Memorandum submitted by Transparency International
(UK)
INTRODUCTION
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.
SUMMARY AND
RECOMMENDATIONS
(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.
RECOMMENDATIONS
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. THE CAUSES,
NATURE AND
EXTENT OF
CORRUPTION
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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