transitional countries seek recovery of funds that
have been illegally acquired through criminal activity or corruption
on their territory and were subsequently deposited in the UK.
The Government believes that asset recovery is a key part of the
anti-corruption effort. It is committed to increase the level
cooperation with these countries.
6.12 Foreign Governments gain access to
the UK legal system through the UK Central Authority (UKCA) in
the Home Office through mutual legal assistance procedures. Such
assistance may include facilitating requests for the assistance
of UK investigating and prosecuting bodies such as the Serious
Fraud Office; action to secure information and evidence relevant
to proceedings; arranging access to the UK courts to issue disclosure
or restraint orders preventing removal of assets from the UK;
and arranging confiscation of assets as a result of a criminal
conviction.
6.13 The Government accepts that the average
processing time for such requests is too long. The Government
is therefore proposing major changes to the arrangements for confiscating
criminal assets in the UK. The proposed new legislation on money
laundering will introduce a new power of civil forfeiture allowing
confiscation on the basis that the proceeds can be reasonably
shown to be the proceeds of crime. Enforcement will be improved
through the establishment of a National Confiscation Agency to
develop an overall strategy and to coordinate and monitor other
agencies.
6.14 The UKCA will also be evaluated during
2000 as part of a wide-ranging review of the UK's mutual legal
assistance arrangements. This will consider whether UKCA is well
positioned to respond to the likely increased call on its resources
and whether there are ways of increasing the speed with which
incoming and outgoing requests can be processed.
Section 7: Working With the Private Sector
Codes of Conduct By Business
7.1 International business is increasingly
aware of the importance of complying with the OECD Convention
on bribery. Firms in the extractive industries are particularly
affected by the distortions of competitive practices that result
from bribery in developing countries and the negative impact on
their brands and business of any association with such practices.
But many firms are facing fierce competition from companies in
bribe paying countries and the success of the Convention depends
on encouraging these firms to desist from such practices.
7.2 The Government believes that, in addition
to legal sanctions which will be confirmed by the new corruption
law, corruption in the business sector can also be restrained
by encouraging voluntary action by business including the adoption
and observance of internationally agreed Codes of Conduct. It
welcomes and supports a number of initiatives in this area.
7.3 There is no internationally accepted
mandatory code of conduct for businesses to adopt. However there
is an array of voluntary codes to choose from. Revisions to the
Guidelines for Multinational Enterprises (MNEs) were agreed by
OECD members and observers in June 2000. They set the standards
of behaviour that governments expect from their MNEs and are the
only multilaterally endorsed and comprehensive code of conduct
that governments are legally committed to promoting. They cover
a wide range of issues, including disclosure of information, accounting
and audit. They state that MNEs should not use bribery to obtain
or retain business.
7.4 Industry leaders such as BP and Shell
have used these to develop their own internal polices and procedures
on ethical standards. They regularly include in their annual reports
information about cases where they have ceased business with firms
or individuals for reasons of bribery or corruption.
Corporate Governance
7.5 Corporate governance initiatives which
set out disclosure and transparency requirements and the regulations
governing the relationship between managers and shareholders are
also important for the control of corruption. In May 1999 the
OECD adopted Principles on Corporate Governance which aim to improve
the legal, institutional and regulatory framework for corporate
governance in their countries. The principles include requiring
firms to maintain adequate accounting records, adopt internal
company controls and to undergo regular external audits.
DFID Initiatives with Business In the UK and Overseas
7.6 A forum with business is planned by
DTI and DFID early in 2001 which it is hoped will lead to joint
action to promote the OECD Convention and to encourage the take
up of the related voluntary codes of conduct and other anti-corruption
measures.
7.7 DFID is currently supporting work by
Transparency International to develop what is hoped will become
an internationally accepted integrity standard for firms drawing
on international best practice. This is being undertaken jointly
with British businesses which already have experience in this
area.
7.8 Several UK firms have expressed an interest
in working with Chambers of Commerce and firms from the same sector
in developing countries to spread good practice in combating corruption
and to encourage the adoption of higher standards of Corporate
Governance. DFID is planning to support a joint programme of action
in at least one developing country in 2001. DFID also welcomes
the World Bank Global Corporate Governance Forum which provides
technical assistance to developing and transitional countries
and has supported Corporate Governance projects in transitional
countries such as Ukraine and Russia.
Company law review
7.9 An independent review of UK company
law is underway which is due to report in 2001. This is expected
to recommend improved levels of reporting and higher standards
of transparency in company accounts. This will improve accountability
and reduce scope for fraud.
ECGD
7.10 The Government published a report of
the review of the mission and status of the Export Credits Guarantee
Department (ECGD) on 25 July 2000. ECGD is responsible for providing
government-backed insurance for UK projects and investments overseas.
It seeks to deter bribery and corruption by ensuring that as far
as practicable projects comply with applicable law. The review
noted that ECGD has a role to play in promoting the Government's
wider objectives in relation to sustainable development and good
governance and that bribery and corruption could undermine the
economic benefits of a project and the economy of the country
concerned. The review concluded that ECGD should develop a statement
of Business Principles to govern its business practice (to be
agreed by DTI Ministers before the end of 2000)—among other
things, these will cover sustainable development and business
integrity. The review also concluded that ECGD should further
develop its systems for assessing project impacts, ensure it has
access to relevant expertise and publish information for how sensitive
cases will be handled. It is clearly in ECGD's self interest to
avoid ill conceived or poorly executed projects and to use its
influence to mitigate their negative effects.
7.11 As part of its move to address corruption
ECGD will be introducing, on 29 September, new provisions into
its guarantee and insurance documents specifically aimed at deterring
corruption in respect of the business it covers. Customers will
be obliged to provide warranties that they have not, and will
not, engage in any corrupt activity. If broken, these warranties
could lead to a range of sanctions being imposed—including
the voiding of the insurance policy and the full return of any
claims paid. ECGD will also give full co-operation to appropriate
authorities undertaking a legitimate investigation into wrongdoing
of this kind by a UK exporter, investor, or lender. As well as
taking steps to deter corruption in the business it covers, ECGD
is also supporting moves in the OECD Export Credits Working Party
to promote and monitor the implementation of the OECD Convention
on Combating the Bribery of Public Officials in the field of officially
supported export credits.
Commonwealth Development Corporation
7.12 CDC finances private sector development
in developing countries and for the time being remains wholly
Government owned. CDC is committed to conducting business on an
ethical and sustainable basis in developing countries and to the
avoidance of involvement in any corrupt transaction. The recent
corporate re-structuring of CDC has been an opportunity to re-emphasise
these principles. The business of CDC is governed by its Statement
of Business Principles which comprise business integrity, social
issues, environment, and health and safety. Under business integrity,
key principles include the need for compliance with all legal
and regulatory obligations, no giving or receiving of improper
gifts or payments, the exercise of effective management and control,
and sensitivity to potential conflicts of interest. Compliance
is monitored by the Business Principles Committee of the Board.
All CDC employees world-wide are also issued with a Business Integrity
Code of Conduct. This provides more detail about expectations
and obligations arising from CDC's business integrity principles
in ordinary business transactions.
SECTION 8: PROTECTING
THE DEVELOPMENT
ASSISTANCE PROGRAMME
FROM CORRUPTION
8.1 DFID is responsible for ensuring that
the development assistance funds entrusted to it by Parliament
are used for the purposes intended, are managed through systems
which assure the highest integrity, and are secure from corruption.
DFID has a duty to ensure both that its own systems are sound
and that those in receipt of UK development assistance funds can
also provide assurance of probity.
DFID systems
8.2 DFID operates within a financial and
accounting control framework designed to comply with the requirements
of Government Accounting. Responsibility for setting the framework
in DFID is vested centrally in a Procedures Unit which provides
a procedural instructions manual for the office. Adherence to
procedures, and their effectiveness, is scrutinised internally
by Internal Audit Department. Regular external scrutiny is assured
through the oversight of DFID by the National Audit Office.
8.3 All DFID staff are subject to the rules
regarding the duties and responsibilities of civil servants. These
are set out for staff in the Departmental Staff Handbook. They
include at all times being, and being seen to be, honest and impartial
in the exercise of their duties. In particular, staff must not
receive benefits of any kind from a third party which might reasonably
be seen to compromise their personal judgement or integrity. Nor
may they make use of their official position (or of official information)
to further their private interests, or those of others.
8.4 All expenditure decisions are subject
to detailed approval requirements. For bilateral project and programme
expenditure, these include establishing clear management, monitoring,
accountability and audit arrangements and, where relevant, specifying
the arrangements for the procurement of goods and services. Approval
procedures require as standard a risk assessment to be made in
regard to all aspects of the proposed expenditure. Where circumstances
require, issues relating to corruption would be addressed as part
of this assessment.
8.5 Financial management controls for day-to-day
administration of aid funds comprise clear operational instructions
in regard to, inter alia, the authorisation and making
of payments (including the importance of separation of duties),
maintenance and monitoring of inventories of DFID-owned assets
(and arrangements for the disposal of assets) and arrangements
for reporting, investigating and recording losses.
8.6 Ensuring accountability of project expenditure
incurred by the authorities in-country ("local costs")
can be problematic. Ideally, DFID would want to rely on the regular
machinery of the partner government to provide appropriate audit
discharge. This is often not feasible. Where local financial control
regimes are weak and do not allow reliance on government-produced
audit statements, DFID employs alternative arrangements. These
can involve: auditing payments through an independent auditor
as they are presented ("continuous audit"); building
specific payment and audit capacity into the project management
structure ("external audit"); assuming responsibility
for making payments directly; undertaking the whole procurement
process directly or through a DFID agent.
8.7 Development assistance funds may also
be provided in the form of budgetary support to governments. In
these cases funds flow into the national or sector budget in contrast
to being managed through a project-specific account. DFID achieves
accountability by requiring its funds to be earmarked for agreed
specific line items of expenditure. Examples have included teachers'
salaries, central government payroll, debt and payments for imports.
DFID will always require a detailed audit of the expenditures.
This is typically undertaken through a combination of both partner
government and DFID-funded auditors. Reimbursement mechanisms
may be used in order to minimise the risk of misuse by allowing
DFID to pre-audit actual accounts before releasing funds.
8.8 For assessed and voluntary contributions
to multilateral organisations, DFID looks to rely on those organisations'
accounting and audit systems to provide the requisite assurances.
DFID scrutinises organisations' accounts and audit reports, following
up action in respect of any qualifications on these reports through
the appropriate executive board channels.
8.9 DFID recognises the continuing importance
of improving financial management capacity in partner governments,
and not just to ensure sound administration of development assistance
funds. Good accounting and audit practice and standards is a prerequisite
for, and part and parcel of, sound public finance management.
Procurement
8.10 Procurement of goods and services presents
particular challenges. The Department's internal systems provide
a sound and directly controllable framework when DFID manages
the procurement itself. However, many other development agencies
receive procure, using funds from DFID and use their own procurement
processes. Increasingly, too, DFID is providing funds to partner
governments through budget support under which procurement is
taking place through local systems. DFID therefore has an active
interest in ensuring that the procurement arrangements of its
major partners, including governments, are robust.
8.11 The procurement function is managed
on behalf of DFID by procurement agents. These agents (currently
five) have been assessed by DFID as technically competent and
adhering to best procurement practice. Procurement overseas can
also be undertaken, either directly by the DFID overseas office,
by local procurement agents appointed for that purpose or more
usually by local offices of the five selected agents.
8.12 A cadre of procurement advisers provide
guidance to DFID programme managers on procurement arrangements
for directly-funded DFID projects. Internal Audit Department and
Procurement Department regularly undertake joint procurement audits
of projects. Procurement Department also carries out "Cradle
to Grave" monitoring checks on the procurement agents to
ensure the integrity of the procurement process is maintained.
8.13 Procurement is increasingly undertaken
by a partner government and support for capacity building is often
required. Whether or not DFID funds are directly involved, DFID
has an interest in promoting stronger local procurement systems
to increase confidence that all public procurement in a
country is undertaken in accordance with accepted levels of probity.
The move toward sector-wide approaches and joint donor financing
mechanisms to channel support directly into government budgets
makes this a high priority. DFID has identified through competition
a panel of procurement experts to support us in this work.
8.14 DFID is currently supporting efforts
by the World Bank to enhance local capacity in several developing
countries. Currently we are providing technical assistance to
the Ministry of Health in Tanzania and, jointly with other donors,
DFID is funding a procurement capacity building programme in the
Ghana Ministry of Health. However this is an area where more needs
to be done.
Procurement policies and approaches of the key
multilateral organisations
World Bank
8.15 All World Bank projects operate to
guidelines on procurement designed to ensure that funds are used
for their intended purposes, with economy, efficiency and transparency
and are protected from corruption. It is important to recognise
that procurement for Bank-funded projects is the responsibility
of, and is undertaken by, borrower governments.
8.16 As part of a strengthened commitment
to address corruption, the Bank has overhauled its procurement
procedures and increased the number of personnel with specialised
expertise in procurement. More attention is being given to assessing
partner government capacity to tender and manage contracts and
to account for spending within Bank projects. Programme managers
carry out country procurement reviews and offer technical assistance
for capacity building where necessary.
8.17 In 1997, the Bank reviewed its procurement
capacity and the controls in place to ensure that procurement
policies were being followed. As a result of this review, the
Bank Board agreed to amend its guide"lines to accommodate
a "no bribery pledge" in bid forms which can be inserted
at the request of the borrower and obligates firms to observe
local laws with respect to the bribing of government officials.
The review also led to re-designed training with heightened emphasis
on procurement ethics, initiated new approaches to building borrower
capacity, sharing of best practices and harmonising approaches.
8.18 The Bank also now commissions periodic
procurement audits, undertaken by independent firms, to verify
that its procurement rules are being observed. Where they are
not, the Bank can cancel the funds allocated to the contract in
question. The Bank also uses these audits to develop plans with
the borrower to build capacity so that similar problems can be
avoided in the future. Where allegations of corruption surface
in these procurement audits, these are referred to an Oversight
Committee on Fraud and Corruption for follow-up, including further
investigations where appropriate. Where evidence of corruption
is established, a Sanctions Committee may debar contractors. To
date, the Bank has debarred 44 firms and nine individuals.
8.19 In fiscal years 1998 and 1999, the
Bank reviewed 54 out of its approximately 1,500 projects. The
audits revealed a number of deficiencies: these included departure
from agreed procedures; lack of proper documentation and institutional
weakness. During that period the Bank has declared misprocurement
on about 40 contracts with a total contract value of $40 million—out
of a total of 45,000 contracts the Bank finances annually totalling
roughly US$45—50 billion. Since 1996, the Bank has also
identified cases in 26 projects in 16 countries in which the borrower
did not comply with the Bank's procurement rules.
Asian Development Bank
8.20 The Asian Development Bank (ADB) has
begun to examine more closely government and project procurement
practices and systems. It is expected that the ADB will work with
the World Bank and other donors for more transparent procedures.
It is also giving consideration to involving non-governmental
organisations more intensively in project monitoring, in ways
which could increase the likelihood of detecting corruption.
8.21 ADB's anti-corruption procedures are
moving towards those adopted by the World Bank. It is increasingly
willing to consider sanctions such as the rejection of proposals,
loan cancellation, declaration of ineligibility where corruption
is detected and is seeking increased inspection rights. Borrowers,
bidders, suppliers, and contractors will be required to "observe
the highest standard of ethics" during the procurement and
execution of contracts. But the ADB's "no bribery pledge"
for bids on large contracts is optional.
African Development Bank
8.22 The rules of procedure of the African
Development Bank (AfDB) for procurement of goods and works make
only brief mention of misprocurement or corruption. If a borrower
has awarded a contract, the AfDB will declare misprocurement only
if the award was issued on the basis of incomplete, inaccurate
or misleading information furnished by the borrower or if it is
established by a decision of a court of law or following a special
audit that the contract was awarded on the basis of corrupt practices.
In that event the bidder may also be sanctioned by curtailing
its participation on AfDB-funded projects for a specified period
of time determined by the AfDB.
8.23 AfDB is hoping to develop three sub-regional
projects in Eastern and Southern Africa, Western Africa and Northern
Africa aiming at harmonisation of public procurement rules. The
terms of reference for the project have been written in collaboration
with the World Bank.
European Community (EC)
8.24 In November 1999, the EC adopted a
decision which is intended to pave the way for simpler, more transparent
and harmonised procedures for awarding contracts in the field
of External Assistance. This resulted from work over the last
18 months to develop streamlined and simplified procedures for
works, consultants and supplies. Since 1 January 2000, these procedures
have progressively replaced 40 different contracting procedures
that applied previously.
8.25 In accordance with the "Common
Rules Applicable to all Contracts", all tender and contract
dossiers for services, works or supplies include a specific clause
stating that any offer or contract shown to have resulted in the
payment of unusual commercial costs will be rejected or cancelled
with immediate effect. Such costs include commissions not specified
in the main transaction, commissions paid where there is no real
or legitimate service involved, commissions paid in a tax haven,
or commissions paid to a beneficiary not clearly identified or
to a company which appears to be a front for another company.
8.26 Those found guilty risk not only a
termination of contract but also permanent exclusion from EC-financed
projects, depending on the gravity of the charge brought against
them.
DFID Policy on UK companies debarred by Multilateral
Agencies
8.27 The Government welcomes the introduction
by the World Bank, EC and other international development agencies
of clearer policies and effective sanctions against corrupt practices
in the award of agency funded contracts. The UK has a direct interest
in supporting this action as a significant proportion of UK development
assistance is channelled through these institutions.
8.28 The World Bank is examining the scope
for international development agencies to exchange information
on firms or individuals that have been found to have engaged in
corruption or fraud. The World Bank already has arrangements in
place to pass evidence of corruption or other criminal offences
to the prosecuting authorities of the country in which the company
is registered.
8.29 It is unlikely for legal reasons that
development agencies will be able to simply accept and implement
each other's decisions on disbarment. Each agency may need to
examine the evidence in each case for itself and reach its own
decision on whether sanctions are appropriate. The Government
intends to come forward with practical proposals for the UK which
it will share with the Committee and promote through other national
development agencies.
Whistleblowing
8.30 As an employer, DFID is subject to
the provisions of the Public Interest Disclosure Act 1998 and
will shortly issue guidance to staff on their statutory rights
in relation to protected disclosures. DFID, as far as it lawfully
can and where so requested, would also seek to protect the identity
of any individual outside the Department who volunteered information
or drew its attention to suspected irregularities or corrupt practice.
Department for International Development
20 September 2000
5 "Recovering the proceeds of crime".
Report by the Cabinet Office Performance and Innovation Unit (June
2000). Back
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