Memorandum submitted by Transparency International
(UK) continued
1.b THE PUBLIC
AND PRIVATE
SECTORS IN
DEVELOPING COUNTRIES
1.B.1 The
public sector
1.b.1.1 Some history
of public sector corruption in the developed world
(i) Corruption in any society is clearly a dynamic phenomenon—either
increasing or decreasing over time. Historical assessments would
concur that corruption was a major phenomenon in eighteenth century
England, but was on the decrease by the mid nineteenth century.
The fact that the first legislation to criminalise the bribery
of a public official was passed in 1889 confirms that by the end
of the nineteenth century an anti-corruption ethos was in place
which was strong enough to lead to specific legislation. In the
US a comparable process was at work taking American society from
the open municipal corruption of the mid to late nineteenth century
to the tough legislation of the early to mid twentieth century.
Italy provides a further example of the fact that corruption is
never a stable phenomeon. The political situation in Italy after
World War II was one in which the Christian Democratic Party was
able to dominate party politics and developed an increasingly
effective but complex system of political and financial pay-offs
which was eventually characterised as Tangentopoli (Bribesville).
Not surprisingly there was eventually a reaction to this embodied
in the Manu Polite (Clean Hands) campaign led by De Pietro which
by 1996 had brought charges against 4,500 senior figures in Italian
political life, including two former Prime Ministers (Andreotti
and Berlusconi). Certain forms of corruption in Italian political
life will certainly now be constrained as a result of these processes.
(ii) Formal analyses of the history of corruption
over distant and more recent centuries do not really explain why
these changes occur but recognise that they are linked to value
changes in society which themselves may be linked to public outcry
against a series of specific events. The introduction of the Foreign
Corrupt Practices Act (FCPA) in the USA fits into this category
since it had been preceded in the period from 1975-77 by a series
of scandals linked to international bribery of which the Lockheed
payments to Prime Minister Tanaka of Japan and Prince Bernhard
of the Netherlands were the most conspicuous. However in the course
of the Senate hearings which led up to the FCPA more than 30 US
multinational companies tabled detailed information on the quantum
of specific bribes which they had paid overseas in the preceding
five years. Public opinion clearly felt, or was persuaded to feel,
that it was time to establish new parameters of corporate behaviour
in this regard. The hearings in 2000 in the Bundestag in relation
to ex Chancellor Kohl and the manipulation of payments to the
CDU may form a comparable phenomenon.
1.b.1.2 The developing world
(i) In the developing world the debate about corruption
has likewise never been static. A good part of the justification
for the communist revolution in China emanated from a reaction
against the corruption of the regime of Chiang Kai Shek and its
failure to eradicate corrupt practices at regional and local level
which emanated from the previous imperial regime. The communist
regime has maintained a nominal anti-corruption stance: in the
early 90s the Ministry of Supervision received more than more
than half a million complaints per year about corruption, of which
20,000 led to convictions.
(ii) In India corruption has never ceased
to be an issue, both before and since independence. The series
of events surrounding the Bofors case confirmed that armaments
transactions were being used both by the Congress Party, and almost
certainly by members of the Ghandi family, to attract bribes for
both public and private purposes. At state level the rise and
fall of political leaders is certainly partly linked to the public
perception of their position on corruption.
(iii) In Latin America key political events
in Argentina, Brazil, Venezuela and Mexico have been linked to
corruption over the last ten years. In Brazil, Color di Mello
was forced out of office for corruption-related reasons in 1996;
in the same year Carlos Peres was indicted by the Venezuelan Congress
and obliged to resign; in Mexico the money laundering scandals
surrounding President Salinas and his brother in the late 1980s
have led to the demise of the PRI.
(iv) The pattern of corruption in both central
and eastern Europe, the countries of central Asia and nearly all
of Africa is even more serious than in these cases. Whilst it
does not follow that the poorest countries are the most corrupt
it is true that many of the worlds poorest people live in very
corrupt countries.
1.b.1.3 Categories and Causes
(i) Whilst it is very difficult to quantify the extent
of corruption, there is a degree of consensus about the mechanisms
which underlie the contemporary phenomenon. A useful approach
to the phenomenon divides it into petty and grand corruption,
with an increasing recognition of the links between the two. Grand
corruption is used to describe large scale deals involving senior
public officials and companies trading or investing on an international
basis. Some of the key mechanisms surrounding this have been very
fully described in George Moody-Stuart's book Grand Corruption.
Petty corruption describes facilitation or grease payments sought
and obtained by junior officials who are actually or ostensibly
rendering a service to the public. In some cases these payments
are made for the provision of a service which should be a free
public good; in others they are for a largely fictitious service
or relate to imaginary offences (as at many an army or police
roadblock).
(ii) There is little doubt that grand corruption
is occasioned largely by the greed of those who are already well
off by local, and often by international, standards. The objective
of the corrupt act is to make the key individuals even more wealthy
and thus more powerful. This is true whether the corrupt act finances
a political party or the individuals concerned (or both, as may
often be the case). In the case of petty corruption the motivation
is more frequently that of survival in societies where individual
civil servants and others receive extremely low pay. Obviously
there is a grey area between these two contrasting cases—notably
of middle level officials who may have expectations about, say,
the education of their children which prove increasingly unrealistic
as real incomes fall or fail to rise.
(iii) A more complex point, however, is
that there are often links between the two forms of corruption
which may feed on each other. For example, in a police force,
roadblocks and other forms of relatively minor harassment may
be conducted at street level by a group of police constables.
The participating constables pass a good part of their takings
to their senior officer, who in turn passes a slice to his own
senior, and so on up to the Chief of Police. The latter may have
some arrangement with the Minister of Home Affairs who turns a
blind eye to this in view of other deals in which the Chief of
Police participates. In this case only a minority of the police
force are participating; the links between the participants may
be based mainly on ethnic lines and a common need to reinforce
each others position. Such a minority-based system does not have
to exclude a separate system being operated by an alternative
network with a different ethnic base. In this case the link between
petty and grand corruption is fairly close since middle and junior
ranks of the police force may be allowed to indulge in petty corruption
whilst the most senior ranks take a slice of these proceeds and
are party to a major deal orchestrated by a Minister.
1.b.1.4 Significance of the cabal
(i) This schema also provides a guide to the mechanism
underlying various types of grand corruption. In most such cases
there is a small cabal of individuals who are strategically placed
in key government departments or agencies to ensure that a deal
can be completed. In, say, the purchase of an armaments system
where a big bribe is to be paid to the Minister of Defence the
latter will have ensured that some combination of the central
bank, customs and excise, his own Ministry and perhaps a well
placed individual in the Ministry of Foreign Affairs are cut in
on the deal. Whilst the Goldenberg case in Kenya did not involve
the receipt of a bribe from overseas, evidence now in the public
domain suggests that such a cabal existed, and was led by the
then Minister of Finance (now Vice President) George Saitoti.
The significance of this for an analysis of corruption is that
in a cabal the individual who may be regarded as the potential
bribee is actually part of a network with a vested interest in
the project.
(ii) In Tanzania in 1994 elements within
the Government of the then President Mwinyi were actively pursuing
the possibility of the purchase of a £100 million civil and
military radar system from Siemens Plessey of the UK to protect
Tanzania air space. This was to be funded by Bankers Trust from
London whose security would rest in a contract for the forward
sale for ten years of gold purchased by the Central Bank of Tanzania
at an agreed price. The deal was strongly resisted by the Governor
of the Bank of Tanzania, eventually subjected to intense media
scrutiny and to intense negative pressure from the Paris Club
of donors at its 1995 meeting. Although it was eventually killed,
or radically scaled down, members of TI-Tanzania observing the
deal noted that the cabal promoting it remained active in its
pursuance well after the new Government of President Mkapa came
to power in late 1995. Amongst other factors it was the failure
of that cabal to co-opt the Governor of the Central Bank which
negated the deal.
1.b.1.5 Privatisation
(i) The process of privatisation which has occurred
in the majority of developing and transition economies in the
past ten years has provided important opportunities for corrupt
deals based on insider cabals of this kind. There are many examples
of individuals close to para-statals under privatisation being
an integral party to the privatisation deal. The role of the oligarchs,
such as Berezovsky in Russian privatisation has been widely recorded,
with personal gain a more important consideration than the potential
gain to state revenues.
(ii) On a much smaller scale the Parliamentary
Accounts Committee in Uganda published a report in 1999 indicating
that the total net proceeds to the State from privatisation were
close to zero. Underlying this failure of the privatisation process
is the effective rigging of the sale by collusion between members
of the tender board reviewing bids and either one of the bidding
companies or the former management team of the para-statal in
question. Sometimes the bidders may have links with the Head of
State which are strong enough to negate the Board altogether.
Thus in Zimbabwe, in 1996, the national power supply agency (ZESCO)
was relieved by President Mugabe of the responsibility for awarding
the privatisation contract for Hwange Power Station when a consortium
including the Malaysian company YTL (which was in a joint venture
with Siemens) was not selected.
1.b.1.6 Grand corruption is not always linked
to aid (at least not directly!)
As the above examples show, grand corruption,
even in very poor countries, is not necessarily directly linked
to aid flows. In many cases, however, there is corruption associated
with conditionalities of aid. An insistence on privatisation is
one such. In other cases the process may be entirely domestic
(as with Goldenberg); in yet others it may be facilitated by export
credits or commercial banks (as has been alleged in the case of
the Bank of New York personnel facing criminal charges for money
laundering in London from Russia in 1999). It is likely that such
cases are at least as common as those in which corruption can
be directly attributed to aid flows.
1.b.2 The private sector
The domestic private sector in the majority
of developing and transition economies has existed in symbiotic
relationship with the role which governments have adopted, as
partly described above. In the minority of cases where governments
have taken a strong anti-corruption stance (such as Hong Kong,
Singapore, Botswana) the private sector has responded by adapting
itself to this stance. However, in the majority of cases it has
responded to the perceived need to interact with the culture generated
by key players in the Government. The ways in which multinational
companies (MNCs) have interacted with this position are discussed
in section 1.d below.
1.b.2.1 Import permits and tariffs
(i) Perhaps the most important single source of corruption
in the domestic private sector, where this is taken to be medium
sized manufacturing and distribution businesses, has been its
interface with import licensing and the tariff structure. The
most extreme example of this problem is certainly Nigeria where
since independence the allocation of import licences has been
an almost entirely corrupt auction based on who could pay most
to the Ministers of Trade, Finance, Energy and Agriculture to
provide authorisation for imports. Since the manufacturing and
agri-business sectors (e.g. Fertiliser and feed mill inputs) in
Nigeria have been highly import-dependant the country has provided
a particularly dramatic example of the consequences of this auction
approach.
(ii) This pattern of corruption being closely
linked to import permits and tariff concessions has been particularly
characteristic of West Africa and consistent across linguistic
and cultural norms from Liberia to Ghana to Cameroun. The pattern
has made nonsense of strategic decisions taken to afford a degree
of protection to new infant industries, which might find overnight
that their protected niche was henceforth to be undermined by
the direct import of the their product.
(iii) However, west Africa is far from alone
in this respect. The sugar industry in Kenya had been relatively
successful since the first major estate at Mumias was developed
in the mid 1960s. However in the course of the 1990s the viability
of the five major estates, including the very successful Mumias,
has been almost entirely undermined by sugar imports made by special
Presidential authority and allocated to local distributors who
are known to be major contributors to political funds controlled
by the President. In 1996 the first casualty of the anti-corruption
stance of President Mkapas new Government in Tanzania was Prof.
Samuel Mbilyini, the newly appointed (and highly rated) Minister
of Finance, who was found to have awarded a major import license
for vegetable oil to two importers on the basis of a zero tariff.
He was obliged to resign as a result of this case.
1.b.2.2 Other licenses and arbitrary payments
The allocation of other types of licences tends
to follow this pattern and to extend to much smaller businesses.
A recent study in Tanzania found that SMEs had to acquire 17 licences
before they could operate, and that an integral part of this process
was the prepayment of a year's income tax on their putative and
projected turnover. Whilst in principle the Ministries of Trade
and Finance could rationalise such licences in the course of one
budget there is in fact a strong vested interest in their maintenance,
particularly at local Government level. In many countries both
larger private businesses and successful SMEs are obliged to make
arbitrary payments to both income tax personnel and in some cases
to the funds of the ruling political party. The strategy of imposing
arbitrary assessments for income tax is based on the perception
that many businesses will find it easier to pay up than to pursue
an appeal; only part of the funds collected in this way will reach
the Revenue Authority.
1.b.2.3 Politically-based holding companies
(i) Another aspect of corruption in the domestic
private sector lies in the ownership of share capital in larger
local companies. There is a history, extending over several decades,
of companies being owned by the political party dominant in a
one party state in order to generate funds for that party. Thus
the Press Holding Company in Malawi, which developed in the era
of President Banda and eventually controlled a significant part
of the modern corporate sector, was essentially a mechanism for
generating funds for the Malawi Congress Party.
(ii) In other cases such private companies
are in practice owned indirectly by those very close to the Head
of State. We have shown above that the process of privatisation
has frequently enabled a cabal of "insiders" to purchase
formerly state owned businesses. An analysis published in Kenya
in 1998 of companies controlled by President Moi and his closest
associates indicated that these totalled four hundred firms. This
figure has not been seriously disputed by those close to State
House. Sometimes the complications arising from such arrangements
are even more dramatic. In 1998, at a time when the world was
being asked by the OAU to impose economic sanctions on Burundi
as part of ex-President's Nyerere's peace building initiatives
three senior politicians in office in three different East African
countries established a sanctions-busting private transport company
in which they are the main equity holders. In Angola, since the
breakdown of the UN-brokered peace agreement in 1997, the purchase
of arms for the government has been largely handled by SIMPORTEX,
a company reported to be controlled by very close associates of
President Dos Santos.
1.b.2.4 A common theme—in all sectors
The themes traced here (import licensing and
tariff exemptions, business taxation and licensing, and the "real"
ownership of larger ostensibly private companies) may appear to
be highly disparate. In fact, there is a common thread which fits
well with TI's preferred definition of corruption: "the misuse
of public power for private gain." The underlying question
is the perception of the responsibilities of public office, especially
in small and vulnerable economies where the misallocation of resources
controlled directly or indirectly by the State has a very high
cost to the public.
1.c GOVERNMENT
ACTIVITY
This topic has been largely covered under "Public
sector" in 1(b) above, but there are several additional points
worthy of including here:
1.c.1 Budget processes and misdirected revenues
(i) In the case of a number of countries the existence
of special accounts into which revenue is paid and never publicly
declared has seriously undermined the budgetary process. This
is a particularly acute problem in oil exporting countries where
a small number of producers generate most of the revenue, a proportion
of which is transferred to the state or its agents through revenue
sharing agreements. Cameroun, Nigeria and Angola all provide examples
of this. President Ahidjo of Cameroun established the special
oil account when Cameroun's oil was first developed in the late
1960s. It remained completely off the budget and figures for its
income and expenditure were inaccessible to both the Camerounian
and international public. Inter alia it assisted in financing
a complete Presidential village in the home area of the Beti,
President Biya's ethnic group, in which there is a separate mansion
for each of the (20) Cabinet members. As a result of intense pressure
from the IMF, and as part of conditionalities associated with
a resumption of IMF lending in 1998, the special account was finally
abolished in that year.
(ii) In Nigeria oil revenue flows accruing
to Government have been handled by the Nigerian National Petroleum
Company (NNPC). Its accounts have likewise not been published
and it has certainly contributed to the massive fortunes attributable
to former Presidents Bushari, Babangida and Abacha. The government
of President Obasanjo is currently seeking the repatriation of
$5 bn from the Abacha family, a significant part of which has
been gleaned from this account.
(iii) In Angola payments made to companies
such as SIMPORTEX are the principal source of finance for the
arms purchased to pursue the war against armed UNITA rebels who
refuse to accept the results of a democratic election—in
itself a legitimate process. However, the fact that these purchases
are not made through the state budget but via SIMPORTEX, effectively
controlled by close associates of President Dos Santos, is a glaring
illustration of the scope for corruption offered by such special
accounts [see para 1.b.2.3(ii)].
1.c.2 Customs and Excise
The administration of customs and excise is
particularly prone to corruption in many countries. In smaller
economies where the yield of corporation and income tax, even
when collected, is projected to be less than that of import duty
this is a particularly serious problem. The first individual to
contact TI from Tanzania was in fact a retired Director of Customs
who wrote that, "I no longer recognised the country in which
I live." He had found the problem of corruption in his service
to be very difficult to handle. Certainly the process of corruption
within customs has been triggered by corrupt arrangements instigated
by senior political leaders, including the individual tariff concessions
which have been mentioned above. It is, however, a characteristic
of many customs services, and another area where petty and grand
corruption converge and "facilitation payments" are
commonplace. The experience of Crown Agents in reforming the customs
administration in Mozambique provides very useful guidelines as
to what may be done in this context.
1.c.3 Defence
(i) In nearly all countries defence procurement remains
a relatively obscure process. A former Vice Chairman of the U.S.
Joint Chiefs of Staff, Admiral Bill Owens, has recently published
a book displaying the irrationality of procurement decisions made
by the latter which states that the Joint Chiefs lacked the power
to impose rational standards on the procurement decisions made
by the services. In other national contexts, where corruption
is widespread, it is not surprising that the dysfunctional nature
of the procurement process is dramatically increased by the prevalence
of bribery. The arms sector has been notoriously prone to corruption
since its development as a large scale industry in the later nineteenth
century. Sir Basil Zaharoff was Vickers most effective export
salesman at the turn of the century and firm evidence indicates
that he was used to posting commissions to purchasers of at least
ten per cent of the value of the sale. The Bofors case in India
in the later 1980s is a model example of the ways in which large
scale deals in the sector are often completed. TI's "Active
Bribery Index", published in 1999 found that the armaments
industry was second only to construction in its propensity to
pay bribes.
(ii) The implications of this process for
small economies are huge, since individual items of equipment
may cost as much as the budget of the Ministry of Health (or more)
in any one year. In the current wars which are characteristic
of some of the conflicts in Africa, or in Afghanistan, the cost
of individual items may be less, but the total cost is high and
procurement processes are equally prone to corruption, not least
where sanctions are in place (as in Angola). The financial arrangements
surrounding these purchases are complex and may well be funded
off the budget through devices such as the special accounts discussed
above, or through back-to-back equipment purchases made through
the exporter of a high value product.
(iii) The pattern of sales of this kind
is becoming more complex as new national suppliers enter the market,
or as existing non OECD arms exporters expand. Thus both Belorussia
and Ukraine have emerged as important arms exporters on their
own account, and both China and South Africa have expanded their
existing positions. Uganda bought four large-scale troop-carrying
helicopters from Belorussia in a highly controversial deal arranged
in 1998 by President Museveni's brother Salim Saleh, then Defence
chief. South Africa has expanded sales by its arms industry both
within Africa and to Iran, at the same time completing a large
scale arms purchase from EU sources with a total value of £3
billion. The latter has proved highly controversial in the South
African press and may attract a judicial inquiry.
(iv) However, while such exporters are increasingly
important, by far the largest proportion of the $20-30 billion
per annum international arms trade is carried out by the traditional
major exporters of the US, UK, France and Russia. Some of the
practices associated with such exports have been briefly described
above. The nature of such deals is clear from a review of the
cases brought against US companies by the Department of Justice
since the introduction of the Foreign Corrupt Practices Act in
1977. Many of the most important cases occurred within the defence
industry, and have involved complex arrangements with middle men.
(v) It is rare to find details in the public
domain in the United Kingdom regarding the terms of agency deals
in the armaments industry. Although the action is understood to
be strenuously defended, a writ issued at the end of 1997 in the
High Court in London (1997 A No. 1828) may possibly, however,
give something of a glimpse into this world. Aerospace Engineering
Design Corporation, a company incorporated in Panama, but reported
to have links with Saudi interests, sued Rolls Royce plc for alleged
failure to pay commissions at contract rates on the sale of aero-engines
to the Royal Saudi Air Force. The writ refers to commissions at
a rate of 15 per cent up to certain base prices and of 100 per
cent on prices above base. It states that the defendant had paid
at a rate of only 8 per cent on the whole price.
(vi) The removal of very high commissions
as a factor driving the international arms market would be an
invaluable contribution to developing greater integrity in world
trade.
1.c.4 Drug dealing
(i) The international trade in illicit drugs is a
more valuable global business, in financial terms, than any other
except tobacco. The trade is controlled by several international
networks focused on particular markets, although there are strong
links between these. The role which drugs play in determining
the civil war(s) in Colombia is widely recognised and has triggered
a number of major US initiatives largely designed to reduce the
value of drugs imported into the US itself. Likewise the role
which the "golden triangle" plays in supplying cocaine
to international markets is also well established. Both the UN
agency, UNICE, and Interpol devote a great deal of energy to attempting
to curb this trade.
(ii) However, the trade is a key source
of revenue to some groups within various countries in the south,
extending beyond those named above. The distribution system is
also frequently controlled by groups operating from the south;
Nigeria is regarded by both Interpol and H.M. Customs as the key
original domicile of many of the most effective distribution gangs.
These gangs now operate systems which are as far afield geographically
as the US and the Czech Republic. Speaking in little known dialects
of the Niger delta the gangs are able to avoid police detection
on a wide front.
(iii) The drugs trade is an increasingly
potent force particularly in southern Africa where the South African
market has attracted considerable flows of cocaine and xxx from
south east Asia. The South African market is partly an entrepot
for forward distribution to Europe. A significant part of this
material is channelled through East Africa, with Zanzibar playing
a role in this process. Thus, when official donors withdrew their
aid to Zanzibar following the rigged elections in 1995 the volume
of the trade increased, with individuals close to Government taking
a significant cut. This is a small but interesting case for the
debate about the case for cutting off aid where corruption is
rife. The net effect of the suspension of aid has been to increase
the extent to which political leaders have resorted to abetting
a criminal activity in order to strengthen their financial position.
This in turn, has fuelled the growing tension in South Africa
surrounding the drugs trade which has led to the emergence of
the PRAHAD vigilante groups in Cape Town.
1.d THE DEALINGS
OF TRANSNATIONAL
CORPORATIONS AND
DEVELOPED WORLD
COMPANIES IN
DEVELOPING COUNTRIES
(i) There can be little doubt that some multinational
corporations (MNCs) have contributed to corruption in some developing
countries over the past 50 years, and not least in the 1990s.
The context in which this has taken place and the pressures which
companies have faced have often been very similar to those described
as relevant to domestic companies in 1(b). The extent to which
US companies were bribing before the FCPA was introduced has also
been noted. MNCs from other parts of the developed world have
never been induced to declare the bribes they have paid on a comparable
basis. It has been a common assertion of UK-based companies that
companies originating from other OECD states are far worse culprits
and that they are only responding to commercial necessity. This
argument has been redoubled in the light of the growing role of
companies from Asia (especially Malaysia, China, Indonesia and
India) who are described as having an even higher propensity to
bribe than the UK's traditional EU-based competitors.
(ii) In 1999, for the first time, TI was
able to test the assertion of the proclivity of companies from
different parts of the world to bribe in its "Bribe Payers'
Index". This was carried out by Gallup in 13 larger "emerging
market" economies and surveyed the behaviour of companies
from 19 larger exporting countries, including relevant exporters
from Asia. The survey was based on interviews with 750 senior
personnel in both government and the private sector in the 13
economies. It found the following ranking of the propensity to
pay bribes (scores out of 10 with a zero propensity of 10):
Rank
| Country
| Score
|
| 1 | China | 3.1
|
| 2 | South Korea | 3.4
|
| 3 | Taiwan | 3.5
|
| 4 | Italy | 3.7
|
| 5 | Malaysia | 3.9
|
| 6 | Japan | 5.1
|
| 7 | France | 5.2
|
| 8 | Spain | 5.3
|
| 9 | Singapore | 5.7
|
| 10 | USA | 6.2
|
| 10 | Germany | 6.2
|
| 12 | Belgium | 6.8
|
| 13 | UK | 7.2
|
| 14 | Netherlands | 7.4
|
| 15 | Switzerland | 7.7
|
| 16 | Austria | 7.8
|
| 17 | Canada | 8.1
|
| 18 | Australia | 8.1
|
| 19 | Sweden | 8.3
|
| | |
(iii) The methodology and the findings of this survey
have not been seriously questioned or disputed, and it may be
taken as a fair assessment of the current situation. It clearly
identifies the UK as a country with a lower propensity to pay
bribes than some key competitors, but still as one whose behaviour
is more or less in line with a group of larger OECD member states,
in most of which, excluding the USA but including the UK, at the
time of the survey it was not illegal to bribe a foreign public
official provided that the bribe mechanism was "properly
organised."
(iv) Two other sources appear to confirm the role of
some UK companies in this regard. The case being brought by the
Government of Lesotho in the High Court in Maseru a long list
of international contractors and consultants for bribing the Project
Manager, Masupha Ephraim Sole, over the period 1992-96 to a total
of $3 million in relation to the Lesotho Highlands Water Project
(LHWP) (see 1.a.1.4 above). The LHWP has been financed by a consortium
of financiers including the World Bank. Of those indicted at least
one is specifically British (Alexander Gibb and Partners) and
one of the two French companies has a UK connection through a
substantial shareholding. All have pleaded not guilty, but the
indictment cites evidence provided by the Swiss Banks of payments
made by all the defendant companies into the Swiss Bank account
of Sole. The World Bank has stated that it will consider the debarment
of the companies in question from bidding for future World Bank
contracts if they are found guilty.
(v) A second source relates to debarment procedures already
executed by both the Government of Singapore and the World Bank.
In the mid-1990s the Government of Singapore debarred five MNCs,
including major UK, German and Japanese companies, from bidding
for five years on power contracts in Singapore since a separate
case had found that an agent close to the power authority had
supplied information in return for a bribe to each of the companies.
(vi) In the case of World Bank debarment procedures it
is very disquieting to note that of 52 companies to be debarred
for fraud and corruption, the addresses listed for 38 were in
the United Kingdom. The predominance of UK companies on the World
Bank list, the inclusion of a British MNC in the Singaporean case,
and the identity of the defendants in the Lesotho case, although
still subject to trial outcome, tends to suggest that some UK
businesses continue to indulge in the practice of securing international
contracts by bribery. This is also confirmed by recent World Bank
research, although the UK does not show up as by any means the
worst offender amongst developed nations.
(vii) Some UK based MNCs have expressed very active concern
on the issue and have taken steps to terminate or avoid the practice.
This is in line with the position adopted by the International
Chamber of Commerce (ICC) as reflected in its Rules of Conduct
on Extortion and Bribery in International Business Transactions.
In the UK, Shell and BP-Amoco are amongst the leaders in this
regard, the former having in 1999 produced a staff manual entitled
"Fighting Bribery". BP also has had a strict policy
of complying with the FCPA. However, the question of compliance
becomes more difficult in the context of subsidiary companies
and particularly of joint ventures.
2. THE IMPACT
OF CORRUPTION
ON DEVELOPMENT
(i) There has long been a school of thought which has
argued that corruption is compatible with development since it
is one of several means of capital accumulation, and such capital
will be invested in ways which increase GDP and ultimately "trickle
down" to the lower income strata of the community. This argument
has fewer supporters than twenty years ago for several reasons.
These include the fact that:
— few very corrupt countries as, say, measured in
TI's Corruption Perception Index (CPI), are achieving significant
rates of growth (3 to 4 per cent or more) over sustained periods;
— the exceptions to this, largely concentrated in
south east Asia, suffered a major setback in 1997-98 which was
at least partly attributable to various forms of corruption;
— whilst in Asia much of the capital accumulated
in this way is invested in the domestic economy, in Africa a high
proportion is exported; and
— the trickle down effect is conspicuously absent
from most countries where corruption is endemic. (A few oil exporting
states might be regarded as the exception to this).
(ii) Nonetheless it is true that corruption of a certain
type is compatible with development at least for a number of years.
Two Harvard economists, Schleifer and Vishny, have argued that
corruption is "sustainable" where the going rate for
commissions is known and is modest in relation to the capital
cost of projects, where commissions do not greatly distort project
costs, and where they are paid to a recognised and discrete entity—whether
Presidential family or political party. They have suggested that
Russia under Brezhnev and Indonesia in the earlier years of Suharto
fall into this category. However, in both these cases there proved
to be political and economic costs which were not sustainable.
2.a The impact of corruption on provision of services to
poor people
(i) Regardless of the fact that some forms of corruption
may be compatible with growth for limited periods, the question
of the incompatibility of corruption with the provision of adequate
services to the poor is hardly contestable. We have discussed
above the effects which corruption has on the collection and allocation
of government revenue, on the development of public policy and
on the interface between service providers and the public. The
distortion in government policy shaped by corruption minimises
the extent to which senior civil servants are really motivated
to ensure that services to low income groups are operational.
At the level of service delivery the picture becomes very bleak.
A surprising amount is known about just how bleak the picture
is as a result of some work undertaken in Bangalore which has
systematically surveyed low and very low income groups over the
past ten years with a view to establishing how much an individual
member of the public has to pay in the form of a bribe to secure
a public service. The national chapters of TI in several countries,
notably in Bangladesh and Tanzania, have followed this example
and produced valuable material on the topic.
(ii) The Bangladesh survey, based on a sample of 2,500
households (both rural and urban) found that:
— 96 per cent of those surveyed agreed that it was
impossible to get help from the police with out money or influence;
— 63 per cent of households involved in court cases
had to bribe court officials for the case to be heard (28 per
cent of these bribes were paid through lawyers);
— nearly 90 per cent thought that it was impossible
to get quick and fair judgement from a court without money or
influence;
— over 40 per cent found it necessary to make a
special payment to school staff to obtain admission for their
children; an additional 34 per cent used an "extra- regular"
method to obtain admission;
— 70 per cent agreed that unethical practices, involving
some form of payment, were necessary to obtain admission to hospital
and over 80 per cent found this true when the patient was seeking
treatment whilst in the hospital;
— about 33 per cent of households paid money for
electricity connections and accessories;
— 30 per cent of households paid a bribe to the
meter reader to reduce consumption assessments;
— about 65 per cent of urban households found that
it was almost impossible to get a trade license without money
or influence.
(iii) These points relate to the provision of "basic
services" some of which may be regarded as primarily urban
(although survey responses are divided between urban and rural).
However, the allocation of land titles and bank credit, both of
prime relevance to rural households, is similarly skewed. Seventy
one per cent of rural households considered that it is "impossible
to register land without money or influence". In the case
of credit only 75 per cent of those receiving loans received the
amount which had been sanctioned, the remainder having been intercepted
by bank officials before reaching them, though failure to repay
the full amount led to confiscation of assets in 55 per cent of
cases.
(iv) The authors of the survey concluded that "Bangladesh
is suffering from endemic and chronic corruption and it has infested
every nook and cranny of society". The survey results from
Tanzania were remarkably similar, and concur with the very extensive
verbal evidence given to the Warioba Commission in each of Tanzania's
50 Districts. In contexts where this culture of corruption is
endemic many, if not most, of the poor are excluded from the basic
services of health, education and energy which may be regarded
as the key building blocks of human development.
2.b Domestic sector private development (eg commercial
banking and power development)
(i) In 1(a) above we discussed some of the distortions
in private sector development, especially of locally owned large
and smaller scale businesses, which arise from widespread corruption.
Here we will provide an additional comment on the banking sector
and on power development.
(ii) In both south east Asia and many parts of Africa
the 1990s have seen the collapse of a number of key commercial
banks which have had actual or effective ties to the state. Thus
in Indonesia it became clear in the course of 1997-8 that the
large scale commercial banks were heavily overstretched in the
finance which they provided to members of President Suharto's
extended family and other close associates. These banks had in
turn been heavily dependent on short term inflows from international
banks; when these were withdrawn, the vulnerability of the local
banks to their dubious portfolio became very clear, creating a
major liquidity crisis.
(iii) In Cameroun, the "liberalisation" programme
of the late 1980s created a strong interest among international
commercial banks in establishing a presence in Cameroun, and at
least four banks did so. In fact the culture of non-repayment
of loans, established over the previous twenty years, proved to
be so deep that all of these have closed. Credit to the agricultural
sector had been particularly prone to corruption during previous
years and in order to re-establish effective agricultural credit
systems a new Credit Agricole was established in the early 90s
managed by an international team funded by GTZ, the main German
technical assistance agency. Within five years, this too had closed.
The combination of internal fraud, severe problems in project
execution, and the culture of non-repayment proved decisive.
2.c The ability of developing countries to attract foreign
direct investment (FDI)
(i) What aspects of corruption are relevant to FDI? A
key aspect of transnational corruption is its role in relation
to large scale investments in new projects or in privatisations.
Whilst these investments may in principle occur in any sector
they are particularly associated with, for example, power generation,
telecommunications and defence. In the case of large scale projects
the mechanism at work has been very well described by George Moody-Stuart,
former chairman of TI-UK, whose book "Grand Corruption"
is perhaps the clearest description in print of this process,
at least in relation to countries of the "south". The
costs involved in the process of Grand Corruption are those derived
from its nature. The need to provide large commissions, which
may involve up to 25 per cent or more of the cost of a project,
to senior figures (either directly or through agents) tends to
cause a serious and unjustified increase in project costs, a consequent
increase in external debt (if there is an element of external
finance—eg through export credits or multilateral or foreign
banks), and may lead to capital flight or diversion of the commission
to offshore financial centres. Overall the rate of return to shareholders
is lower than it would otherwise be, and the cost of the product
to customers higher.
(ii) Furthermore, the manner in which the corrupt payments
are arranged will frequently lead to surplus purchases, skewed
specifications, substandard performance, and even unnecessary
facilities constructed solely as a means acquiring commissions.
(iii) There is growing evidence that international investors
build in an aversion to corruption in their calculations of where
to place investment. If an investor knows that he can only develop
a project—with or without a joint venture partner—on
the basis that he will have to make a significant payoff, this
is increasingly likely to dissuade him or her. If the investor
is aware that not one but a series of payments—perhaps stretching
over several years—will be necessary the level of dissuasion
will be even greater. If these payments may have to be made to
a series of currently unidentified people with influence over
the outcome of the investment the negative signals may be decisive.
Of course these factors may be offset if the national market in
question is very large or medium scale but growing very fast.
(iv) A specific but related issue for investors is the
question of dealing with bureaucracy which can cost both time
and money. Daniel Kaufman at the World Bank has produced a set
of data which shows a consistent relationship between an economy
in which there are a large number of bureaucratic regulations
and a high level of corruption (as measured by the TI Index);
and also a close relationship between a high level of corruption
and the amount of time which corporate management is obliged to
spend with bureaucrats. Both of these analyses show how significant
levels of corruption may act as a disincentive to FDI, when there
is a choice of national location.
(v) Valuable related work on the broad impact of corruption
on FDI has been published recently by Prof Shang Jin-Wei of Harvard
University who has analysed the correlation between levels of
FDI and a country's position on the TI Corruption Perception Index.
He has found that as a country moves up the corruption perception
index (ie becomes less corrupt) so it is likely to attract increasing
quantities of FDI. Looking at the question from the investors'
point of view he has equated a reduction in the level of corruption
with a reduction in the rate of corporation tax. Thus he finds
that if Mexico were to move up from its low position in the index
(i.e. heavily prone to corruption) to the level of Singapore (in
the 10 "least corrupt") its ability to attract foreign
investment would increase as if it had reduced corporation tax
by 20 per cent. One might question these findings on the grounds
that China alone attracted $40 billion in FDI in 1995, and is
widely acknowledged to have a fairly high level of corruption
(a score of less than three in the index). However, if the flows
of FDI are shown on a per capita basis China attracted ten times
less investment per head in 1995 than did Malaysia; and between
1994 and 1999 the Czech Republic received more than 10 times as
much FDI per capita as did Ukraine.
(vi) On a more empirical basis a survey was conducted
by the UK NGO "Worldaware" for the Commonwealth Secretariat
and the Commonwealth Business Council in 1998. It was based on
interviews with 38 UK based companies, each with significant trade
or investment interests in Commonwealth Developing Countries.
Respondents were asked to rank 22 factors in order of importance
as obstacles to FDI. Corruption was ranked as the decisive constraint,
ahead of political instability, inadequate infrastructure and
problems of accessing foreign exchange. Whilst there are fifty
developing (low or middle income) countries in the Commonwealth
many receive virtually no new flows of FDI, including some, such
as Kenya and Papua New Guinea, which in the past have received
very significant flows. In fact flows have always been concentrated—in
the early 1990s Malaysia and Nigeria together accounted for 75
per cent of total flows to developing Commonwealth Countries.
It is clear that corruption has been a major constraint on FDI
in the recent past for which many countries are paying a high
price given that formal aid flows now account for only about 15
per cent of all flows to developing countries.
(vii) There is no doubt that a really valuable natural
resource base, or a country with very high tourist potential,
can overcome investors reluctance to commit funds. However in
these cases the expected rate of return has to be exceptionally
high: investment in the Tanzanian mining industry over the last
three years has fulfilled these conditions because the costs of
exploitation and the extent of the resource (particularly of gold)
are expected to justify it. Investment in China fits into a special
category of investment in a massive market, which is again large
enough to offset the undoubted costs of corruption in that economy.
However, as the World Bank Development Report for 1997 noted:
"No matter how high the degree of predictability of corruption
in a country, its rate of investment would be significantly higher
were there less corruption".
2.d The distortion of decision making by developing country
governments as a result of corruption
This has been largely covered under in 1(b) and (c) above.
There is, however, another aspect of corruption which has begun
recently to attract serious research attention—labelled
"State Capture"—in which companies (either indigenous
or foreign) go beyond the corruption of purchasing decisions and
procurement processes to the "capture" of the legislative
and regulatory process itself, bending the creation of laws and
regulations to their own interest. World Bank researchers, in
particular, are now looking at this closely.
3. MEASURES TO
COMBAT CORRUPTION
3.a The provision of support for the development of appropriate
legislation and judicial capacity to deal with cases of corruption
and effective anti-corruption commissions in developing countries.
(i) Assistance through aid mechanisms can only be effective
when it is actively sought by the Government in question and is
not simply a response to donor pressure for governance programmes.
Additional conditions for the development of appropriate legislation
are a willingness to confront difficult questions such as the
reverse onus of proof which places the burden of proof on the
defendant. The effectiveness of Anti Corruption Bureaux
(ACBs) very much depends on:
— committed political backing at the highest levels
of government;
— political and operational independence to investigate
even the highest levels of government;
— adequate powers of access to documentation and
to question witnesses;
— leadership which is perceived to be of very high
integrity.
(ii) It is fairly self evident that without backing from
the highest levels of government an ACB cannot be expected to
make much progress. In Kenya at the present time the new ACB,
brought into being by the anti-corruption legislation of 1999
is considered by many Kenyans to be basically flawed in that it
shows no sign of tackling the largest of all Kenyan scandals—the
Goldenburg case discussed above. The question of adequate powers
to access documentation and the questioning of witnesses may seem
an obvious provision, but in Zimbabwe the Anti Corruption Act
specifically excludes investigation of the President's Office
or of the army. Operational independence may seem an obvious condition
for success, but in South Africa the Special Investigating Unit
established under Judge Willem Heath must seek the State President's
permission before proceeding to investigate any case.
(iii) Where an alternative strategy of involving the
public more directly has been adopted there has been conspicuous
success, as in Hong Kong. In this case, an oversight committee
(with participants from civil society and the private sector)
must agree to closing an investigation file before this action
can be taken. Perhaps even more importantly it is generally agreed
that it is crucial to sensitise the public to the issue of corruption
and to be aware that office holders found guilty of corruption
can be prosecuted. In Hong Kong the intensive preparation of public
opinion has been the key to the success of the agency. In Malawi
where a relatively successful ACB has been launched in the last
two years a similar programme of sensitisation was conducted leading
to the receipt of more than 5,000 complaints. Successful ACBs
generally also have the powers to freeze the assets of those under
investigation (or those holding funds on their behalf); to seize
and impound travel documents, to prevent a person from fleeing
abroad, and to protect whistleblowers.
(iv) Where these and related conditions are met there
is a good case for donor assistance being used to support ACBs,
which in many cases are chronically underfunded. Even in South
Africa the Special Investigating Unit is suffering serious budgetary
cutbacks, even though it recovered a total of £130 million
(equivalent) for the state in 1998/9. Three relatively successful
examples of donor support to ACBs are those in Uganda, Botswana
and Malawi, each of which has made valuable contributions to addressing
corruption in the recent past. In the case of Uganda much of the
material placed in the public domain by the Inspector General
of Government (Director of the Equivalent of an ACB) has been
used intensively by Parliament to criticise Ministers, at least
three of whom have been obliged to leave office partly on corruption
charges.
(v) In many countries there is inadequate judicial capacity
to deal with cases of corruption, which are frequently complex
and involve commercial law. This is especially true where countries
are emerging from a legacy of one party state government in which
much of the corporate sector has been in state ownership. In cases
such as this, it may be very useful for a donor to fund one or
two senior judges who are specialised in commercial law, so that
cases can be heard. A positive consequence of this is that the
need to refer cases to international dispute procedures (e.g.
ICC, ICSID) outside the country in question would be reduced,
and companies which may consider that they are the victims of
extortion could have recourse to the courts.
(vi) Thus support from the UK and other donors to
ACBs and the judicial system is more than justified where the
conditions discussed above apply. However, this has to be
offered in the context of a programme for strengthening judicial
integrity and accountability. Where judges are appointed by the
President, and can also be dismissed by the President, findings
against senior members of government may still prove to be rare.
3.b Regional Initiatives to Combat Corruption which Takes
Place at Borders Between Countries
(i) In most regional free trade areas or customs unions
(such as COMESA in southern Africa or the East African Community
or Mercosur in the southern cone countries) the formal focus is
on the abolition of tariffs on intra-regional trade and the harmonisation
of external tariffs. However, in such blocs is it frequently the
case that the effect of the formal tax regime is greatly distorted
by the prevalence of consistent demands for bribes by customs
officers. This may be in addition to, or instead of, the tax regime.
(ii) A recent study listed the following advantages to
harmonising the tax system within the newly re-formed East African
Community:
— a common taxation system will hold the common
market together;
— operators will enjoy the complete absence of fiscal
frontiers among countries;
— reduced border control will reduce the manpower
required to manage movement of goods and people;
— there will be a reduction of smuggling problems
among the three countries.
(iii) In practice each of these points will tend to reduce
the levels of corruption prevalent border posts. As the Community
becomes a zone in which trade is completely free the levels of
this particular form of corruption are very likely to fall away.
If this is matched by other forms of successful economic integration
(such as a common external tariff and a common currency) corruption
in the context of regional trade may be largely eliminated. However,
it is equally likely that the rents which are generated by the
status quo are sufficiently attractive to ensure that progress
in this respect may be slower than Treaty obligations would suggest.
3.c The Provision of Support to Civil Society Groups in Developing
Countries to Raise Awareness about Corruption and to Build Domestic
Demand for its Eradication
In reviewing the role which civil society can play in addressing
the corruption issue it is essential to recognise that there are
many different components of civil society, and each has its own
needs. For the purpose of this analysis the three principal types
of group can be categorised as follows:
3.c.1 Different types of civil society group
(i) Existing advocacy groups, not corruption-specific:
Existing groups active in areas such as human rights and the environment
which have chosen to recognise corruption as a factor which reinforces
the negative effects of their main concern; in some cases, such
as Lok Sevak Sangh in India and Poder Ciudadano in Argentina,
they may have an existing large mass membership;
(ii) Specifically anti-corruption groups: All
seventy national chapters of TI fall into this category but some
other, single-country, anti-corruption groups predate TI—such
as Integrity in Nigeria and The Anti-Corruption Network
in South Korea;
(iii) Professional associations: These consist
primarily of skilled professionals such as accountants and lawyers
who may choose to focus on issues such as corruption and fraud
either for broad social, economic and political reasons, or to
achieve specific improvements across the profession in its general
practice. The first objective is more typical of professional
bodies in the south: the Kenya Law Society and the Cameroun Bar
Association are both examples of professional organisations which
have campaigned courageously on the corruption issue. On the other
hand, in the UK, a Fraud Advisory Panel designed to improve governmental
and corporate response to fraud, was formed through an initiative
of the Institute of Chartered Accountants in England and Wales.
3.c.2 Ways in which such civil society can be active:
(i) Awareness Raising: moving the corruption
issue up the national agenda through small scale meetings, demonstrations,
conferences and placing material in the press;
(ii) Political Lobbying: direct lobbying of Government,
and maybe of international organisations, to ensure that a particular
route to redressing corruption is adopted;
(iii) Prosecution or legal representation on corruption
related issues: mounting a prosecution against an individual
or set of individuals as the Law Society of Kenya did with eight
individuals allegedly associated with the Goldenburg case in 1998.
Alternatively, direct legal assistance to individuals who may
wish to bring a case against the authorities as the Cameroun Bar
Association did in a series of Town Hall meetings in 1999.
(iv) Civic Education: can be regarded as part
of moral education at school level and delivered through teacher
training. TI Chapters in countries as different as Italy and Papua
New Guinea have had active civic education programmes designed
for school level and delivered through the orientation and training
of teachers;
(v) Monitoring the anti-corruption aspect of the
Growth and Poverty Alleviation Programmes: the linkage of
debt relief to anti Corruption measures, as envisaged in the conditionality
built into relief under the HIPC initiative, provides a key opportunity
for civil society groups to measure progress in this regard.
(vi) The following matrix relates each of these activities
to the three types of civil society group discussed above:
| Awareness Raising |
Political Lobbying | Legal Initiatives
| Civic Education | Media Placement
| Monitor WB/IMF Programme |
| Existing Advocacy Groups | x |
x | | |
| |
| Specifically Anti-corruption Groups | x
| x | | x |
x | x |
| Professional Associations | |
x | x | x | x
| x |
| | |
| | | |
| 
