Select Committee on International Development Fourth Report


84. In this Section we will examine the link between aid and corruption before looking first at how multilateral funds are safeguarded and secondly how bilateral funds are protected.

Links Between Aid and Corruption

85. Laurence Cockcroft, Transparency International (UK), said "Few forms of aid have completely avoided either directly or indirectly fuelling corruption".[204] Even DFID's Country Strategy Paper on Indonesia admits "in the past some donor funded projects probably fuelled corruption".[205] World Bank staff estimated that in Indonesia about 20 - 30 per cent of all development funds had been systematically diverted.[206] In arguing that aid dependency was a "motor of corruption",[207] Transparency International drew on the work of Judge Warioba, a former Prime Minister of Tanzania and chair of the 1995 report on corruption in Tanzania. He said that donor assistance created a set of assumptions about continuing aid flows that were valued more for the personal incomes they generated than their value in raising GDP in the long run. This whole problem has been compounded by donor organisations which strove to reach disbursement targets and had weak financial controls so that aid was given with little thought to the longer term goals and with little accountability.[208] This is symptomatic of an overemphasis on inputs rather than considering the intended outputs. We welcome the shift that DFID has made to move from an input driven approach to one that focuses on outputs.

86. Anne Cockcroft, CIET, said that some of the problems stemmed from the large sums of money in projects and programmes, pressures to meet disbursement targets and a lack of incentive to check how money was spent once a disbursement target had been met.[209] The Corner House suggested "What constitutes a development failure from the point of view of the poor and civil society, however, may well constitute a development success from the point of view of funding agencies, consultants and companies involved in a project. Even ill­conceived anti­corruption programmes, for example, are evidence of some sort of 'action' for which institutions can - and do - claim credit".[210] The Corner House said that staff at the World Bank were reluctant to raise issues that might slow down a loan for fear that it might adversely affect their career.[211]

87. We welcome the fact that DFID has recognised that "Development programmes can themselves be vulnerable to corruption in aid procurement and misuse or diversion of development assistance".[212] DFID has been improving procedures, upgrading systems and training staff to ensure corrupt practices are prevented and detected. This needs to be supplemented by internal and external audit.

88. Anne Cockcroft noted that some large donors paid officials to attend meetings, which was to some extent a form of corruption.[213] The Committee was told that the UNDP paid those attending some of its courses in Vietnam. This kind of activity can lead to skewed priorities and may undermine important development work. Anne Cockcroft felt that it was a misperception that you had to pay people to attend meetings. We believe it is wrong for donors to be paying people to attend meetings they should attend as part of their duties. There may be legitimate expenses associated with travel that can be reclaimed but donors should not be funding any projects or programmes where money is routinely paid to government officials or others simply to attend meetings.

89. Rick Helsby, PricewaterhouseCoopers, spoke about some of the forensic investigative work they had conducted for donor organisations, NGOs and the World Bank.[214] He also noted that there were significant barriers to forensic investigative work in developing countries including an unwillingness or lack of ability on the part of local police to tackle cases of fraud, an overwhelmingly bureaucratic process and an absence of any mutual assistance agreements with other countries. He said that this kind of work was also hampered by "a very ill­developed sense of corporate ethic".[215] Building institutional and technical capacity in the criminal justice and legal systems of developing countries is essential if companies are to have the confidence that their investment is protected by the rule of law and that the rule of law will be evenly applied. Companies need to have the confidence that they will have recourse to the police and courts where fraud and corruption are discovered. Companies also need a non-corrupt legal system so that business disputes can be settled fairly. In fighting corruption, multinational companies have a role in sharing best practice and supporting local industries in developing countries. We will consider this in greater detail later in the Report.


90. Humanitarian relief can be subject to the same demands for bribes at customs posts and port authorities as ordinary commercial shipments. In areas of conflict there can be problems transporting supplies due to financial extortion by one or more of the parties engaged in the conflict, associated with the authorisation and facilitation of the movement of goods. The distribution of aid for disaster relief is often carried out through NGOs who effectively act as agents for the distribution of food and other supplies. As with all organisations, NGOs run the risk that a failure of internal systems could result in fraud or corrupt practice. The problem is compounded by the fact that local NGOs are often established primarily in order to access funds from bilateral donors and international NGOs. It is very often difficult for donors to assess the financial and management capacity of local NGOs. Transparency International said 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".[216]

91. Transparency International pointed out that there was a concern that some humanitarian relief could prolong conflict, particularly in the case of famine relief. They gave the example of southern Sudan where a significant part of famine relief had been co­opted by all sides of the conflict at one time or another. We have discussed these issues in our Report on the Sudan.[217] Transparency International pointed to similar dilemmas facing the famine relief programmes in Sierra Leone and Angola. They 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".[218] DFID should try to develop a framework for the delivery of humanitarian assistance that limits opportunities for corruption. The Committee does not underestimate the difficulties associated with this. DFID should engage with the organisations routinely involved in the delivery of humanitarian aid to see what can be done collectively to improve systems and procedures to limit opportunities for corruption.

92. Richard Manning, DFID, acknowledged that humanitarian aid could be threatened by corruption but argued that by increasing DFID's capacity to understand the reality of what was happening and by making use of efficient and experienced non­governmental organisations, they had limited the risk of British taxpayers money being misappropriated.[219] He recognised that it was not always possible to ensure that the food supplies eventually ended up in mouths they had intended to feed.[220] We looked briefly at the role of corruption in conflict our Report on Conflict Prevention and Post-Conflict Reconstruction,[221] but further examination of this is required. The role that aid plays in fuelling conflict, and the part that corruption plays in this, requires further research.


93. Although decisions can be swayed and influenced by corrupt practices, not all poor decision-making in developing countries is due to corruption. Some poor decision-making is the result of flaws and deficiencies in the decision-making process. Richard Manning, DFID, said "The reality of the situation is that development will only take place positively in countries if their governments are taking substantive decisions on resource allocations - one of the most important set of decisions that any developing country can take when resources are so constrained. It follows from this that whatever the sort of assistance one is providing, if you are working in an aid dependent country donors should be concerned about the quality of decision making in that country generally and we are working to try and strengthen that".[222] It is important that donors recognise the difference between poor decisions that have been influenced by corrupt practice and those that are simply the result of a flawed process. Decisions on the use of funds freed up by debt relief are very prone to both corruption and poor decision making. It is vital that donors work towards the establishment of systems that can prevent both the corrupt use of discretionary power and poor decision making.

Protecting Multilateral Development Funds from Corruption

94. Multilateral development agencies play an important part as standard setters and they must take a stronger stance on corruption.[223] DFID spends just over £1.1 billion through multilateral donors (the bulk of which, just over £674 million, is spent by the European Community). DFID relies on the controls of multilateral agencies to provide an assurance that the assessed and voluntary contributions it makes to them are protected from corrupt practice.[224] Richard Manning told the Committee, "We look very carefully, when we make a contribution to [multilateral development agencies], as to how effective they are from all points of view".[225]


95. The April 2000 US General Accounting Office Report on the World Bank[226] noted that there had been significant improvements in developing management controls within the World Bank. Richard Manning said the US General Accounting Office had recognised that the World Bank was making a serious effort. He said DFID believed the World Bank controls were "up to the mark internationally" and that this in itself, had sent a useful message to the regional banks.[227] However, the Report raised concerns that there were still issues to be addressed before the World Bank could provide a reasonable assurance that funds were being spent according to its own guidelines.[228]

96. It was interesting that many of the concerns raised in the Report related to a lack of technical skills and weak institutions in borrower countries. The Report noted that the Bank had placed an increasing emphasis on building institutional capacity. It expressed particular concern about the capacity of borrowers to meet World Bank procurement requirements and the ability of borrowers to deliver effective project management. In the course of its investigation, the US General Accounting Office looked at twelve randomly selected projects. In five it found that "borrowers' implementing agencies had little or no experience managing development projects".[229] Six projects failed to meet the Bank's minimum financial management requirements for approval. In three they had particularly weak capacity for carrying out procurement and in four projects the implementing agencies had not even been established.[230] The Report recognised that capacity and institution building would be both difficult and time consuming. It also noted the World Bank Institute had questioned the sustainability of some of its own anti-corruption work in African countries.[231]

97. Worryingly, the Report raised specific concerns about the independence of project auditors, particularly government auditors in borrower countries, used to audit Bank financed projects. The Report said that ability of the Bank to provide assurances that funds were being correctly spent was closely linked with the success of institution and capacity building activities.[232]

98. We consider that improvements in the World Bank, in terms of the strengthening of internal controls, are providing an important lead for the regional development banks. However, there are still some improvements that can be made and we believe that DFID should look again at the US General Accounting Office Report on the World Bank to identify areas of concerns that DFID together with the Bank can work to improve.

99. DFID should also examine the concerns expressed in the US General Accounting Office Report about the institutional and technical capacity of borrower governments to assure that funds are being spent correctly. Borrowing by national governments should be transparent so that parliaments and civil society can assess how funds are being spent. This will be key in safeguarding British taxpayers' money spent through the World Bank and other multilateral development agencies.


100. Transparency International recognised that the positive anti-corruption initiatives by the World Bank have had a considerable impact on other multilateral donors, especially the regional development banks.[233] The regional development banks and the World Bank can all benefit from sharing improvements and best practice on their internal controls.

101. The Asian Development Bank (ADB) is seen by DFID as moving towards the anti-corruption procedures adopted by the World Bank, although it maintains a "no bribery pledge" that is optional on large contracts.[234] Corruption is further down the agenda of the African Development Bank where only brief mention is made of corruption in its rules on procurement of goods and works.[235] DFID should make corruption a central concern of the regional development banks, eliminating its effect from all their activities. DFID must use its membership of their Boards to ensure this takes place.

102. The regional development banks and the World Bank are key players in terms of tackling corruption. They often have significantly more leverage than bilateral donors as a result of the size of their programmes. Many of the bilateral donors have very good programmes but are only small players in a given country. Clare Short recognised this when she gave the example of lending in Indonesia where the UK programme is the order of £15 million compared to US$1 billion lent or given by the Asian Development Bank. By working with the ADB to improve the quality of its programmes the UK could have a greater impact in terms of improving systems and quality of life than through the current stand-alone programme.[236] We were able to see a similar relationship at work in Vietnam where the UK had a disproportionately high level of influence, considering the size of its programme, largely as a result of the constructive relationship it had with the larger players such as the World Bank. DFID should encourage the multilateral development agencies to ensure the complementarity and coordination of their anti-corruption efforts. DFID should also seek to use the leverage of the multilateral development agencies in working with difficult governments or where DFID has a small presence.

103. The Committee has heard very little about ways in which the EC is assisting developing countries in combatting corruption. The EC has an important role to play. It is the fifth largest donor of ODA and the second largest multilateral donor. When the ODA of the EC and its member states' bilateral programmes are taken together, they account for more than 40 per cent of world ODA. The EC also has a number of additional advantages, such as an extensive network of country delegations and a perception of neutrality. As part of its Statement on Development Policy, the European Commission proposed six 'priority areas' on which it proposes to focus its development policy. One of the six areas is 'good governance and the rule of law'. The Committee would welcome further details from the Government on efforts being made by the EC to address the problem of corruption in developing countries and in EC programmes under its core policy area 'good governance and the rule of law'.

104. With regard to accountability, Richard Manning, DFID, conceded that "One has to say that we have significant concerns about the European Commission".[237] We request that DFID, in its response to this Report, comment on the appropriateness and effectiveness of EC controls against the corrupt and inappropriate use of its development budget.


105. The World Bank maintains a list of firms and individuals barred from future procurement contracts. During the inquiry the Committee heard evidence from a number of companies that supported the development of such lists.[238] The disbarment of companies by International Financial Institutions on the grounds of corrupt or fraudulent practice is likely to increase over the next few years[239] and is likely to be a powerful tool for tackling corruption.[240] DFID said that the Bank was looking at the scope for this kind of information to be shared with other development agencies. There are already arrangements in place to pass evidence of corruption or other criminal offences to the prosecuting authorities of the country in which the company is registered.[241] We would encourage DFID to press forward with work on sharing lists of debarred companies among development agencies. The harmonisation of such lists around the world should make tackling corrupt practice easier and signal that there are no safe havens where companies willing to bribe can avoid exposure. DFID said "The Government intends to come forward with practical proposals for the UK which it will share with the Committee and promote through other national development agencies".[242] We look forward to receiving these proposals. However, DFID said that "It is unlikely for legal reasons that development agencies will be able to simply accept and implement each other's decisions on disbarment. Each agency may need to examine the evidence in each case for itself and reach its own decision on whether sanctions are appropriate".[243] We do not underestimate the difficulty there will be in achieving agreement on this issue.

Protecting Bilateral Spending

106. In addition to protecting the money spent through multilateral development agencies, it is essential that £1.3 billion spent bilaterally by DFID annually is adequately safeguarded. Richard Manning, DFID, reassured the Committee "... it is implausible that British aid money will have been used on any significant scale for corrupt practice".[244] However, this view was not shared by the Corner House.[245]


107. DFID operates within an accounting and controls framework designed to meet Government Accounting requirements and employs regular internal and external audit. DFID staff are subject to the rules covering civil servants which exist to safeguard impartiality and integrity and which ensure that staff cannot use their official position and official information to further private interests. DFID has an approval process for bilateral and programme expenditure that ensures appropriate management, monitoring, accountability and audit arrangements are in place including the arrangements for procurement of goods and services.[246]

108. DFID would prefer to rely on partner governments to provide local accountability but recognises this can be problematic. DFID states that "Where local financial control regimes are weak and do not allow reliance on government­produced audit statements, DFID employs alternative arrangements".[247] Such arrangements might include the use of independent auditors or building audit capacity into the programme management structure. Where DFID is providing budgetary support to governments it achieves accountability by requiring its funds to be "earmarked for agreed specific lines of expenditure".[248] DFID intends to make use of both partner government and DFID funded auditors to provide an assurance on how funds are spent.


109. Procurement is obviously an area of particular concern and DFID uses procurement agents to carry out this function. DFID assesses these agents to ensure they are competent and adhering to best practice. Richard Manning, DFID, said "...if you look at the specific procurement arrangements which cover the handling of British bilateral aid, there should not be any significant scope for corrupt practice within that".[249] Increasingly, DFID is relying on partner governments to undertake procurement. This sometimes requires improvements in local systems to provide the levels of assurance and probity required by DFID, although these capacity building measures are in themselves a development activity. Improvements in procurements systems in order to handle British aid should lead to an increase in confidence that all procurement in a country is done in an appropriate and safe way.[250]


110. Whistleblowing and hotlines for reporting corruption are useful methods of controlling and policing corruption. DFID is subject to the provisions of the Public Interest Disclosure Act 1998 and staff have certain statutory rights in relation to protected disclosures. We welcome the fact that DFID will issue guidance to staff on their rights under the Public Interest Disclosure Act 1998. DFID have told us that they would also seek to protect the identity of any individual outside the Department who volunteered information or drew its attention to suspected irregularities or corrupt practice.[251]

111. David Phillips, Crown Agents, told us that they found whistleblowing to be one of the most effective means of recording and reporting corrupt practice.[252] The World Bank has had similar success with a hotline they established for reporting corruption, although the US General Accounting Office Report said that they could do more to publicise the hotline among World Bank projects.[253] DFID should consider setting up a hotline for the reporting and recording of corrupt practice. Such a hotline would need to be advertised widely within projects and programmes that received British funding. It should also act as a help line for those who need advice on how the funding of projects can be safeguarded.

204  Evidence, p.105 Back

205  DFID, Indonesia Country Strategy Paper, Sept 2000, para c8 Back

206  US General Accounting Office Report World Bank: Management Controls Stronger but Challenges in Fighting Corruption Remain, April 2000, p7 and Evidence, p.301 Back

207  Evidence, p.48 Back

208  Evidence, p.48 Back

209  Q.523 Back

210  Evidence, p.301 Back

211  Evidence, p.308 Back

212  Evidence, p.3 Back

213  Q.469 Back

214  Q.651 Back

215  Q.652 Back

216  Evidence, p.50 Back

217  Seventh Report from the International Development Committee, Session 1997-98, Sudan, HC872-I Back

218  Evidence, p.51 Back

219  Q.6 Back

220  Q.9 Back

221   Sixth Report from the International Development Committee, Session 1998-99, Conflict Prevention and Post-Conflict Reconstruction, HC 55-I Back

222  Q.20 Back

223  Evidence, p.49 Back

224  Evidence, p.12 Back

225  Q.16 Back

226  US General Accounting Office Report World Bank: Management Controls Stronger but Challenges in Fighting Corruption Remain, April 2000 Back

227  Q.16 Back

228  US General Accounting Office Report World Bank: Management Controls Stronger but Challenges in Fighting Corruption Remain, April 2000, p.5 Back

229  Ibid., p.15 Back

230  Ibid., p.15 Back

231  Ibid., p.17 Back

232  Ibid., p.6 Back

233  Evidence, p.48 Back

234  Evidence, p.14 Back

235  Evidence, p.14 Back

236  Q.772 Back

237  Q.17 Back

238  Evidence, p.331 Back

239  Evidence, p.69 Back

240  Evidence, p.69 Back

241  Evidence, p.14 Back

242  Evidence, p.14 Back

243  Evidence, p.14 Back

244  Q.3 Back

245  Evidence, p.298 Back

246  Evidence, p.12 Back

247  Evidence, p.12 Back

248  Evidence, p.12 Back

249  Q.3 Back

250  Evidence, p.13 Back

251  Evidence, p.15 Back

252  Q.372 Back

253  US General Accounting Office Report World Bank: Management Controls Stronger but Challenges in fighting corruption remain, April 2000, p.11 Back

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