Select Committee on International Development Minutes of Evidence

Memorandum submitted by Transparency International (UK)


Submission by Transparency International (UK)

  This document is a response to the invitation issued by the International Development Committee (IDC) of the House of Commons to interested parties in the UK and elsewhere to discuss the relevance of corruption to the process of development. In particular the IDC invites memoranda which discuss the interface between corruption and the policies of the Department for International Development (DFID) and the multilateral and non governmental organisations to which it contributes.

  Transparency International-UK (TI-UK) welcomes this opportunity to present its views on these issues to the Committee, which also for the most part reflect the views of TI's international network. TI-UK will be glad to discuss this and related material with the IDC.

  This response is structured in accordance with the Terms of Reference proposed by the Committee. After a one-page summary three chapters follow the outline given in Press Notice No. 31, dated 20th June 2000.

Transparency International (UK)

is a non-governmental organisation dedicated to curbing both international and national corruption and, in this connection, to increasing government accountability. It is the only global non-profit and politically non-partisan movement with an exclusive focus on corruption. It was founded in 1993. It has an international secretariat in Berlin and national chapters in about 80 countries. Transparency International (UK) is the UK national chapter.

TI-UK's primary concern has been with fighting corruption in international trade and investment. It is also concerned, however, with the domestic law of corruption, both because of the need to curb corruption within the UK and because it is the foundation of any attempt to deal with the "supply" side of international corruption.

The UK chapter consists of individual members led by an elected Board supported by an Advisory Council consisting of people eminent in their fields, from a broad spectrum of both politics and business. Whilst recognising that corruption in international trade involves organisations in the business world, TI-UK is not an anti-business body. It has a Corporate Supporters' Forum and encourages the sharing of information and best practice amongst companies aspiring to operate with high standards of corporate integrity.

  (i)  The text which follows ranges broadly over the subject of corruption, throwing some light on its origins, nature and importance in particular for the developing and transition economies. It discusses the various ways in which both large scale and small scale corruption can both separately and together sustain the phenomenon of mass poverty at a time of unprecedented growth in global GDP.

  (ii)  In discussing this it does not lose sight of the key responsibilities which OECD economies have for directly or indirectly facilitating a significant part of this corruption, regardless of whether corruption is an issue within their own societies. The UK, given its continuing outreach as an investor, trader and aid donor, with a prominent role in the Commonwealth, has as great a responsibility to roll back the effects of corruption as any other OECD country.

  (iii)  This submission argues that in order to fulfil this responsibility HMG should be seeking to mainstream an anti-corruption dimension in all of the UK institutions which interface with the problem. A strategy of this kind (as the IDC Terms of Reference recognise) is necessarily much wider than the aid programme delivered by DFID and the International Financial Institutions (IFIs) which DFID supports. It extends to export credits, the legislation which covers bribery, the regulatory system which governs the banks, the criminal intelligence system and the direct and indirect incentives which government may offer to the private sector.

  (iv)  A summary of specific recommendations follows. Their application requires the kind of integrated approach mentioned above. However in the view of TI-UK a further dimension is necessary if the UK is really to play a significant role in this area.

  (v)  The Prime Minister has been a party to several G-7 summits which have, inter alia, focused on corruption and organised (i.e. white collar) crime. The UK has become a signatory to several international instruments and conventions in this field. However the fact that the UK has not introduced new legislation to make overseas bribery a crime, and that such bribes remain deductible against tax, effectively undermines the role which the nation might be expected to play, and which the rest of the world expects it to play. The mainstreaming of anti-corruption measures can only be regarded as "strategy with effect" when the UK is seen to turn commitments into action.


  Section 3 contains many detailed recommendations. The principal items are summarised here for convenience under four headings.

  We have followed the terms of reference closely in structuring the content of this submission. There are other aspects of the subject which are not covered specifically, such as the debate over conditionality of aid, in which a country's adoption of an effective anti-corruption programme is insisted upon as a pre-condition for official aid; also, the challenge of supporting entrepreneurs in the micro-enterprise and SME sectors, living and working in corrupt societies and struggling to develop as islands of integrity. We will be happy to discuss these matters, or to provide written material on them if requested by the Committee.

A.   UK legislation and related issues

  1.  In order to comply with the OECD's Anti-Bribery Convention the government should without delay enact legislation (either as a separate bill or as part of the Financial Crimes Bill) creating the offence of bribing a foreign public official and assuming extraterritorial jurisdiction as proposed in the Home Office paper (Cm 4759). [Para 3.g.4]

  2.  The Government should negotiate agreements on the return of confiscated assets similar to those applicable in drug trafficking cases [Para 3.d.2.3]

  3.  The Government should clarify the NCIS's policies and procedures for sharing intelligence in cases of requests to approve suspicious banking transactions involving possibly corruption-related laundering, including with whom in the UK and overseas they consult when deciding what to do with their intelligence; and tightening procedures for approval. [Para 3.e.1.2]

  4.  States that have signed the OECD Anti-Bribery Convention should prohibit corporations based in their own countries from making political party contributions in violation of the laws of the countries where the contributions are made. [Para 3.f.1]

B.   Resources and processes for implementation/enforcement

  1.  We make several recommendations regarding the improvement of international legal co-operation in cases of corruption and call for more effective linkage between the activities of the Financial Services Authority, the Serious Fraud Office and National Criminal Intelligence Service. Consideration could be given to a kind of hot line, channelled through DFID, which could present Mutual Legal Assistance requests to the Home Office and provide direct feedback to ACBs. The current arrangements are far too slow. [Paras 3.d.1; 3.d.2.1; and 3.e.1.2]

  2.  International financial institutions, donor agencies and export credit agencies should share information on organisations suspected of corruption, so that each can assess the quality of evidence and use it in its pre-qualification procedures. A second stage, when the validity of these is accepted, would be a mutually binding agreement to disqualify debarred companies from each others' tender procedures. [Para 3.h]

  3.  Greater effort needs to be given to the fight against money laundering, and to ensuring that money-launderers are prosecuted. High-profile convictions for laundering the proceeds of foreign corruption will help to change attitudes [Para 3.i(viii)]

C.   Overseas support

  1.  Non-governmental organisations overseas can benefit from external funding when this is matched to specific objectives and is linked to clear commitments from the recipient organisation as to its internal structure, commitment to its membership and its general transparency. [Para 3.c.2]

  2.  DFID should support the development of anti-corruption bureaux and judicial systems, which will be highly beneficial where conditions of independence apply. [Para 3.a]

D.   Education and awareness

  1.  Government should promote anti-corruption awareness among UK companies, possibly via the DTI, and should encourage companies (a) to develop, disseminate and implement codes of conduct; (b) to seek opportunities to associate with other businesses working in the same countries with a view to collective resistance of corruption; and (c) to publicise the problems of working with integrity in countries where it is very difficult and, in extremis, to consider withdrawal. [Para 3.j.4]

  2.  There needs to be a clear declaration by all relevant authorities, along with adequate publicity, as to the criminality of laundering foreign corrupt money, and clarity as to the fact that prosecution will follow discovery. [Para 3.e]

  3.  Encourage DFID to try to raise awareness amongst victim countries of the potential for civil remedies in cases of corruption. [Para 3.e.1.3]


  1.a  The delivery of development assistance, export credits guarantees and humanitarian aid by bilateral and multilateral official development agencies and by non governmental organisations.

1.a.1  Corruption and the delivery of development assistance

  It will be useful to approach this question from three angles: (1) aid funds made available to governments which are spent by them (2) aid funds spent in recipient countries through specific programmes controlled by donor agencies and (3) the nature of the aid dependency relationship and the extent to which the relationship itself can lead to subtle forms of corruption in countries which are heavily aid dependent.

1.a.1.1  Donor assistance controlled by recipient Governments

  (i)  The proportion of aid funds spent directly by Governments has been steadily falling but remains significant, especially in the case of multilateral lending. The proportion has been falling largely as a result of donor concern with questions of both efficiency and corruption. Corruption within this component of aid tends to occur where government departments and agencies are awarding contracts to local and international contractors, whether these are placed through competitive bidding or otherwise. The contract allocation process can easily be used to ensure that kickbacks are paid to the most influential personnel in the contract award process. This is particularly common in the construction industry and is financed either by an inflated price or by underfulfilment of the contract. In some cases no expenditure may have taken place or underfulfiment may be substantial. This form of corruption, however, is not limited to capital expenditure. It is equally likely to arise in, for example, the recurrent financing of medical supplies; inputs may be overinvoiced or medical supplies which were intended to be distributed free may be sold by doctors in senior positions, or by more junior medical personnel.

  (ii)  Corruption of this kind often involves senior staff of the relevant ministries and agencies, and this may well extend down departmental staffing layers in what might be termed complicit hierarchies (see 1c below). A manifestation of this is the issue of per diem payments where agricultural extension staff and similar personnel are eligible for payments at a standard rate to cover travelling expenditure; the travelling may not take place, or the funds may be co-opted by more senior personnel. In a related vein, where aid funds have been used to fund a public service (such as seed distribution) for which a modest price was to be charged the relevant product may be sold on a freelance basis by nursery operators or their immediate superiors, with no funds returned to the Exchequer.

  (iii)  Corrupt practices of these kinds have seldom been beyond public knowledge. For example the Auditors General of both Tanzania and Kenya have produced effectively damning reports from the mid-1980s onwards which have covered many aspects of both government and donor funded corruption, which have generally been debated in Parliament. Donor reaction to these reports has been muted.

1.a.1.2  Corruption and donor-managed assistance
  (i)  Direct control of the expenditure of aid funds by donors has been given different emphasis at different times. In the 1970s the massive expansion of World Bank lending to the rural sector in Africa was characterised by semi- independent project management units, which were designed to achieve effective implementation and were more or less managed by the World Bank itself. In the 1980s programme aid, which was a form of balance of payments assistance linked to various conditionalities, was partly a reaction to this project-based approach. In the 1990s many bilateral donors, including DFID, have re-emphasised a project based approach where donors play a key role in project execution. Each of these strategies were (or are) designed to short circuit recipient government departments in the interest of effective development. However, whatever might be the other merits of such approaches, it is clear that none of them has prevented a significant degree of corruption.

  (ii)  Project management units of the type characteristic of the 1970s depended for their effective implementation on the intensive use of consultants for the purpose both of project design and implementation. Pre-qualification for a short list was usually controlled by recipient governments and in the interstices between a government and the Bank it was often possible for a corrupt payment to secure selection. One form of programme aid characteristic of the 1980s, at a time when currency exchanges had not been liberalised, involved the provision of hard currency by donors to fund a range of imports to be handled by private sector distributors. The latter were to provide an equivalent sum to the central bank in local currency when the imports had been sold. In Tanzania in the late 1980s a sum of more than $300 million was made available in foreign exchange by donor consortia led by the World Bank, but local currency payments collected represented only a small proportion of this. Allocations were made by central bank personnel and the chosen distributors were effectively given a massive free injection of cash. Although this represents a particularly dramatic example, it is far from unique.

  (iii)  The strategy of even more direct donor involvement in project management in the 1990s has avoided some of these problems. This approach, however, is highly management intensive and places considerable strain on donor missions in recipient countries, often requiring an expansion of personnel. It is not sustainable in the long run, either in political terms or in terms of cost effectiveness, as it gives rise to the obvious contradiction of creating a parallel system to that of the recipient government itself.

1.a.1.3  Aid dependency and corruption

  There is an important argument that a high level of aid dependency is itself a motor of corruption. This view is held across a wide political spectrum. One of its perhaps more surprising supporters is Judge Warioba, a former Prime Minister of Tanzania, who chaired the 1995 report on Corruption in Tanzania. He and others argue that a high level of aid dependency (characteristic of, say, Mozambique where aid flows of $1 billion in 1995 accounted for 75 per cent of GDP) generates a set of assumptions about continuing inflows which come to be valued for the personal incomes and expenses they underwrite rather than for their value in raising GDP in the long run. Where whole Departments (such as education or health) derive more than half of their budgetary resources from aid flows, and where these are only loosely monitored, a syndrome is established in which additional resources are continuously sought (and often successfully acquired). In this context the anxiety of various donors to achieve their disbursement targets, and increase them over time, has often led to very light audit processes and has fuelled the kinds of small and not so small scale corruption discussed above. From the perspective of the donor agency it also leads to the creation of a class of aid bureaucrats who have a vested interest in the indefinite continuation of this process.

1.a.1.4  The specific role of Multilateral Financial Institutions (MFIs)

  (i)  MFIs such as the World Bank play a special role in the international development system. The Bank in particular has been widely regarded as generating best practice, even as its strategies have undergone significant changes. Its position on corruption has evolved dramatically and very positively since James Wolfensohn became its President in 1995. Up to that time the Bank had tended to turn a blind eye to the sometimes corrupt award of contracts by recipient governments where that government controlled the short list of pre-qualifying contractors. Whilst in principle the recipient government had to submit the final short list of pre-qualified bidders to the Bank, this was frequently a formality. Furthermore, the pressure to increase the total volume of lending, or to accelerate disbursements as a percentage of commitments, which has been characteristic of the agency for some of its existence, led it to overlook cases where some form of corruption may have taken place. This appears to have characterised Bank dealings with the Lesotho Government in relation to the Lesotho Highlands Water Project where that Government was expressing concern about management financial discipline as early as 1994. Evidence presented to the High Court in Maseru by the Government of Lesotho in July 2000 appears to have vindicated its earlier position.

  (ii)  In similar vein, the letting of contracts by the Water and Power Development Authority in Pakistan in the mid 1990s apparently involved a chain of commission payments, allegedly including one made by a UK-based power utility. In this case the Government of Pakistan argued that a World Bank staff member had taken bribes from one of the bidding companies and brought a case in court against that individual.

  (iii)  Since 1995 James Wolfensohn has clearly established a path for the Bank which makes it a major player in the global anti-corruption struggle. The components of this strategy have included: (a) an intensive programme of research into the incidence and origin of corruption, (b) changes to procurement rules which facilitate special audits of ongoing projects outside the annual audit cycle, (c) the debarring of firms and individuals found as a result of such audits to have behaved corruptly, and (d) considerable funding for governance initiatives designed to deal with corruption within borrowing countries. By mid-October 2000 a total of 52 companies had been debarred by the Bank from future bidding on Bank funded projects (of these 38 were British, of whom the majority had been contracted to work on World Bank funded projects in Nigeria). We shall return to this later.

  (iv)  These positive anti-corruption initiatives by the World Bank have had a considerable impact on other MFIs, notably the regional development banks for Latin America, Asia, Africa and Eastern Europe. Each of these has adopted some part of the Bank's current approach. For example the African Development Bank has so far debarred six companies from bidding on its contracts; the Asian Development Bank is actively promoting governance programmes in a number of Asian countries; the EBRD is promoting a Code of Conduct for companies which wish to bid on its projects.

  (v)  Among multilateral agencies the European Development Fund (EDF) of the EU probably has the worst reputation for ignoring the corrupt award of contracts. The European Court of Auditors has expressed concern about this over a number of years. A large-scale example is the Turkwell Gorge Dam in Kenya where massive overruns beyond the project budget, partly funded by the EDF, occurred in the late 1980s, and where (according to the Auditor General of Kenya) no final audit has ever been completed. The problems associated with EDF aid partly arise from the fact that the EDFs obligations to ACP member states under the Lome (and now Suva) Conventions require it to earmark a certain proportion of its budget for each ACP state, and although the funds can be held up they cannot be transferred to another member state. Secondly, contracts for project implementation have to be awarded to companies in EU member states on a basis roughly proportionate to contributions by member states to the EDF itself. A premium is placed on companies which bid through a joint venture with an ACP-based company. In practice this has created a model which results in some projects of dubious validity being implemented by inadequately qualified consortia who may have won the contract by corrupt practices

  (vi)  The multilateral development agencies have a more important role as standard setters than any one bilateral agency, even though the latter are important contributors to their soft window or grant based programmes. The stronger stance which the MFIs are now taking on the corruption issue is therefore an important and positive development.

1.a.2  Export Credits

  (i)  The role of export credits in development finance is as a source of parallel funding for projects where aid flows also play a part. This role has been particularly significant in the context of larger scale construction and industrial development funding where a component of the project is eligible for funding by a national export credit agency. Export credit agencies also play a key role in (a) parallel funding of bilateral aid projects where a blend between loan funds and export credits is feasible and (b) funding the purchase of capital equipment by middle and higher income developing countries where the government is able to guarantee loans made either to itself or to the commercial sector. In the latter case both ECGD and the French COFACE have at least 15 per cent of their portfolios in the armaments industry.

  (ii)  Some part of export credits which play any one of these three roles may be used to fund bribes. In 1998 Le Monde reported that COFACE had funded about £2 billion in bribes in the previous three year period mainly in the armaments industry, a report which recent revelations in France concerning the sale of naval vessels to Taiwan make quite plausible. Sales to the oil exporting states in the Middle East often involve commissions which may be well in excess of 15 per cent, and may easily range up to 30 per cent.

  (iii)  It is not difficult to see that the funding of such payments is feasible where the deal is a bilateral arrangement between a buying and a selling country. The question requires further discussion in the context of parallel funding of either bilateral aid projects or of multilateral aid projects. In the case of a bilateral project the client country may be offered an indissoluble package: the aid will be made available for certain project components provided that another component is financed by an export credit. (Such types of "tied" aid are contrary to current UK policy, but are still favoured by some other countries). The recipient country may choose from a short list of the exporting country's manufacturers or contractors. In practice selection from this list may involve the solicitation or offer of a bribe, to be covered in the cost of that component. In a turnkey project the bribe may be costed to a large single component of a complex project which may in turn be supplied by a sub contractor (who will pay the bribe). In this case the export credit agency would find it very difficult to identify where the bribe is costed, still less to prevent it being paid.

  (iv)  In the case of projects funded by multilateral agencies there is less scope for export credits to be used in this way. However in the past the leading MFIs have generally welcomed export credits as a contributing source to the finance of large scale projects. The process has involved some negotiation with their member states who might have a capacity to supply a key project component. Where a member state has offered a contribution of this kind, albeit subject to a competitive bid from one of its own suppliers, it has frequently been accepted as a part of the project financing package. In such cases there has been significant scope for a particular supplier to arrange for a bribe to be paid to those awarding the tender.

  (v)  TI-UK welcomes recent changes to the ECGD's mission, and in particular the new emphasis on business principles. Provisions aimed specifically at bribery have just been introduced into proposals and application forms.

1.a.3  Corruption and aid delivery via Non-Governmental Organisations (NGOs)
  (i)  As an alternative strategy to working with governments or establishing direct management, donor agencies have, over the past thirty years, channelled an increasing proportion of aid flows via NGOs. The latter now account for more than ten per cent of all aid flows and donor agencies provide significant proportions of this. ODA and DFID have been at the forefront of this process, since the Joint Funding Scheme (by which the Department matches private contributions to NGOs) has been in operation since the late 1960s. More recently a pattern has emerged in the distribution of aid for famine relief by which UK-based NGOs may effectively act as agents for the distribution of food and other supplies. Both of these situations raise significant questions in relation to corruption.

  (ii)  Larger-scale NGOs based in the UK and elsewhere operate in recipient countries either through their own in-country management teams or through locally constituted NGOs, or a combination of the two. Where programmes are managed directly, or through a local affiliate which is effectively a subsidiary, NGOs run the normal risks of the failure of internal integrity systems.

  (iii)  Where they are working through local NGOs the problems are more severe since in many developing countries there is now a multiplicity of local NGOs, a significant number of which have been established primarily in order to access funding—both from bilateral donors and international NGOs. Assessing the financial and management capacity of such NGOs is not an easy task, especially where the positive charisma of a leader plays an important part in establishing the case for support. Where such NGOs are membership-based organisations the critical issues concentrate around the role of the leadership vis a vis the membership, and the extent to which the organisation is generating financial benefits to Board and staff members. In spite of the undeniably genuine motivations of the great majority, even church-based NGOs are not immune to this problem. In fact, because of their presumed altruistic motivations, they are less likely to have tried and tested integrity systems in place. The Bishop of Busogas Trust in eastern Uganda developed an integrated rural development programme in the 1980s which was subject to exposure in the Ugandan press in the early 1990s on the grounds of serious internal corruption.

  (iv)  As a result of problems of this type a number of international NGOs are now recognising the need for a form of compact with local NGOs in which both parties agree to a formal commitment to accountability, which may be mutually reinforcing. In 1997 the NGO movement in Zimbabwe organised a workshop on this topic; PACT has done good work in developing a best practice manual for NGOs; Christian Aid in the UK recently circulated a draft paper with a view to further developing its own principles in relation to the more than three hundred NGOs with which it works internationally. However, it is clear that the temptations to corruption within local NGOs remain a threat to the effective delivery of their services, and to the cost effective expenditure of the money which they raise.

  (v)  Food aid and famine relief take many forms. There are schemes for input to commercial millers as a means of generating both flour and meal to the urban market. There is local currency support to rural communities, as pioneered by USAID under PL480 arrangements. The latter is more specifically concerned with direct relief of famine. Two key points occur in relation to both these operations: first, they face demands at customs posts and at port authorities for bribes in order to unload both routine and emergency supplies, which may or may not be resisted. Second, in areas where there is a degree of civil conflict the transport of supplies may be subject to financial extortion applied by one of the parties, which may have to be met if food supplies are to be delivered at all. A more general expression of this problem is that in some conflict situations the availability of famine relief may prolong the conflict. A key example of this is southern Sudan where a significant part of famine relief provided over more than fifteen years has been co-opted by the armed forces of the SPLA and its splinter groups, or by the Sudanese army, thus renewing the capacity of both parties to pursue the conflict. Similar dilemmas face or have faced the famine relief programmes in Sierra Leone and Angola.

  (vi)  It may be argued that NGOs engaged in famine relief need to be more open about these questions, and to recognise in public that a significant part of their supplies may be misused in response to extortion at the point of a gun. This may prove disturbing to the giving public, but should also add support to the efforts of the NGOs by increasing the weight of public opinion to do something effective against corruption in the relief processes.

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