SECTION 6: TACKLING CORRUPTION - ACTION
IN THE UK
112. In the UK, a large number of different bodies
are responsible for addressing corruption including various government
departments, several regulatory bodies and a host of organisations
responsible for the investigation and prosecution of offences.
The Home Office leads on development of criminal law relating
to bribery, money laundering, asset recovery and mutual assistance.
The Department of Trade and Industry is responsible for UK commitments
under the OECD Convention on Combatting Bribery of Foreign Public
Officials in International Business Transactions
and improving corporate governance including the adoption of codes
of conduct. The Treasury is responsible for oversight of action
against financial crime and money laundering. DFID promotes action
on corruption in developing countries as 'an essential measure
for poverty reduction'.
The main elements of the UK Government's anti-corruption strategy
- the support of anticorruption strategies
in developing and transitional countries committed to tackling
- the protection of development assistance from
- the elimination of bribery from international
trade and business;
- the prevention of the laundering of funds corruptly
acquired in developing countries.
113. We have already looked at anti-corruption strategies
in developing countries in Section 4, and at the protection of
development assistance in Section 5 of this Report. In this Section
we will consider the UK's implementation of the OECD Convention
as a means of tackling international bribery. We will then examine
the role of money laundering and the Government's efforts to control
it before considering the role of the private sector.
Implementing the OECD Convention in the UK
114. The OECD Convention on Combatting Bribery of
Foreign Public Officials in International Business Transactions
is an international convention that requires signatories to adopt
national legislation to make bribery of foreign public officials
illegal. Jeremy Carver, Clifford Chance, explained that the purpose
of the OECD Convention was to set a high standard for national
laws with regard to the bribing of foreign public officials. He
explained it included a broad and clear definition of bribery
and it required dissuasive penalties. It established a strong
standard for enforcement and made provision for mutual legal assistance.
Transparency International said that the OECD Convention was the
most important initiative in the fight against international corruption.
They noted that signatories to the Convention represented 80 per
cent of world trade.
The Convention was signed by the UK in 1997. DFID said antibribery
conventions such the OECD Convention and the Council of Europe
Convention illustrated a new commitment to action by developed
In November 1998, the Convention was ratified on the basis of
existing statute (Public Bodies Corrupt Practices Act 1889, Prevention
of Corruption Act 1906 and Prevention of Corruption Act 1916)
and common law. The Government was obviously convinced that existing
law was sufficient to implement the OECD Convention. Elaine Drage,
Department of Trade and Industry, told us "Our legal advice
at the time was that the law and case law did support the United
Kingdom's view and we were already compliant with the Convention".
She said that this was supported by one piece of case law. Transparency
International noted that a number of important issues had been
left unresolved when the Convention was originally negotiated
including the funding of foreign political parties and their officials,
recipients of bribes, bribery through foreign subsidiaries, links
to money laundering and the role of offshore havens, and the extension
of money laundering provisions to recognise corruption as a predicate
Transparency International were particularly concerned about the
issue of funding to foreign political parties.
CRITICISM OF THE CURRENT IMPLEMENTATION OF THE OECD
CONVENTION IN THE UK
115. The Corner House said that "The pervasive
use of corruption by Western companies operating in the South
also reflects the relaxed attitude of Western legal authorities
In a similar vein, Transparency International claimed that "Those
bribing overseas seem to have a rather comfortable regime in this
They went on to say "Until there is fresh legislation in
the UK, the OECD Convention has no direct and immediate impact
on UK law, which remains as ineffective as it has been for the
The OECD Peer Review Process
116. The OECD has a peerreview process that
looks, in Phase 1, at conformity of the implementing legislation
with the articles of the Convention and in Phase 2 at the application
of the laws in practice. DFID has provided funding to the OECD
Secretariat to support the work of the peer review process.
The Phase 1 OECD peer review of the UK was critical of the UK
Government for failing to address all aspects of the Convention.
The peer review group was unable to determine whether the UK laws
were in compliance with the standards of the Convention and urged
the UK to enact appropriate legislation. The review was concerned
- there was no explicit provision criminalising
bribery of foreign public officials;
- there was a lack of legislation specifically
prohibiting bribery of foreign officials;
- the UK relied on common law which does not expressly
mention bribery of foreign officials;
- there was insufficient case law to support the
UK's interpretation of the 1906 Prevention of Corruption Act and
that there was potential for this Act to clash with the European
Convention on Human Rights.
117. The Phase 1 review of the UK will be repeated
until the OECD is satisfied that appropriate legislation is in
place. Transparency International were critical of the Government's
attitude saying that having failed the first Phase 1 review, it
actively proposed to fail the second Phase 1 review as no new
legislation would be introduced in time for the second Phase 1
118. Monty Raphael, Peters and Peters, said "...it
is regrettable that we appear to have ratified the OECD Convention
on the basis that we could conform to its requirements; quite
clearly, we have not been able to. Also I find it rather surprising
and rather sad that we are not going to be told when a Bill will
Laurence Cockcroft, Transparency International (UK), was more
forthright saying "the UK is currently gravely at fault,
to an extent which can be described as a national disgrace".
Elaine Drage, Department of Trade and Industry, conceded that
"It is clear that the United Kingdom law is not sufficiently
Damage to the Reputation of the UK
119. Transparency International said "There
is real concern within the OECD at the UK's apparent lack of commitment
to the implementation of the Convention. Bribery of foreign public
officials (FPOs), is a serious international economic crime. To
delay enacting this offence could severely damage the future success
of the Convention, which rests on the basic assumption that the
same rules will apply to all major exporters".
Jeremy Carver, Clifford Chance, was similarly unimpressed saying
that the OECD peer review's judgement of the performance of the
UK had been lamentable and humiliating.
Mark Pieth, Chairman of the OECD Working Group on Bribery in International
Business Transactions, told Transparency International (UK) that
the OECD bracketed the UK with Turkey, Brazil, Argentina and Chile
on the basis that it had been found not to have implemented the
Elaine Drage, Department of Trade and Industry said of the peer
review process "I am informed that all countries were criticised,
but to varying degrees. We were criticised the most severely".
Mark Pieth said that the UK might be not be permitted to be an
evaluator in the Phase 2 peer reviews.
120. The Institute for Chartered Accountants expressed
disappointment that the law did not feature in the Queen's Speech
on 6 December 2000 and said "it should be reintroduced into
the Parliamentary timetable without delay".
In June 2000, the Home Office published a paper, 'Raising Standards
and Upholding Integrity: The Prevention of Corruption'.
This indicated that a Bill would be introduced when parliamentary
time allowed. In the foreword to 'Raising Standards and Upholding
Integrity: The Prevention of Corruption', the Home Secretary recognised
corruption as "a deadly virus". Transparency International
said that if it was a deadly virus it would not wait for parliamentary
time to be available.
We were surprised there was no provision for new legislation to
implement the OECD Convention in the Queen's Speech of 6 December
GOVERNMENT PROPOSALS FOR NEW LEGISLATION
121. There has been some response by the Government
to the continual criticism of its failure to implement the OECD
Convention. 'Raising Standards and Upholding Integrity: The Prevention
was based on the work of an interdepartmental review group and
set out the Government's proposals for the reform of the law of
corruption. In the Globalisation White Paper, DFID stated that
the Government was committed to
- revising the laws implementing the OECD Convention;
- introducing legislation to strengthen money laundering;
- working to help developing and transition countries
recover illegally and corruptly acquired funds deposited in the
122. DFID said that, when enacted, the law to implement
the OECD convention would include a clear definition of the concept
of corruption to enable its application to both the public and
private sectors. It explained that the law would have wider applicability
and would make clear that bribery of a foreign public official
to further a business transaction was an offence. It noted that
the law would be subject to extraterritorial jurisdiction
so that UK nationals engaging in corruption would be subject to
prosecution in the UK courts even if the bribe was paid abroad.
Elaine Drage, Department of Trade and Industry, explained that
Transparency International had helped to prepare a short Bill
designed to implement the OECD Convention. But she noted that
there were other Conventions on similar topics, such as Council
of Europe Convention on Corruption, and said that one of the aims
of the Home Office was to introduce legislation that covered all
123. Despite these proposals, it is likely that the
poor performance of the UK in implementing the OECD Convention
is damaging our reputation among developing and developed countries.
Clare Short was convinced that it was. She said that despite the
good record we had in addressing corruption "... the view
we are taking on the OECD Convention is damaging our reputation
and I really regret it because our commitment to have new legislation
means that we are going to do the right thing, so why do we not
do it more elegantly and say we know our existing law is too weak?"
The current legislation on corruption, which is over ninety
years old, is inadequate to meet our responsibilities under the
OECD Convention on the Bribery of Foreign Public Officials in
International Business Transactions. New legislation is urgently
needed to meet our international obligations but, incredibly,
has yet to be introduced. We cannot understand why the Government
has not yet introduced legislation to deal with this shameful
situation, especially as the issue is unlikely to be controversial.
The Government should introduce such legislation without delay.
The Government should ensure that any legislation introduced is
consistent with other anti-corruption Conventions to which the
UK is a signatory.
124. Transparency International have criticised the
tax deductibility of bribes in the UK. The Treasury clarified
the position for the Committee stating that any bribe made illegal
under existing UK legislation was denied tax relief as were business
entertainment, hospitality and gifts, irrespective of whether
they were corrupt payments.
They conceded that if a bribe was paid wholly outside the UK,
it could not be an offence in the UK and therefore would not be
denied relief (however, if the decision to bribe was taken in
the UK it might be).
The issue is not really one of tax deductibility but of extra-territoriality.
It is entirely unsatisfactory that confusion remains over the
issue of the tax deductibility of bribes. The Inland Revenue and
the Treasury should take steps to clarify the situation and should
make explicit that no form of bribery or corrupt payment, anywhere,
can receive tax relief.
SIMPLICITY AND CLARITY
125. Transparency International argued that any new
legislation on corruption should criminalise the bribery of foreign
public officials and should allow UK nationals to be prosecuted
in the UK even if the offence takes place wholly outside the UK.
They called for clear effective legislation with equivalent laws
in Scotland, Northern Ireland and Crown Dependencies. Similarly,
Monty Raphael, Peters and Peters, suggested that "We could
outlaw specifically the corruption of foreign public officials,
make it explicit rather than implicit, as we have been told up
to now it is, in our legislation; and, of course, we could extend
our extraterritoriality laws, again in much the same way, specifically
perhaps, or by reference to existing legislation".
Campaign Against the Arms Trade believed new legislation criminalising
bribery of foreign officials should be brought forward to establish
clear and well monitored anti-corruption rules for UK business.
Monty Raphael explained that despite the difficulties in investigating
and prosecuting offences committed partly or wholly overseas and
the difficulties gathering evidence or finding witnesses willing
the UK should send a clear message to the rest of the world, by
implementing new legislation, showing that we regard this as a
very urgent matter.
126. Jeremy Carver, Clifford Chance, said "...it
is not so much that evidence of effectiveness comes from enforcement
proceedings, or prosecutions, it comes from having a clear, simple
law that the successful business knows what to do with. The uncertain
law and the mess that we have here in this country is the worst
creator of confusion, of bad business practice, and therefore
anticompetitive practice, which essentially is very bad
for British business".
There has been a great deal of reflection on the low number
of prosecutions for corruption under the current legislation.
We believe that the number of prosecutions may not be the best
measure of effectiveness provided that legislation is sufficiently
simple and clear as to make plain the boundary between right and
wrong. We believe that any new legislation should be as clear
and as simple as possible.
THE BRITISH AND AMERICAN EXPERIENCE COMPARED
127. The lack of appropriate legislation in the UK
is often contrasted with the situation in the United States where
the Foreign Corrupt Practices Act has made the bribery of foreign
public officials illegal since 1977. It is worth noting, however,
that in Transparency International's Bribe Payers Index, the United
States is ranked as having a higher propensity to pay bribes than
The American legislation provides an exemption for bribes paid
through joint ventures and for facilitation payments. American
companies may be able to use off-shore arrangements to circumvent
the law thus giving rise to the perception that US companies are
more willing to pay bribes than UK companies. As with the UK,
there have not been many prosecutions under the anti-bribery legislation
possibly because of the expense and difficulty of conducting an
international investigation, especially where the host government
might not be willing to cooperate. Laurence Cockcroft noted that
one of the successful impacts of the law in the United States
was to force companies to have clear compliance procedures.
A lack of prosecutions for corruption might not be a problem provided
that the legislation making corruption illegal is simple, effective
and results in meaningful changes in companies such as the introduction
of appropriate compliance procedures.
128. Anglo American were concerned to ensure that
any moves to tighten up legislation in the UK (which they accepted
were necessary) should be accompanied by steps to ensure that
other OECD countries did not evade the provisions of the Convention.
They were keen to see the OECD Convention extended to non-OECD
countries and to see aid supporting anti-corruption measures in
UK businesses should not be put at a competitive disadvantage.
John Bray, Control Risks Group, pointed out there could, in fact,
be a competitive advantage to being backed by legislation that
prohibits corruption. He explained it provided companies with
a justification for resistance. He said "If as a company
you are approached by somebody demanding a bribe, it is a very
strong advantage to be able to say 'Look, I cannot pay, because
if I do I will be prosecuted and I personally may go to prison'".
We must equip companies with the necessary legislative backing
to resist extortion and bribery. The law should provide companies
with a shield that protects them from those who solicit bribes
by giving them the argument that a company and the individuals
concerned would face the stiffest penalties in the UK if they
were to engage in corruption of any sort. We believe that the
DTI should work with companies to help them address issues of
corporate governance and ethics and through Trade Partners should
provide help and support on the ground to companies working in
countries where corruption is endemic.
129. DFID told the Committee that "Corruption
is aided and abetted by money laundering".
They said that grand corruption and money laundering "form
a cycle of interdependent and illegal activity". Corruption
can originate in any country and weaknesses in banking and financial
systems anywhere can be used to access the global financial system
to launder funds.
Co-ordinated global action is needed if the cycle of grand
corruption and money laundering is to be broken.
130. There are few estimates of the scale of money
laundering. The IMF, using 1996 statistics, suggested that the
total global laundering problem was between US$590 billion and
US$1.5 trillion a year. Mark Malloch Brown quoted IMF statistics
suggesting that money laundering accounted for between 2 and 5
per cent of global GDP.
Ceri Smith from HM Treasury did not think that such figures would
be reliable given the problems with measuring the scale of money
laundering. There is certainly no estimate of the scale of money
laundering in the UK and consequently no idea of how significant
laundering the proceeds of corruption might be.
131. Money laundering is the process by which illegitimate
funds are given the appearance of having been legitimately acquired.
It involves three stages: placement (where the financial system
is first accessed), layering (moving of funds between companies
or jurisdictions - "effectively the washcycle in the
and integration (allowing the beneficial owner to enjoy the funds
as apparently legitimate). Ceri Smith, HM Treasury, indicated
that the UK is principally used for layering or integration of
funds rather than the initial placement. John Abbott, Director
General, National Criminal Intelligence Service (NCIS), said the
United Kingdom was vulnerable because it was a major international
financial centre. London has a reputation of being relatively
and Ceri Smith said that to some extent "the United Kingdom
could be said to be a victim of its own success"
in that passing money through London added a certain amount of
legitimacy to the money. He said there were effective anti-money
laundering controls in place and this had been recognised by the
Financial Action Task Force (FATF), which is the principal international
antimoney laundering organisation, when it had assessed
the UK. FATF described the UK anti-money laundering systems as
impressive and comprehensive.
132. Historically, legislation to control money laundering
has developed in a piecemeal fashion. The EC Money Laundering
Directive (91/308/EC) is enacted in UK legislation by the Criminal
Justice Act 1993 (CJA) and the Money Laundering Regulations 1993
(MLR). The CJA made laundering the proceeds of serious crime,
and failure to report suspicions of money laundering, a criminal
offence, adding to the provisions already contained in the Drug
Trafficking Act 1994 and the Prevention of Terrorism Act 1989.
The MLR requires banks and other financial institutions to have
measures in place to prevent money laundering. The Queen's Speech
for the current Session contained provision for a Bill to increase
powers against money laundering and to make it easier to recover
the proceeds of crime. This draws largely on the work done by
the Performance and Innovation Unit of the Cabinet Office for
'Recovering the Proceeds of Crime' of June 2000.
133. The European Directive on Money Laundering required
financial firms to know the identity of their customers when opening
an account or when transactions exceeded _15,000, to keep appropriate
records and establish antimoney laundering programmes. It
also required banking secrecy to be suspended whenever necessary
and any suspicions of money laundering to be reported to the authorities.
In September 2000, EU finance ministers agreed to extend the directive
to widen the definition of money laundering to include 'all serious
crimes', to extent the provisions to include a number of professions
beyond bankers, such as lawyers and accountants and to improve
cooperation between Member States.
134. DFID said the Government was keen to ensure
that financial institutions had appropriate procedures in place
to detect and deter money laundering, and to report suspicious
transactions. Through the Financial Services and Markets Act 2000,
the Government has given the Financial Services Authority (FSA)
a statutory objective to combat financial crime.
The FSA has consulted on its proposed rules on money laundering,
which will come into force when the new Act is implemented (sometime
in 2001). The Joint Money Laundering Steering Group are revising
their Guidance Notes in light of changes in legislation.
135. One of the main tools for tackling money laundering
is the system for reporting suspicious transactions to the National
Criminal Intelligence Service (NCIS). DFID told us "The Government
is ... concerned to ensure that a wider range of professionals,
such as lawyers and accountants, take seriously their responsibilities
to report suspicious transactions".
However, current reporting levels are perhaps best described as
patchy. In 1999, 10 out of 554 banking institutions contributed
78 per cent of reports from the banking sector (39 per cent of
all disclosures). Only 4 per cent of insurance companies and 6
per cent of London Stock Exchange member firms made reports compared
to 76.8 per cent of building societies. Reporting from Bureaux
de Change has improved from 7 per cent of all disclosures in 1995
to 21 per cent in 1999 but 90 per cent of these came from only
Solicitors and accountants are often key in the initial placement
of funds and are often prime targets for money launderers.
NCIS have said that accountants are an obvious target for money
launderers. However, accountants made about 0.7 per cent of the
14,129 suspicious transaction reports to NCIS in 1998 having accounted
for only 0.3 per cent of the 14,148 reports made the previous
year. Similarly, only 57 out of 12,500 solicitors made reports.
Howard Davies, Chairman of the Financial Services Authority, is
quoted in the Performance and Innovation Unit Report, 'Recovering
the Proceeds of Crime', as saying in 1998 "We believe there
is evidence that nonbank financial institutions are increasingly
targeted by money launderers, which argues for an upgrading of
our efforts outside the banking sector".
We are concerned at the under-reporting of suspicious transactions
by certain professional groups, in particular lawyers and accountants.
ENFORCEMENT OF MONEY LAUNDERING LEGISLATION
136. Because of the risk of money laundering, a number
of banks now refuse to accept funds where the identity of the
underlying beneficial owner is not known. The FSA Rules and the
revised Joint Money Laundering Steering Group Guidance Notes will
both reemphasise the need for the underlying beneficial
owner to be identified. Jeremy Carver, Clifford Chance, stressed
the importance of the 'know your customer' principles saying that
they should not simply be a matter of know your customer but also
know your customer's business.
The British Bankers Association said that the Joint Money Laundering
Steering Group Guidance Notes recognised that know your customer
went beyond identification at the outset of a relationship.
We believe the 'know you customer' principle is key to the
detection and control money laundering. We also believe that it
should extend beyond simply determining beneficial ownership to
understanding a customer's business and how their wealth is derived.
The FSA and Joint Money Laundering Steering Group should take
account of this in further developing their money laundering rules
and guidance notes.
137. As part of the money laundering process, funds
will often be moved through nominee and shell companies to ensure
that beneficial ownership remains hidden. A bank or financial
institution should always know the identity of the underlying
beneficial owner but this can be difficult to determine where
there are highly complex financial structures protecting the anonymity
of the beneficial owner. We noted with interest that the Financial
Services Authority has just completed its investigation of money
laundering controls at 23 banks in the UK linked to Abacha family
members and found that 15 banks had significant control weaknesses.
Banks often rely on a chain of responsibility that can be applied
between regulated parties. If a transaction is received from a
bank known to be operating under regulations that require beneficial
ownership to be established, the receiving bank can be assured
that underlying beneficiaries have been identified. Members of
FATF are peer reviewed to ensure that their regulation encompasses
the 'know your customer' principle. FATF have published a list
of non-compliant states, and banks are warned to make extra checks
on transactions originating from such states.
138. The British Bankers Association explained that
the regulations required only 'reasonable measures' to identify
an underlying third party (to avoid unnecessary duplication and
inconvenience to ordinary customers), there were weaknesses in
the chain of responsibility and due diligence system. Tim Sweeney,
British Bankers Association, said it would not be unusual for
money launderers in positions of power to use a Central Bank to
transfer money and where a commercial bank in the UK received
a telegraphic transfer from a Central Bank, then it was highly
likely to be regarded as a legitimate transaction.
Tim Sweeney also pointed out that a lot of the money moving through
London was passed through correspondent banking relationships,
where one bank opened an account with another bank and used that
account to move a customer's funds. Money can thus acquire the
"London stamp of respectability" and avoid the controls
and 'know your customer' safeguards that provide the defence against
In this context FATF becomes very important because, as Tim Sweeney
pointed out, the relationships between regulatory authorities
in different jurisdictions and financial institutions in different
jurisdictions become fundamentally important in tackling money
laundering. There are further weaknesses in the current system
that allow professional intermediaries such as lawyers to hold
client accounts. The British Bankers Association pointed out that
there was legislation that precluded banks from making any enquiries
or incurring any liability in respect of the underlying client.
Lawyers were thus able to use client confidentiality to mask the
beneficial ownership of the funds.
This situation is likely to be addressed under the proposed second
European Money Laundering Directive, which will extend the scope
of the Money Laundering regulations to cover all lawyers and accountants.
In revising legislative loopholes, the Government must ensure
that weakness and inconsistencies in the current system for tackling
money laundering are addressed.
139. The British Bankers Association felt that corruption
by a head of state or a public sector official fell within the
definition of fraud and would therefore be covered by requirements
to make suspicious transaction reports to NCIS.
However, this seems to have made little difference and Anglo American
recognised that "At present too many heads of state and their
families feel that they can siphon huge sums from the public exchequer
without any great likelihood of being called to account or of
having to return their ill gotten gains".
Many of the organisations involved in tackling money laundering
are unable to take proactive action in relation to states with
endemic corruption and must wait for a request before intervening.
There is no way that organisations like NCIS or the SFO can determine
which states are likely to have senior figures engaging in corruption
and money laundering. Philip Thorpe, FSA, said "...there
is not a black list of jurisdictions that we can rely on".
They need reasonable grounds before commencing an investigation
and they must wait until they are asked to act either as a result
of some kind of mutual legal assistance request, a formal complaint
or a suspicious transaction.
140. We are aware that some information of this nature
is available from DFID as they assess the level of corruption
in each country where they are working. The Foreign and Commonwealth
Office is also likely to make some analysis of corruption in assessing
the economic stability of countries. The DTI probably makes some
assessment of investment risks and the Export Credits Guarantee
Department (ECGD) would almost certainly have some knowledge of
corruption as a risk factor in its lending decisions. At the very
least some of this information should be shared with investigative
authorities so that the worst excesses of kleptocratic states,
like Zaïre under Mobutu or Nigeria under Abacha, can be identified
and prevented. There is already a model for such action in FATF
which maintains a list of non-cooperative countries (financial
centres whose anti-money laundering controls are deemed to be
inadequate). To tackle money laundering effectively the Government
can no longer rely on a process of reaction. The activities of
Mobutu and Abacha, for example, were well known at the time. What
interest or monitoring was there from the UK authorities as to
whether money was being laundered through the UK? A more proactive
investigatory system should be established to combat money laundering.
We do not believe that this need undermine the duties of self-regulation.
141. The current regulations often put banks and
other financial institutions in a difficult position. The British
Bankers Association pointed out that an institution cannot freeze
customer funds without the risk of being sued by the customer
but would be guilty of committing the criminal offence of laundering
if they moved the funds (and also risk a civil suit from the rightful
owner). The British Bankers Association noted that the courts
have recently sought to provide guidance to banks that were caught
up in this dilemma but said there were no easy or quick answers.
Banks were also in a difficult position with respect to suspicious
transaction reports as, having made a report, closure of an account
could constitute the offence of 'tipping off' the customer that
a law enforcement investigation was underway.
142. There is clearly a need for greater awareness
among financial institutions and others as to what constitutes
money laundering and what kinds of transactions should be reported
as suspicious. Monty Raphael stressed the need for training of
lawyers and other professionals if money laundering were to be
tackled seriously. He said that training should be mandatory but
recognised that there was a need to ameliorate the cost to small
firms of solicitors and accountants.
John Abbott said "There is a whole host of activities that
are undertaken by solicitors and accountants that bring them into
contact with the movement of money and I believe that there is
still a lot of work to be done in terms of raising their awareness
and understanding and education so that they are better equipped
to identify what we would regard as likely suspicious financial
We believe that there is a case for training on the prevention
of money laundering to be made a mandatory part of the initial
training for lawyers and accountants. It should be a component
of any continuing education for these professions and any ongoing
training by compliance officers.
CRITICISM OF CURRENT REGULATION AND ENFORCEMENT MECHANISMS
143. John Abbott, NCIS, was concerned about the current
system for combatting money laundering saying "I think the
laws are too complex. I think that there are loopholes, there
are examples of gaps in enforcement capability. Broadly speaking
the police service and the law enforcement agencies have the powers
but not the incentive, the regulators may have the information
but do not have the powers yet".
Ceri Smith, from HM Treasury, saw this as a result of the piecemeal
way the legislation had developed and the small differences in
definition and in the nature of the crimes within the three main
pieces of legalisation.
144. Money laundering as a stand-alone offence has
rarely been prosecuted.
There have been relatively few prosecutions for money laundering
and even fewer convictions. This has been attributed to the fact
that many of those guilty of money laundering are actually prosecuted
and convicted on other offences related to drugs trafficking or
terrorism. Although money laundering is a criminal offence in
the UK it is typically the underlying crime (predicate offence)
that has been prosecuted. The reason given for this was that the
money launderer is often the same person who commits the underlying
crime. However, Graham Rodmell from Transparency International
did not agree, saying that in the case of corruption "...almost
certainly those responsible for the predicate offence are offshore,
so they are not likely to be prosecuted in this country".
Lorna Harris, Home Office, conceded that there was genuine concern
that individual prosecutions for money laundering do not take
place often enough.
145. Concern was expressed that there are still insufficient
resources dedicated to this area. John Abbott, NCIS, felt insufficient
resources were devoted by law enforcement agencies to tackling
money laundering. He recognised that there were a huge number
of competing demands on law enforcement agencies in priority areas
of work. He had reservations about the ability of all law enforcement
agencies to conduct the often complex enquiries associated with
money laundering. He agreed that specialist enquiries of this
sort required certain skills that not all police forces would
146. NCIS receive about 15,000 reports per year,
handled by 30 staff and funded by a budget of £0.9 million.
Australia has some 965 financial organisations compared to 7,000
in the UK but AUSTRAC, the Australian body for handling disclosures,
has 82 staff and a budget of £3.8 million pounds.
This comparison, given in the PIU report, is staggering even given
the differences in the roles of the bodies and the nature of the
markets they monitor. It is clear from the evidence that enforcement
bodies in the UK are underfunded and under resourced. The Performance
and Innovation Unit report - 'Recovering the Proceeds of Crime'
- also noted that financial institutions felt that there was little
feedback on suspicious transaction reports and when there was
it was too late to influence decisions around continuing a relationship
with a client. We are concerned that there are insufficient
resources being dedicated to the detection and investigation of
money laundering, particularly the handling of suspicious transaction
reports. We anticipate that the situation could get much worse
unless the new legislation, which extends the scope of current
legislation to cover previously unregulated bodies, is accompanied
by the resources necessary to enforce it properly. The investigation
of money laundering is often time consuming and requires specialist
skills that need to be developed. If the Government is serious
about the fight against money launderers, the regulatory and investigatory
bodies must be adequately resourced.
147. It appears that money laundering has the potential
to be a major problem for the UK. Mark Malloch Brown said "I
think different countries have different Achilles' heels on [corruption].
The United Kingdom issue has been this banking issue, of funds
coming through the UK banking system".
There are a number of reasons why money laundering remains
a major issue in the battle against corruption. First, London
is a major financial centre and so will be attractive to money
launderers. Secondly, the UK response to money laundering is currently
uncoordinated and piecemeal. Thirdly, the current approach does
not do enough to recognise the importance of tackling the laundering
of the proceeds of corruption. We are deeply concerned about the
vulnerability of one of this country's most valuable financial
assets - the City of London. The Government should take coordinated,
coherent and properly resourced action to fight money laundering
if the UK, through the City of London, is to maintain its reputation
as one of the most important international financial centres.
148. Investigations into money laundering are
complex and often require specialist skills. There is a need to
refocus efforts to control money laundering and look at ways of
better coordinating the response of the various agencies to make
the specialist skills needed for tackling money laundering available
when and where they are needed. The Government must ensure that
effective action to enforce the law is taken.
PROPOSALS FOR NEW LEGISLATION AND NEW BILL
149. Monty Raphael welcomed the fact that new legislation
promised to clarify the system by placing in one statute all the
legislation on money laundering that has been developed in a piecemeal
fashion, to tackle the laundering of the proceeds from drugs,
terrorism and serious crime. He hoped that inconsistencies between
the different pieces of legislation would be removed.
We welcome the fact that the Government is to bring forward
legislation that will update existing legislation on money laundering
and address inconsistencies. We believe that the UK Government
should take the opportunity to make clear that the bribery of
foreign public officials and other forms of corruption are predicate
offences for money laundering.
INTERNATIONAL ACTIONS TO TACKLE MONEY LAUNDERING
- THE ROLE OF THE UK
150. The UK has taken a leading role on the international
stage within bodies dedicated to tackling money laundering, such
as FATF and the Egmont Group.
John Abbott, NCIS, said, "We need to bear in mind that the
United Kingdom, in comparison with many other countries, remains
near the top of the list of those endeavouring to tackle these
The Government is committed to supporting actively the efforts
of the international community to tackle money laundering, particularly
through the work of the Financial Action Task Force.
151. Tackling money laundering risks being like squeezing
a water filled balloon. The problem will just move elsewhere when
one part of the system is squeezed. International cooperation
is vital if money laundering is to be tackled successfully; as
Philip Thorpe said "If we alone are looking to see a sea
change in the business of money laundering we will not succeed
on a global basis. We have to look to other institutions and other
governments to put in place similar requirements".
FATF is the principal international antimoney laundering
standard setting body and plays a pivotal role in the international
fight against money laundering. International collaboration in
the area of money laundering is crucial to the success of efforts
to control the problem and FATF is encouraging the harmonisation
of laws, cooperation between jurisdictions and exchange of information
between governments. The UK is a member of FATF and DFID said
that it supported the extension of FATF-type arrangements to other
parts of the world, particularly in Asia, Africa the Caribbean
and Central and Eastern Europe.
Beyond the work of FATF there are other development activities
that could be undertaken. For example, there are a number of countries
that could benefit from access to the specialist skills of the
FSA and NCIS. Transparency International has suggested that more
information could be shared with victim countries and that better
provision could be made for mutual legal assistance.
The UK must also continue to press for action on money laundering
in a number of international fora including the European Union,
the Council of Europe, the Commonwealth and the United Nations.
152. We welcome the Government's commitment to
work through Financial Action Task Force and believe that the
UK should play a leading role in international efforts to tackle
money laundering. DFID should examine the possibility of supporting
developing countries seeking membership of FATF. It should also
consider what more can be done to help countries access the specialist
skills of organisations such as the Financial Services Authority,
Serious Fraud Office and National Criminal Intelligence Service
in the UK in order first to tackle corruption and money laundering
but second to build their own capacity and institutions.
MUTUAL LEGAL ASSISTANCE
153. DFID said that the Government regarded asset
recovery as a key part of the anticorruption effort.
In the UK, foreign governments gain access to the UK legal system
through the UK Central Authority (UKCA) in the Home Office.
There has been much criticism of the UKCA. Jeremy Carver, Clifford
Chance, said "As a firm, we have worked for many years for
Governments all over the world, and occasionally I have had to
assist Governments in mutual legal assistance matters, simply
because they find it so difficult to deal with the UK authorities".
Transparency International criticised delays in processing reports
saying that the Mutual Legal Assistance Unit was under-resourced.
They were concerned that suspects were able to slow down the system
with "unmeritorious judicial review applications".
Jeremy Carver, Clifford Chance, said that the last democratic
Government of Pakistan tried to obtain evidence through the UKCA
relating to corruption prosecutions in Pakistan. He explained
that courts in the UK prepared 26 boxes of evidence which were
delivered to the Home Office. He said that these sat in the Home
Office for nearly two and a half years. He noted that investigations
could be carried out quickly but was concerned that the Home Office
was a "swamp" where things got lost.
Clare Short was also critical of the current Mutual Legal Assistance
procedures saying that they were slow and unresponsive. She did
hold out some hope as there is now an agreement between the Home
Office and DFID where DFID is informed of requests from developing
countries so that they can help those countries prepare their
The Globalisation White Paper said that DFID was "committed
to greater cooperation with developing and transition countries
to help them recover funds that were illegally acquired through
criminal activity or corruption and subsequently deposited in
It went on to talk about strengthening the arrangements which
give overseas governments access to the courts and investigative
authorities in the UK and providing advice to governments on preparing
their requests for legal assistance.
154. Transparency International felt there was a
case for extending the role of the SFO so it could provide direct
assistance to developing countries. They also proposed a hotline
routed through DFID for mutual legal assistance requests.
There is scope for DFID to assist countries outside groups like
FATF and the Egmont Group to improve their institutions and provide
training so that such countries could join FATF and Egmont and
enjoy the benefits that membership confers. In line with our earlier
recommendation, DFID should examine the scope and practicality
for UK institutions engaged in tackling money laundering and corruption,
to provide technical assistance and direct support to similar
organisations in developing countries.
155. Transparency International said that the confiscation
of assets could only happen where there was a formal agreement
with the requesting country but noted that few developing countries
have agreements to cover all criminal offences.
They further noted that funds are retained by Her Majesty's Government
and no formal mechanism exists to return funds. The Government
should consider what steps are necessary to ensure that any funds
that are confiscated, including those confiscated by the new National
Confiscation Agency, which are the proceeds of corruption from
a developing country can be returned to the country of origin.
FREEZING OF ASSETS
156. Assets can be frozen very quickly through civil
processes using freezing injunctions (formerly known as Mareva
Orders). These can be used to freeze assets that are the subject
of a dispute until the dispute is settled and ownership of the
assets determined. They are often, although by no means exclusively,
used in commercial disputes. Civil proceedings require a lower
standard of proof and a foreign power would only need to demonstrate
that they had a good claim on the funds to obtain a freezing injunction.
157. Assets can be frozen in the UK by means of a
restraint or charging order under the Criminal Justice Act 1988
or the Drug Trafficking Act 1994. A foreign government can seek
an order to freeze assets, believed to be in the UK, subject to
two conditions: firstly, that the foreign government has issued
a confiscation order or has started proceedings that will lead
to such an order and secondly, the country in question is designated
in the UK under subordinate legislation (as in, for example, Statutory
Instrument 1991 No. 2873 - The Criminal Justice Act 1988 (Designated
Countries and Territories) Order 1991 or other similar Orders).
An order to freeze assets by the UK Government is a temporary
measure to freeze the assets pending a confiscation order arising
from criminal proceedings abroad. For this reason the UK Government
and Crown Prosecution Service need to be sure that proceedings
in the foreign country are likely to lead to a confiscation order
before the CPS would feel able to seek an order to freeze assets.
Currently, a foreign government seeking to freeze assets that
was not contemplating a confiscation order would need to pursue
the civil remedies referred to above.
158. The situation is different in the Roman civil
law system used in many continental countries where an investigating
magistrate is put in charge of investigations. They have the power
to issue orders freezing assets very quickly. They have an ability
to freeze assets as part of an investigation, not necessarily
in the context of an actual or imminent confiscation order as
is required in the UK. This may put the UK at odds with countries
which take action to freeze assets and ask the UK to take similar
action but find that the UK is unable to do so because a confiscation
order has not or will not be issued abroad. In 'Proceeds of Crime
Bill - Publication of Draft Clauses'
the Government has proposed changes to the present law that would
enable assistance to be granted to any country without the need
for designation. The proposals still require an order for the
recovery of property to have been made in criminal, civil or other
court proceedings in the foreign country. The Government indicates
the proposals will allow property to be frozen at a much earlier
stage in an investigation provided there are reasonable grounds
to believe that the property to be frozen may be needed to satisfy
an external order.
159. We believe legislation should be introduced
to ensure that assets can be frozen on evidence of an investigation
rather than on evidence of charges, giving the UK the same powers
that Roman civil law countries currently use to freeze assets.
Any body charged with detecting and investigating money laundering
should also have the ability to request that assets be frozen
at the start of an investigation. As a wider long term goal, and
once we have appropriate legislation, the Government should encourage
other common law countries to make similar changes to their law
so that a harmonised international position on freezing orders
can be developed.
Coordinating the Fight Against Corruption and
Money Laundering Across Government
160. DFID has done much to mainstream development
thinking across Whitehall. But there are still some barriers that
need to be broken down as Clare Short indicated when she talked
about how the Foreign Office still saw development assistance
as being associated with doing projects while High Commissioners
and Ambassadors did any hectoring that was required.
This was certainly the view expressed during our visit to Vietnam.
Clare Short felt that what was needed was a shared United Kingdom
effort. Both DFID and the Foreign Office have a remit to engage
with the governments of developing countries on governance issues.
They must work together to ensure a coordinated and complementary
approach on governance and corruption issues.
161. DFID has a role in ensuring that the interests
of developing countries are recognised and included in the systems
that the UK has in place for tackling corruption and money laundering.
DFID's job must be made much harder by the huge number of different
organisations that have an interest in these areas. George Staple,
Clifford Chance, said "There is a worry that the involvement
of so many different departments results in a failure to properly
focus on the whole area with which the Government is trying to
He listed the following as having a policy or investigatory interest:
The Home Office
The Department of Trade and Industry
The Department for International Development
The Financial Services Authority
The Foreign Office
The Lord Chancellor's Department
The Cabinet Office
The Attorney General
The National Audit Office
The National Criminal Intelligence Service
The Serious Fraud Office
HM Customs and Excise
The Inland Revenue
The Department for Social Security
The Crown Prosecution Service.
162. As George Staple pointed out, there are good
reasons for different departments to maintain specialist interest
in their area of responsibility but it appears that no single
body has a lead responsibility for ensuring the:
- current laws are consistent with the international
treaties the UK has ratified;
- laws are up to date and effective;
- resources are adequate and allocated in the most
163. The SFO said it had no remit in dealing with
corruption per se but noted a great deal of corruption
involved fraud of some description which would allow it to consider
George Staple thought it was illogical for the SFO not to have
an extended remit that included corruption and money laundering.
He thought that the currently limited remit of the Serious Fraud
Office could be expanded to deal with cases of money laundering
Transparency International also felt that in addition to a review
of current investigations and prosecution procedures, the jurisdiction
of the Serious Fraud Office could be extended to include corruption.
The Government must give serious consideration to extending
the role of the SFO to tackle corruption and money laundering
as well as fraud. Any change in its remit would need to be properly
resourced but could provide a much needed focus for these issues.
164. The evidence presented to this inquiry suggested
that there was a lack of focus and coordination in the way the
Government was tackling corruption and money laundering. Jeremy
Carver, Clifford Chance, said "The fact is that in Whitehall
there is only one Department that has taken this issue seriously,
and that is the Department for International Development".
Another example of the lack of coordination was provided by NCIS
who attributed a lack of convictions for breaches of the Money
Laundering regulations to the fact that no particular organisation
was designated to deal with such breaches.
Laurence Cockcroft, Transparency International (UK), noted that
the UK response to corruption could be much more effective if
it not only had adequate legislation to deter overseas bribery
but also a much better coordinated response. He said that apart
from DFID the only other department to take the issue seriously
were the Export Credits Guarantee Department - "Only if anti-corruption
policy is prioritised and mainstreamed through the UK government
machine can we lift the cloud of inadequacy - inviting and frequently
attracting the contempt of other OECD countries - which now envelopes
165. George Staple noted that the Report of the Roskill
Commission on Fraud Trials (1986) had recommended a national fraud
commission in response to fragmentation in the system of detection,
investigation and prosecution of fraud. He said the Report saw
an opportunity for a body to coordinate and bring together
the efforts of all the different Departments of State engaged
in tackling fraud.
He suggested that there was still scope for a coordinating body
that could bring together all the issues, address anomalies in
the law and tackle the difficulties of prosecution.
Monty Raphael said that it would be wrong to separate corruption,
fraud and money laundering, as they are all inter-related and
that what was needed was a holistic response.
New developments need to be factored into how information, investigation
and prosecution are all coordinated. The FSA is soon to acquire
new powers but there was little evidence presented to the Committee's
Inquiry that the Government had examined the impact that this
would have on other regulatory and investigatory bodies. John
Abbott, NCIS, pointed out that the Metropolitan Police Service
had developed a money laundering investigation team in the last
year. Early indications are that this has proved successful with
some extremely positive results.
We believe that there is greater scope for sharing information
between government departments at both a policy and operational
level to ensure that anticorruption policies are built in
to wider objectives. The roles of the respective investigative
and regulatory bodies should be re-examined to ensure that corruption
is taken seriously and to avoid the situation where each organisation
believes it to be the responsibility of another to address a particular
issue. The Government should examine the case for a single body
or office performing a coordinating function across Whitehall
and the investigatory and regulatory bodies active in this area.
Corruption can only be successfully tackled where there is a greater
degree of cooperation and coordination among all the interested
Working with the Private Sector
166. The Corner House told us "Every year, Western
businesses pay huge amounts of money in bribes to win friends,
influence and contracts. These bribes are conservatively estimated
to run to US$80 billion a year - roughly the amount that the UN
believes is needed to eradicate global poverty".
DFID recognised that corruption distorted competitiveness and
was an unfair barrier to trade. It felt tackling bribery would
help prevent damage to the interests of legitimate businesses
in terms of reduced sales and market share.
CORRUPTION IN THE PRIVATE SECTOR
167. The Corner House reported that "UK private
sector involvement in corruption comes in many forms - from bribery
of officials to win contracts to the handling of corrupt payments
by UK banks".
They also said bribery was more common than the low number of
prosecutions would suggest and noted that many of the anti-corruption
drives led by governments and by popular movements were revealing
"many instances of alleged corruption involving UK companies".
In their memorandum, Transparency International noted that the
arms industry was second only to the construction industry in
its propensity to pay bribes.
Campaign Against the Arms Trade said that the high financial value
and the levels of secrecy associated with arms deals made them
more susceptible to corruption.
They called for prior scrutiny of export licences and disclosure
of the details of arms exports in the Annual Reports on Strategic
DFID pointed out that firms in the extractive industries were
particularly affected by the distortions of competitive practice
that result from bribery.
Anglo American said that they typically had less exposure than
oil companies to auctions for rights to explore or exploit areas
Such auctions were often the subject of malpractice.
168. Transparency International said that their Bribe
Payers Index "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
United States 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'".
They recognised that some multi-national companies had identified
corruption as an issue and taken appropriate steps but stated
that addressing corruption effectively becomes much more difficult
in the context of subsidiary companies and joint ventures.
INDUSTRY INITIATIVES, CORPORATE GOVERNANCE AND PROPOSED
CHANGES TO UK COMPANY LAW
169. DFID recognised the importance of corporate
governance initiatives, transparency and disclosure requirements,
and the regulations that govern the relationship between managers
The maintenance of adequate records, the adoption of internal
controls and the use of external audits are all key parts of corporate
governance. It is likely that over the next few years corporate
responsibility and corporate citizenship will play an increasingly
important part in the way that companies organise and present
themselves. The current debate on corporate governance (how companies
are directed and controlled) is likely to merge with the debate
on the wider accountability of companies to their employees, customers,
suppliers, creditors, governments and the community they operate
We are encouraged that DFID is planning a forum with the DTI
this year to promote the OECD Convention and other anti-corruption
170. George Staple, Clifford Chance, said "I
feel, and I think others share this view, that the whole question
of fraud and corruption and money laundering prevention is not
taken at a sufficiently high level in companies, it is too often
the responsibility of middle management, who do their best but
often do not have all the information, and indeed resources, available
to them. It should be the responsibility of the Chief Executive,
it should be high, fraud prevention, corruption prevention, money
laundering prevention, high on his list of responsibilities, and
he should have to report each year to the shareholders that he
has in place adequate fraud and corruption prevention measures,
he has got whistleblower systems in place, so that employees
can feel that they can report mischief of one sort or another".
Roger Davis, PricewaterhouseCoopers, indicated that the accountancy
profession was 'edging up on [George Staple's suggestion]' but
recognised that progress could be faster.
Corporate Transparency and International Accounting
171. A number of witnesses, including Transparency
International, The Corner House and Global Witness, suggested
in their evidence that there was a need for greater corporate
transparency, particularly where there were special accounts into
which revenue was paid as was common in the extractive industries.
The use of such accounts seriously compromised the budgetary process.
Transparency International said that in countries where there
was little openness about financial matters companies should state
publicly any payments they make to the state. Such statements
would make it difficult for governments to maintain special accounts
and reduce the scope for the diversion of government revenue to
private ends. They said that this was simply a case of applying
the same reporting requirements that apply in the UK to their
dealings with governments in developing countries.
Reg Hinckley, BP, told the Committee that they tried to ensure
that their dealing with governments were open and above board.
The Committee welcomes the moves by BP to report openly the payments
associated with oil in Angola.
In making legitimate payments to a government, companies have
a responsibility to ensure these are open and transparent to prevent
some or all of the payment being diverted for personal gain. Companies
cannot claim that, having made a payment, it is not within their
power to prevent corrupt use of the monies. All companies should
seek to conduct their business in an open and transparent way
and make information on their dealings with the governments of
developing countries publicly available.
172. Companies have certain responsibilities by virtue
of their size and position. They must balance transparency with
commercial confidentiality in being accountable to shareholders.
The Corner House suggested that many companies failed to report
allegations of corruption even when this had resulted in action
being taken against the company. They felt this was a narrow interpretation
of a company's duty to return a true and fair view of the company
in its annual accounts - "The failure to disclose corruption
allegations to shareholders is of major concern and signals a
major lacuna in current standards for company reporting. Corruption
is not only damaging to a company's reputation, but is also indicative
of poor management control within a company".
Such reporting would be in line with the Turnbull Report (1999)
which recommended annual reporting on internal controls including
those in place to address non-financial risks. If a company
has been accused or convicted of any corrupt practices, shareholders
and other stakeholders, such as employees or customers, should
be informed by the audit committee of the company concerned in
a report to the annual general meeting. Companies should also
report on the controls and systems they have in place to prevent
173. An increasing amount of effort is going into
the development of international accounting standards with a growing
emphasis on transparency.
Work on audit standards is also being taken forward including
work on how any exceptional and unusual business transactions
identified by auditors could be disclosed publicly.
Roger Davis, PricewaterhouseCoopers, saw a leading role for the
UK in terms of widening corporate reporting to provide a better
audit of not only the financial position but also a company's
policies including their social policies.
DFID accepted that corporate governance initiatives dealing with
transparency and disclosure of financial information were important
for the control of corruption and noted the OECD had published
Principles on Corporate Governance in May 1999. These aim to improve
the legal, institutional and regulatory framework for corporate
governance by requiring firms to maintain adequate accounting
records, adopt internal company controls and undergo regular external
A review of company law is currently underway and DFID have said
that this is expected to recommend "improved levels of reporting
and higher standards of transparency in company accounts".
174. Roger Davis, PricewaterhouseCoopers, said "We
do not think it is our role, as auditors, to pass what I might
call moral judgements on what is acceptable or not".
But auditors do have a key role to play in spreading best practice
and raising standards and we do not see how they will be able
to do this without making some kind of judgements about what works
and does not and about which companies need to do more and which
do not. The accountancy and auditing professional bodies should
look closely at the role that their professions must play in the
fight against corruption and money laundering. We would encourage
them to play an active and vocal part in the current debate on
the best way forward.
CODES OF CONDUCT
175. In addition to the legal sanctions that arise
from the implementation of Conventions such as the OECD Convention
on the Bribery of Foreign Public Officials, there are a number
of other steps that companies can take to reduce corruption. Foremost
among these are the voluntary codes of conduct.
The OECD Guidelines for Multinational Enterprises, agreed on 27
June 2000, provide an internationally agreed code of conduct.
They consist of nonbinding recommendations to help companies
operate in harmony with government policies and with societal
expectations. The guidelines contain a number of recommendations
specifically on bribery. Many companies have chosen to develop
their own codes of conduct and ethics.
176. Codes of conduct are only useful if they are
followed up with training to support implementation and monitoring
to ensure compliance. Control Risks Group found that although
take-up of codes was high there was often little follow-up. John
Bray, Control Risks Group, said "We did a survey last year
of some 50 US companies and 70odd Northern European companies
and we found that the overwhelming majority now did have formal
Codes of Conduct saying that they would not pay bribes to secure
business, but followup mechanisms were not so consistent".
He too stressed that training was a key issue.
177. Roger Davis, PricewaterhouseCoopers, noted that
there was increasing interest in codes of ethics among companies.
Anglo American have a Code of Corporate Governance and said it
was an essential tool in communicating company values to their
staff worldwide. They explained it also provided staff with protection
if they were put under pressure by foreign officials to behave
In their memorandum, Transparency International encouraged the
use of corporate codes of conduct but stressed that to be effective
they must be widely disseminated, accompanied by training and
understood within the company.
The Corner House recommended that companies be encouraged to "draw
up ethical policies laying down anticorruption standards
against which shareholders and investors can judge performance".
Transparency International felt codes should be extended to joint
ventures. The DTI should encourage companies to put in place
codes of conduct that take account of corruption. This issue should
be considered during the preparation of the forthcoming Company
OPPORTUNITIES FOR THE PRIVATE SECTOR TO TACKLE CORRUPTION
- WORKING WITH LOCAL PARTNERS TO SET A GOOD EXAMPLE
178. Worldaware recognised that multinational companies
have greater opportunities to overcome corruption than small companies
given their negotiating strength.
Transparency International criticised the fact that the private
sector was not taking a lead in fighting corruption in developing
countries, even when an incoming government had made a commitment
to fight corruption. They said that there had been little response
from either international or local business to the attempts by
the Nigerian government to tackle corruption.
Corruption needs to be tackled across the board and not in
isolated pockets and it is vital that all parties, including the
private sector, are engaged in efforts to eliminate it. The lack
of response from the private sector to the anti-corruption efforts
of developing countries is particularly worrying.
179. Multinational enterprises (MNEs) can provide
an important role model for smaller and domestic companies to
follow. John Bray, Control Risks Group, said, "The point,
therefore, being that being a model of best practice and applying
that model in all your dealings, for example with your own subcontractors,
is in itself a very important role which companies can play".
Bribery by MNEs undermines attempts to tackle corruption. It is
important that companies resist bribery and extortion. Ian White,
Crown Agents, said that "What we want to encourage is companies
who are forced or feel coerced to pay bribes to report that to
the relevant authorities wherever possible".
It is important to remember that multinational companies have
an important impact on the local businesses they work with and
there is tremendous potential for this to be a positive interaction
that builds and develops local capacity. Reg Hinkley, BP, said,
"We do have, through the behaviours of our staff and the
code of ethics within which they operate, the opportunity to demonstrate
good practice continuously and as a company that is what we do
strive to do".
Equally, if companies were engaging in corrupt practice or had
poor systems it was possible to set a very bad example.
180. A number of companies told us that it was difficult
for them to raise issues relating to corruption openly. John Bray,
Control Risks Group said "...companies are reluctant to be
seen to be telling governments what to do, they do not want to
get on soap boxes".
Similarly, BP said they had got further by not lecturing in public.
John Bray explained that while it was badly received for companies
to lecture on corruption, it was not so badly received for them
to share best practice.
Companies can achieve a great deal by working in partnership with
local organisations like chambers of commerce and professional
associations. There was some evidence to suggest that the international
companies doing best were those with strong local partners who
share a common sense of honesty, transparency and business ethics.
In exchange for sharing information on best practice, a local
partner may offer an international company other advantages such
as a greater awareness of political and social contexts and may
offer an international partner some protection against corrupt
practice. In its memorandum, DFID noted that "Several UK
firms have expressed an interest in working with chambers of commerce
and firms in the same sector in developing countries to spread
good practice in combatting corruption and to encourage the adoption
of higher standards of corporate governance".
We welcome the interest companies have shown in working with local
partners through chambers of commerce. We see such activities
as being in the interest of both parties. We believe that DFID
should encourage this type of activity and should seek to broaden
the focus to include professional bodies, associations and service
organisations such as the Round Table, Rotary International and
Lions International. DFID should examine what scope and need there
is for building and strengthening the capacity and institutions
needed to create professional bodies and associations in developing
countries, especially for lawyers, accountants, business and engineering,
as such bodies could have an important part to play in tackling
181. We have already examined the impact petty corruption
has on the poor. The same petty corruption affects businesses.
Manzoor Hassan, Transparency International (Bangladesh), said
companies were often placed in a difficult position of needing
a service that could be delayed significantly if a bribe was not
paid with the risk of lost business in the interim.
BP said it could be difficult to draw a distinction between corruption
and legitimate business incentives for a manager working in different
We are not convinced that this is the case. We do not see why
the actions of a manager should differ from one country to another,
especially between developed and developing countries. We have
already examined whether there is a cultural basis for corruption.
Perhaps it is not so much the difference of culture that makes
the distinction between corrupt and legitimate business difficult
to determine for a manager but the fact that there is less likelihood
of being caught in countries with weak oversight structures and
where a ruling elite is engaged in corruption. The fear that a
company might lose out to a competitor who is willing to pay a
bribe might also tend to blur the boundaries of acceptable behaviour.
In these circumstances, the level playing field created by the
OECD Convention and the Integrity Pacts promoted by Transparency
International become important catalysts for change and should
be supported. Some of what happens in developing countries is
probably closer to extortion than to bribery but unless companies
resist the temptation to pay they are as guilty as those extorting
182. All the companies that gave evidence to the
Committee said that they did not tolerate bribery. All had some
form of code of conduct or ethics to ensure that the company's
policy on bribery was clear to all employees. However, all the
companies that gave oral evidence, with the exception of Crown
Agents and Control Risks Group, admitted that they would make
facilitation payments. We are sure they are not alone. The companies
said that such payments were not encouraged and they would rather
not make them, but all agreed that, if unavoidable, such payments
would be tolerated under controlled, transparent circumstances
and only where they were deemed to be part of local custom and
practice. The companies drew a distinction between acts that were
unlawful or designed to achieve unfair advantage or non-commercial
advantage and practices which are essentially about speeding up
183. However, the policy of tolerating such payments
was not universally shared. Ian White, Crown Agents, said "Making
a facilitation payment or speedy money, as it is quite often called
in Africa, is just the same as paying a bribe in any other society".
He did not see how anyone could differentiate between facilitation
and bribery. He said that by making these payments companies were
perpetuating petty corruption and what was required was a firm
stance and a refusal to make such payments.
John Bray, Control Risks Group, said his company would advise
its clients to resist making such payments even in places where
illicit payments were customary, though he did recognise that
people were often put under a great deal of pressure.
There are other options for companies when faced with demands
for such payments other than payment. One area where companies
could set a good example is in the reporting of requests for bribes
to the local authorities. Companies can raise the issue of corruption
at a junior level with more senior officials. Large companies
have much more leverage than small companies in this regard.
Taking a stand against such payments is an important part of the
anti-corruption effort and Laurence Cockcroft, Transparency International
(UK), said "there is some evidence that people who take a
stand are recognised as such and can get results".
184. Monty Raphael made it clear that he would not
distinguish between a bribe and a facilitation payment. However,
he was able to explain why some of the uncertainty and some of
the acceptance of these payments had come about. The US Foreign
and Corrupt Practices Act prohibits bribery to secure business
or a business advantage but allows facilitation payments where
these are legal locally.
Such payments are often illegal locally and company's codes of
ethics often fail to address this issue adequately.
Under the Act, it is mandatory to record facilitation payments.
Monty Raphael said "the American legislation makes an exception
for, what are called colloquially, grease payments, or, rather
more difficult to pronounce, facilitation payments. This is where
petty corruption meets acceptable business practice, if it is
This exemption in the American legislation produced the precedent
for facilitation payments being permitted by the OECD Convention.
He went on to say that the Council of Europe Convention makes
no exception and provides a general ban on bribery of all kinds.
185. Rick Helsby, PricewaterhouseCoopers, noted that
facilitation payments were extremely difficult to find in company
accounts because "by their very nature they are meant to
be hidden". In evidence to the Committee, David Philips of
Crown Agents said that "...I do not suspect that anybody
has a line saying 'facilitation payments or bribes' in their accounts.
What they will have under customs clearance entries is a line
which is long accepted and which will always appear... you will
see a line which is called 'petty disbursements' and that will
cover a multitude of items and I think you will find that most
of these facilitation payments, the tea money, the speedy money,
the small payments, will appear under that category".
186. Some companies may resist efforts to address
corruption and tackle facilitation payments because they believe
it will not be in their interest. But we believe by working together,
resisting these payments and lobbying for improvements in service
delivery, their massive collective leverage could be used to bring
about real improvements in the quality of services. We see
no difference between bribery and facilitation payments. Our legislation
should make clear facilitation payments are not acceptable and
that anyone making them would be breaking the law. Demands
for such payments should be resisted by companies and reported
to the local authorities. The OECD Convention should be amended
so that it also forbids facilitation payments.
IMPROVING THE TENDERING PROCESS
187. We heard that the public opening of tender bids
was an important way to tackle corruption.
We were told this was common practice in America where the public
and other tenderers could examine the selected bids and monitor
that a fair and proper selection process had been followed. Mike
Welton, Balfour Beatty, said "The audit trail from the original
public opening of the bid process through to the final award is
an absolute fundamental".
The Nigerian Government also recognised the importance of publicly
188. Integrity pacts were also seen as a helpful
development in the tendering process. Laurence Cockcroft, Transparency
International (UK), said they had been championing the concept
of an AntiBribery Pact for some time. Basically in order
to prequalify in the tendering process for a contract, companies
sign a document that states they will not pay a bribe in relation
to that particular project. The process is monitored by civil
society groups and provides a mechanism for redress. It has been
successfully applied in a number of projects and interest in such
agreements is growing. Laurence Cockcroft, Transparency International
(UK), said that the World Bank did not support this mechanism
as it was seen as infringing the rights of companies to bid freely
on contracts as pre-qualifying is a condition of being allowed
We believe that the public opening of tenders, the creation
of audit trails to ensure a fair process is followed and the use
of integrity pacts will all help to eliminate corruption in the
allocation of contracts. We do not see why the concept of integrity
pacts should not be extended to become industry-wide agreements
not to engage in bribery, especially where there are relatively
few companies in a particular sector.
THE ROLE OF AGENTS, SUBSIDIARIES AND JOINT VENTURES
189. We were told that commissions paid through agents
are "frequently a euphemism for bribes".
John Bray, Control Risks Group, said there was a complacency about
the use of agents. He urged that UK legislation make clear that
the use of foreign agents or subsidiaries to pay bribes was not
permitted. He pointed out there were financial risks and risks
to a company's reputation in having agents acting on their behalf.
The Defence Manufacturer's Association was concerned to ensure
it was recognised that "reasonable hospitality is not bribery"
and that while agents should not be paid excessive commissions
in the expectation that they will be paying bribes, some agents
have higher costs in some parts of the world.
The OECD Convention did not address bribery through foreign
subsidiaries and agents when it was originally negotiated, although
it is likely that the OECD will re-examine this issue. The UK
Government should address this deficiency in any new legislation
on bribery that it seeks to introduce.
THE EXPORT CREDITS GUARANTEE DEPARTMENT AND CORRUPTION
190. In our Report "The Export Credits Guarantee
Department - Development Issues", the Committee referred
to evidence that suggested the Export Credits Guarantee Department
(ECGD) should do more to scrutinise the record of companies applying
for credits and refuse support for companies involved in bribery
191. The Corner House was critical of the role played
by the ECGD. They examined the evidence of corruption in a number
of ECGD backed projects including the Lesotho Highlands Water
Project, the Turkwell Hydroelectric Dam in Kenya and the Ewaso
Ngiro Dam in Kenya. They concluded that "This evidence strongly
suggests that the agency, which underwrites the export contracts
and investments of UK companies working abroad, has inadequate
procedures to pursue or guard against corruption with the vigour
and application that the UK public has a right to expect. New
measures introduced to combat corruption, though welcome, also
fall far short of credible responses to the institutional failures
that are evident in the agency's management and operations".
They went on to say that ECGD should:
- "Introduce a mandatory requirement to withdraw
credits awarded to companies convicted of corruption, regardless
of whether or not the conviction is directly related to an ECGD
credits or guarantee;
- Suspend credits (or the consideration of credits)
where a company receiving or seeking ECGD support is being investigated
for corruption, pending the outcome of the inquiry;
- Refer all allegations of corruption that involve
UK companies bribing foreign officials to the police and instigate
their own independent inquiries;
- Ban any company found guilty of corruption from
receiving ECGD support for a period of ten years.
- Liaise with other export credit agencies and
multilateral development banks to draw up a consolidated list
of companies banned by any international finance institution".
192. Gordon Welsh, ECGD, told the Committee that
ECGD would not act until it had evidence that a company had been
found guilty of corruption. He said until then there would be
a presumption of innocence and well-being.
He also said that companies were required to sign a warranty saying
that they had not engaged in corruption. He went on to say that
either a failure to sign the warranty or inclusion on the World
Banks list of debarred companies were prima facie grounds
for not providing ECGD cover.
In December 2000, ECGD introduced a set of Business Principles
that included statements on business integrity and corrupt practice.
Through these ECGD commits itself to combat corrupt practice and
promote the OECD Convention on the Bribery of Foreign Public Officials.
However, ECGD does not check whether contracts being considered
for support have been won as a result of a competitive tendering
We welcome the introduction of a set of business principles
by ECGD and the use of a warranty that seeks to prevent export
credits being given to companies who have engaged in corrupt practice.
However, we remain concerned that internal procedures and controls
may be insufficient to prevent credits being given to companies
with a poor track record and which therefore present a high risk.
Applications for support should be subject to rigorous scrutiny
and there should be in place a system to check that the scrutiny
has been carried out. We would welcome further evidence on the
actions being taken by ECGD to strengthen procedural and institutional
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Deb 24 January 2001 Vol 361 c 626W Back