Select Committee on International Development Minutes of Evidence

Memorandum submitted by the Department for International Development - continued


  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.


  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.


  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.


  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.


  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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